The Complete Guide to Buying and Selling Apartment Buildings Second Edition STEVE BERGES John Wiley & Sons, Inc.
THE COMPLETE GUIDE TO BUYING AND SELLING APARTMENT BUILDINGS
The Complete Guide to Buying and Selling Apartment Buildings Second Edition STEVE BERGES John Wiley & Sons, Inc.
Copyright 2005 by Steve Berges. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. The publisher is not engaged in rendering professional services, and you should consult a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com. Library of Congress Cataloging-in-Publication Data: Berges, Steve, 1959 The complete guide to buying and selling apartment buildings / Steve Berges. p. cm. Includes index. ISBN 0-471-68405-8 (pbk.) 1. Apartment houses United States. 2. Real estate investment United States. 3. Apartmetn houses Purchasing United States. 4. Residential real estate Purchasing United States. I. Title: Guide to buying and selling apartment buildings. II. Title: Buying and selling apartment buildings. III. Title. HD259.B47 2004 333.33'8 dc22 2004042246 Printed in the United States of America 10987654321
D E D I C A T I O N It has been said that behind every good man is a good woman. This statement holds true for me, except that in my case, there have been two good women. This book is dedicated to the two women who have had a most profound influence on my life. They are my mother, Eleanor May Miller Berges, and my wife, Nancy Anne Thompson Berges. In memory of my mother, thank you for your kind words of encouragement throughout my childhood years. I will always remember your example of dedication and perseverance to attain your goals. It was you who convinced me of my self-worth, and it was you who taught me to believe in myself. Your example will forever live in my heart. To my beloved wife, thank you for your continued support over the years. While my mother laid down the torch of life, you have picked it up in her stead. You are now the driving force in my life. It is you who carries on her tradition of love, confidence, and inspiration. It is you who gives me strength when I need it most. Of all the things God created, truly you are the most beautiful. v
A C K N O W L E D G M E N T I wish to express my sincere thanks to my wife, Nancy, for her editorial support during the production of this manuscript. Her wisdom and insight have contributed significantly to the successful completion of this book. vii
C O N T E N T S CHAPTER 1 Introduction to Multifamily Ownership 1 Introduction 1 Holistic Approach 2 Background 4 Market Outlook 6 Regional Trends 9 CHAPTER 2 Advantages of Multifamily Ownership 13 Time and Efficiency 14 Market Liquidity 15 Transaction Costs 16 Concentration of Units 17 Management and Labor Considerations 17 Tax and Record Keeping Considerations 18 Divestiture of Property 18 CHAPTER 3 Bridging the Gap 21 Strategies 22 Leverage The OPM Principle 23 Clearly Defined Objectives 24 Maslow s Hierarchy of Needs 27 Conquering Your Fears 29 CHAPTER 4 The Value-Play Strategy 35 Buy and Hold versus Buy and Sell 36 Ten Ways to Create Value 39 Diamonds in the Rough 47 How to Tell a Diamond from a Lump of Coal 61 CHAPTER 5 Establishing Your Niche and Locating Properties 69 Establishing Your Niche 70 Availability of Resources 70 Property Size 71 Property Age 74 Holding Period 79 ix
Contents CHAPTER 6 Six Ways to Locate Properties 85 Real Estate Brokers 86 Classified Advertisements 87 Industry-Specific Real Estate Publications 88 Local and National Web Sites 88 Associations and Real Estate Investment Clubs 89 Banks 89 CHAPTER 7 Financial Analysis 91 Valuation How Much is That Property Really Worth? 92 Two Crucial Principles That Saved Me $345,000 93 Valuation Methodologies 95 Financial Statements 102 Five Key Ratios You Must Know 117 The One-Minute Assessment 124 How to Read Between the Lines 125 CHAPTER 8 Case Study Analysis 129 Case Study 1: 52 Units in Flint My Way or the Highway 129 Case Study 2: 12 Units in Saginaw Below-Market Rents 142 Case Study 3: 16 Units in Beaumont A Banker s REO 151 Case Study 4: 98 Units in Houston Creating Synergism through Consolidation 162 CHAPTER 9 Negotiation Strategies and the Due Diligence Process 175 Five Cardinal Rules of Successful Negotiation 176 The Due Diligence Process 185 CHAPTER 10 Financing Your Acquisition 191 Traditional Financing Alternatives 192 Secondary Financing Alternatives 203 Additional Financing Considerations 206 CHAPTER 11 Closing the Deal 215 Closing Fundamentals 216 Closing Credits Can Add Up 219 CHAPTER 12 Managing Your Property 223 Hiring a Professional Property Management Firm 224 Your Role as a Strategic Manager 227 Expect the Unexpected 228 x
Contents CHAPTER 13 Four Effective Exit Strategies 233 Outright Sale 234 Refinancing 235 Equity Partnership 245 Exchange of Properties 248 Combining Methods 249 CHAPTER 14 Five Keys to Your Success 255 Understanding Risk 256 Overcoming Fear of Failure 259 Accepting Responsibility 261 Willingness to Persevere 264 Defining Your Sense of Purpose 267 APPENDIX A: WWW.THEVALUEPLAY.COM 273 APPENDIX B: WWW.SYMPHONY-HOMES.COM 275 GLOSSARY 277 INDEX 297 xi
THE COMPLETE GUIDE TO BUYING AND SELLING APARTMENT BUILDINGS