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  1. #1
    ivillages is offline Junior Member
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    Jun 2009
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    Default Looking for advice on ss property in foreclosure

    Hi All,

    I've got a signed-around PSA for a self storage property with a price negotiated based on pro forma discounted about 20%. It has a ton of upside. Right now I'm doing my due diligence and have found that although it is 87% occupied, of those occupied units, the owner has let over 55% of the tenants go into delinquency, so property's cashflow is about 60% of what it should be.

    Now, I just got the preliminary title report to find that the seller was served foreclosure papers on August 8th with the auction scheduled for 12/4 for nonpayment on the primary note. He did not disclose any of this when we finalized our offer on 9/9.

    Right now I have until mid October to sign off on the due diligence or renegotiate the price. I'm pretty sure he has at least one backup offer and I would be surprised if his competitors have not considered buying him out since he's in foreclosure. If he's not willing to negotiate a new price, the deal will die on 10/11 and he's got nearly 2 months to find another buyer before the foreclosure.

    Does anyone have thoughts for strategies on this deal? Fyi, I've purchased a few residential properties that were in foreclosure so I'm quite familiar with the procedures and tactics.

    Any good, pertinent advice is much appreciated.

    Thanks

  2. #2
    MisterJim444 is offline Moderator
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    Dec 2007
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    Winchester, Virginia
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    Default

    ivillages

    You could have a great deal on the hook or a nightmare waiting to happen. If the seller did not disclose these vital pieces of information what else has he withheld from you in hopes you don’t find it in your due diligence?

    You will have to examine every rental agreement very closely to see what the rental terms are for each tenant. Did he give away the future? Pay for three months get the next three months free? Or something just as crazy? Pro forma income, no matter how discounted, isn’t worth much if you need to evict or put into lien status 50% of the current tenant base.

    You need to know how the target market competition is doing to start to get a handle on whether you can ramp up the occupancy and how long it will take to get the property stabilized. After being in this industry for the past 26 years, I have seen countless times people get caught up in trying to make a deal work because they were only looking a the upside potential and not willing to admit to the potential for “going off the financial cliff” if everything didn’t work out perfectly – which of course it never does.

    In addition to the pending foreclosure, what is the status of the property taxes right now? Had the owner taken any type of security or cleaning deposit in the past from any of the existing customers? You defiantly don’t want to assume an unfunded liability for thousands of dollars in deposits which you know he will not transfer at closing. Despite the percentage of customers that are delinquent – are there any that have outstanding pre-paid rent balances? This is another area that is oft times ignored by lawyers preparing self storage purchase agreements. Without language to have the “non-earned” rental income transferred at closing, you are once again buying an unfunded liability.

    I have a number of clients that have made some big money buying and turning around under performing properties. However, I have found in many cases, it is better to walk away sometimes and live to fight another day if there is something in “your gut” that makes you feel uneasy about moving forward with the acquisition.

    Best of luck and keep us posted on SSTalk of your progress.

    MisterJim444
    Learning Never Ends, But Will Time?

  3. #3
    ivillages is offline Junior Member
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    Jun 2009
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    Default

    Great advice, thanks. Surprisingly, property taxes are paid for 2009. I've done my marketing research and there are only 2 other competitors in a 5 mile radius, one of which is very successful and has a modern facility, the other is kind of a mom n pop and a bit of a joke. This community just got a new Wal Mart and the local tribe is building a 5-story hotel/casino, so it appears to be a growing community. It is about 7 miles from a major city in my state.

    I'll look into the non-earned income/deposits. I met with the onsite manager last week and he does not have any specials or prepays. He's not doing any marketing and basically has allowed the delinquent tenants to remain unpaid. The owner/seller seems to be oblivious to the hard facts and now is in foreclosure.

    I've done some preforeclosure deals with residential properties using subject-to and I'm wondering if this will work with commercial. Any thoughts on this? With about a $550K first and a $270K second, that debt service would make the cashflow tolerable until I can get the delinquencies straightened out and get some marketing in place to attract new accounts.

  4. #4
    MisterJim444 is offline Moderator
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    Default

    "iv"

    I will have to defer the question to an attorney. I would strongly recommend, based on your comments, that you are ready with a new manager immediately. Also, determine in advance what management software program that they are using so you and or your new staff can hit the ground running in dealing with the software issues. If you are going to move forward with the closing don’t wait until you have taken over to get your hands on a demo disk from that software company to get familiar with the operationing system and give them a heads-up that you are taking over the facility and may need some priority help for the transition.

    You would immediately remove all security codes the old owner and manger had in the system and of course replace all the office door locks. You may also need to replace the company locks that have been used on the property since the old manager will probably have a master key for them.

    If you are going to change the name of the facility make sure you know when the Yellow Page ad deadline is for the local phone books. You would hate to be out of the Yellow Pages for a full year because you missed a deadline and the current owner has zero incentive to keep the ad. You will also want to legally assume ownership of the web site url. If they do not have a web site, you could simply register it yourself even prior to acquisition.

    Again best of luck.

    MisterJim444
    Learning Never Ends, But Will Time?

  5. #5
    ivillages is offline Junior Member
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    Thanks yes, I've already contacted the software vendor since the business is using Sitepoint. They have no YP ads or website, and I've registered a domain and will be setting up a website upon acquisiton, since my other business is website developer/consultant. I'll proabably keep on the existing manager to clean up the accounts and work with me to get things straightened out, then make my decision about replacement.

    Thanks

  6. #6
    tbrooks57 is offline Junior Member
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    Jun 2008
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    my experience, it is usually the manager that allows customers to become deliquent. you might want to rethink your decision to keep old manger, New Owner, New Manger, unless there are extreme circumstances. sound like maybe owner is absentee, the old manager probably "trained" tennants that they could be late. The other possibility as much as I hate to say this, I have found that high deliquencis might be a sign of manager stealing rent, taking it under the table.

  7. #7
    ivillages is offline Junior Member
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    Default

    Actually I think the owner is taking income under the table, since he can't produce bank/tax statements for me, and I just discovered that the property is in foreclosure.

  8. #8
    tbrooks57 is offline Junior Member
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    Jun 2008
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    Default

    you might contact whoever holds the first and see if you should be dealing with them or stay with the owner, although doesn't sound like the owner is the sharpest stick around or is certainly not the most honest of people out there

 

 
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