Step by Step How to Buy your First Multifamily Property

Hello YouTube, it's Christian Osgood and I am back this week with Brandon Vukelic. We are talking Multifamily 101, one of our most asked questions of all time: what is the actual process from start to finish in buying your first deal and every subsequent deal? So Brandon, welcome back. I'm glad to have you. Yeah, this guy has brokered and done a lot more transactions than I have, so he is actually the adult supervision here. He knows what he's doing. I've done some stuff, but we'll share a couple stories and exactly how how you do this. So when you're first starting, obviously you're going to find a building that is part of buying a property and you're going to run your analysis. We're going to start from the point where you have analyzed your property. You've decided this is what you're going to buy. What is the next step?

Once you know, I want to buy this, you contact your awesome agent like me and say, I'd like to write a creative, strong offer. Right? And again, the key is speed. In my opinion, speed wins, right? You want to lock that sucker up and just have the right to purchase that property before anybody else does. Doesn't mean it's not going to cost you money at this point, Just gonna cost me, the agent, your partner in this process, half hour or so to write up that offer and get that submitted. We're gonna submit that to the other side. Mm-hmm.

So that's the purchase and sale agreement. There's a few parts to that that are contingencies. Yep, contingencies that are really, really important. For Cody and I in Washington State, we just generally do a feasibility, which is more or less our catch-all. Yeah, we'll usually lay out— I don't usually put in the contract, but I usually talk to the other broker about these are the things that we want to execute in the feasibility, just so every party knows what you want to do. But it's just a period where you get to review, inspect, and decide, is this property actually what I think I'm buying and what I want to move forward on? Best practice for us, and I highly recommend— we were talking about this earlier— multifamily is not single-family. You don't typically get to walk the property prior to putting in your offer. Like you said, speed is everything. You find the deal, lock down the deal. So this is probably going to be your first time walking through the property. You don't want to send non-refundable money before you've ever been inside the building and done any due diligence. People will lie on almost every deal I've ever done. Turns out the income is magically less than they, than they advertised.

Expenses.

Yeah, you want to be able to verify all these things before you hand them money because it can be a huge hassle to get that money back if the deal is not what they advertised.

And you might ask, well, why would I write an offer on something I haven't been through? Well, You gotta keep in mind there's tenants involved, right? And in Washington, we have to post— seller has to post notice to have access to walk that property. They don't want a bunch of tire kickers coming, you know, saying, "I wanna buy this property, I wanna buy that, I need to take a look." And you're bugging the tenants, you're bothering the seller, right, with all these notices. So in Washington, what we do is, it might be similar in other states, is you submit that offer, it's accepted, now you get your chance for a free kind of preliminary walkthrough, we call it. And that's when you kinda walk through, I, with my clients, walk through, let's call it triplex, right? And then we walk through all 3 units. And then we decide, we come to this Y in the road. Okay, now we wanna back out 'cause this is a complete mess, more than we thought. Or the other side is, hey, this is about what we expected, we can tackle this project, or it's way better than we expected, 'cause there's only 2 pictures in the listing, right? And now we're gonna do our inspections, put down our earnest money, and move towards closing. Mm-hmm.

Now, one thing that you can do, and we, Cody and I don't do this, I've actually never done an LOI, but I do get questions about letter of intent. We always start with the PSA because like you said, speed matters. I want to show that we're serious. Let's just skip to the good part. What are your thoughts on LOIs? Have you used them? Yes.

Those are usually for bigger properties. So that's the big boys usually. You know, if you're doing big multifamily commercial, a letter of intent, we should explain, that's what an LOI is. And that's a simplified letter, like spelling out the terms. Hey, Mr. Seller, this is what I'm going to offer. These are the terms I need. And we're going to put that together. If we can agree on this LOI, this letter of intention, then we can create a purchase and sale agreement and submit a formal offer.

Now, for myself on any size property, like the resort we're buying is not that big, but still a $4.5 million sale, it's a bigger thing. I like to do that in person. If you can get in front of the decision maker and just have a conversation of this is what we expect, I mean, sure, you can follow that up with an email and put stuff in writing, but you cannot beat an actual conversation with the other decision maker, whether it's a 1,000-unit purchase or a duplex. If you can have that conversation, that face-to-face time, That beats a letter of intent every time. But we get that question a lot, so I wanted to address that. For the most part, I would not worry about them too much. If you're going after 1, 200-unit buildings, probably a skill that you should learn.

Yeah.

Okay. So we get through feasibility, we've gone through our PSA, we're purchasing. What comes next, Brandon?

Well, if we're not doing what you guys do, which is seller financing, there's no banks involved, you're lucky, fortunate. Most of my clients are financing, and so now we're going to wait for an appraisal. And that's, again, people kinda get frustrated with appraisers, I do too, but they're there to protect the buyer and they're there to protect the bank. You may be willing to pay $1 million on a property, but if it only appraises for $800,000, maybe you have second thoughts about paying $1 million, and your bank sure as heck isn't gonna give you a loan based on the $1 million offer you made. They're gonna base it on $800,000.

When you're doing creative finance, seller finance, contract for deed, any of the creative pieces, that's why we don't have to negotiate on price. That's why you see a lot of these deals stuck on the market forever, It's not that people just get stuck and can't negotiate terms, it's they have to do price because they have to bring it to a bank. If you get creative and you can do seller financing, all of a sudden there's no rules around price because you don't have that appraisal.

Yeah, it's beautiful.

Yeah, and if you notice, that's all coding I've ever done. So if you really want to find an easy place to find deals, look on market for stuff that's been on there for 150, 200 days. If they don't carry a lot of debt on that, they can probably seller finance. And if they do, there's other ways around it with a contract for deed. We're not going to go into the details on that here with subject-to clauses. That goes way in the weeds. But if you can work out something directly with the seller and get around having to borrow from a bank, all of a sudden price doesn't have to be negotiated. You can overpay for a property if you get better terms. And I will take terms over price. Any day of the week. So with the appraisal, I've had some fail. My first one, I actually had a— I think you just ran into this— I had a house with an ADU run like a duplex, separately metered, but legally it is a house with an additional dwelling unit. Single-family is the designation. The appraiser said, I've decided I think it's a duplex. I'm like, well, that's just wrong. It's not. The County says it's not, the building's not, it's obviously a, it's a 5-bedroom house with a 1-bed unit beneath it. It's a converted basement, right? We had to get a whole nother appraiser. It cost me an extra few thousand dollars, and I lost a week of time. Uh, Brandon, you're dealing with that right now on that transaction, right?

It's, uh, it's actually pretty rare that appraisers kill deals, but it's, it's, uh, it's ironic. Currently, right now as we're speaking, I'm dealing with this on a, uh, single family with an ADU. It's a converted garage, uh, that has been built out years ago as an ADU, okay? County records, public records, all title, everything says single-family property. This appraiser is calling it a duplex, and he is refusing to complete the report as a single-family and pushing back. Now, not the end of the world usually, Christian, but for my buyer, he's going 5% conventional because it's single-family. If it's technically a duplex, that's gonna make him have to bump to 15% down,, which is going to be in his, in this case, $40,000 more. And, uh, unfortunately appraisers don't like to be told they're wrong, especially by agents. Oh, and, uh, there's really nothing we can do to push back. So we're actually trying to cancel that appraisal order and resubmit with the AMC, which is the company that manages appraisal orders from the lender.

So that's, that's exactly what I had to do too. We just had to get a new appraiser in there. He looked at it and saw what it actually is and away you go, but it's a hassle. Sounds good. So I'll get through that. One other quick appraisal story. I bought an identical duplex to a friend next door, and I renovated mine beautiful. Painted it, gutted it, decked it up, put $50,000 into it. He didn't do any renovations. I got my appraisal, came in very low, and I just had to accept it. I was trying to do what they call the BRRRR strategy and refinance all the cash out. I had to leave about $40,000 in that deal because of a low appraisal. The funny thing is I ended up selling that duplex 2 months later. They used mine as a comp for his, and his appraised above what I was trying to get mine for. It appraised $70,000 above, completely unrenovated 1955 duplex. So just know when you go into them, don't be emotional about it. Appraisals are supposed to be objective. They really are very subjective. It's kind of roll the dice, so When you get to that stage and you're through it, congratulations, you are almost to close because that is a big, that can be a really big hurdle. Once you're over appraisal, you usually get right through underwriting, which is the next step. Underwriters will finish, on a bank, finish checking the boxes for your loan. You'll probably have a couple little things, maybe strap a water heater to the wall or something that a bank's gonna wanna see. And then, Brandon, are there any other steps before we move to final signing?

No, after you get through appraisal, it's pretty good. I mean, there's a lot of things that can happen if it comes in low. There's a lot of ways to attack that, right, with the seller. You know, maybe you meet in the middle, maybe they come down on price, maybe you back out, whatever. But appraisals are kind of the last contingency that a buyer has before, you know, you're at risk of losing your earnest money if you're not already doing non-refundable.

Now, if you're doing creative financing, you're not bringing all of your own money to the table, there is one more step, which you actually have to pay with someone's money. It doesn't have to be yours, but you do have to figure out the money. A quick rule for this, we call it deal Then debt and equity. So you finished out your deal, you understand, hey, I'm buying it, we're under contract. I'm usually done or almost done with feasibility by the time I get to my capital raise portion. Um, don't raise capital before your deal. That's just the wrong order to do that because I don't know what the right capital structure is for the deal until I have the deal. People mess that up all the time. But once I have my deal, I have my terms, I know we're going to get to close, we need to find the money. And if I don't have it I need to line the right person to the opportunity. And so the rules to that is it needs to cash flow and your investors need to get a return that works for them. If they're trying to bump their equity in the future, you can do the really high buyouts to buy out their equity and offer them ownership. If the property cash flows beautifully day one, you have a ton of cash flow, you can raise it as private debt. And even at expensive debt, Cody and I borrowed at 12%. I've structured something at 18%. I will borrow at 18% to make 45%. That is something that you can do. But you do need to figure out the capital. And if you have your money, or if the money's coming from the bank, you've got through underwriting, with capital lined up and your inspections done, you are ready to move on to final signing. Only rule for final signing is just read all the docs. I've caught errors on 4 or 5 transactions One of them was a $34,000 credit to me that they just forgot. So you actually do want to go, especially on that final settlement statement, it's going to list out every piece of money that goes back and forth. Read every line. I've seen so many people get in there and just start signing away. You only get one shot at the final signing. Spend the hour in escrow, make sure you get it.

Title and escrow are humans, they are human beings, right? They prepare those documents. We make mistakes, humans make mistakes. It's pretty rare too, but yeah, if you don't look over that final settlement statement, you may miss a credit that was owed to you by the seller at closing or something like that. Good luck getting that reconciled after you have closed.

Yeah, that is the full process though. You pretty much find the property, write up the property. Lock up. Yeah, go through your inspections, feasibility, other pieces of due diligence. Records. Yep. Make sure that your capital's lined up, whether it's bank or private. Um, get through that final appraisal or underwriting or capital raise, whatever that looks like. And then pay attention on your signing. If you can do those steps, that's really it. And you go through that a couple of times. It's not a ton of steps to do. You can buy properties very quickly, very efficiently once you get good at this. Yep. All right. That's all we have. You want more on multifamily, uh, 101, follow this channel. We do this every Tuesday. You want to learn more about brokerage, the markets, everything from Brandon. He actually has his own channel, Multifamily Momentum. You want to learn from a master, this is your guy, Brandon Buklich. Until next week, we'll see you guys then.