Power of Sale - Won't share expenses

[streetcore]

I emailed a realtor to ask about utility costs for a duplex where the landlord currently pays all utilities. This same duplex was on the market for several months earlier this year and was then taken off the market. It reappeared on MLS last week for the same asking price as before.

The realtor has been helpful in trying to obtain some information regarding the expenses, but today he replied and said the home is a power of sale and the lawyer in charge says the utilites are not available to share. His response also referred to "the person holding the mortgage". So it sounds like it might be a private lender, rather than a bank.

Is this kind of behaviour normal for a power of sale? If you were considering a property like this how would you go about estimating the expenses? I'm a new investor looking for my first rental property. So I'm not sure I want to get involved with something like a power of sale, but I'd still like to understand more about the process.

On the surface this looks like a decent property. It's fully rented with at least one long term tenant and based on rough calculations it looks like it might provide modest cash flow even with 20 per cent down. However, if utility costs are excessive it could be a loser. If it's making money or breaking even I don't know why it would end up as a power of sale.

Thanks,

Andy

 

[SVS]

Do you know any other realtors or investor in the area? Try contacting somebody in a similiar area of town with a similiar building, or experience with similar building. There should not be a huge variance unless there is issues with the building envelope and air is getting in. Add 20-30% on top to be really safe, there's no reason it would be way out of wack compared to a similar building with the same utlitity rates.

 

[SVS]

I emailed a realtor to ask about utility costs for a duplex where the landlord currently pays all utilities. This same duplex was on the market for several months earlier this year and was then taken off the market. It reappeared on MLS last week for the same asking price as before.

The realtor has been helpful in trying to obtain some information regarding the expenses, but today he replied and said the home is a power of sale and the lawyer in charge says the utilites are not available to share. His response also referred to "the person holding the mortgage". So it sounds like it might be a private lender, rather than a bank.

Is this kind of behaviour normal for a power of sale? If you were considering a property like this how would you go about estimating the expenses? I'm a new investor looking for my first rental property. So I'm not sure I want to get involved with something like a power of sale, but I'd still like to understand more about the process.

On the surface this looks like a decent property. It's fully rented with at least one long term tenant and based on rough calculations it looks like it might provide modest cash flow even with 20 per cent down. However, if utility costs are excessive it could be a loser. If it's making money or breaking even I don't know why it would end up as a power of sale.

Thanks,

Andy

"If it's making money or breaking even I don't know why it would end up as a power of sale." There could be a million and 1 reasons! Don't worry about that just treat it as any other investment and do your homework. Power of sales are not always negligence or people being irresponsible sometimes life catches you with a sucker punch.

 

[Thomas Beyer]

Was this a grow op with excessively high utility costs ?

If not, then estimate expenses and write an offer that is taking into account some unknown facts, i.e. below where you'd offer with fully disclosed facts.

Likely a court will review all offers by a certain deadline so make the offer as clean as possible.

Fortunes can be made here for the astute !

 

[streetcore]

I did some Googling and found out there was a fire in one unit about 6 years ago with an estimated $50K in damages. Two tenants also suffered fairly serious injuries and the fire inspector said an upstairs smoke detector was installed near the floor, so the tenants weren't alerted in time to escape. So perhaps there were some lawsuits, lengthy vacancies, and/or repair costs that contributed to the power of sale.

 

[RE123RE]

Hi,
where is the property? do you live nearby?
even 10% Cap can mean only $200 a week as its only 2 unit..
which brings the question - how much time will you have to spend on this duplex?
.. referring to perhaps the most important question:
Who will manage it superbly? what do you know about them? what are the options mgmt-wise?
the reason I am asking is:
in numerous cities across Canada, thousands, there isn't one PM you can call not crooked.
Thanks

 

[Matt Crowley]

^ Mmmm no. Although I am sorry if you have had bad experiences with PMs. Not everyone here is interested in investing in Panama or whatever.

Hi,
even 10% Cap can mean only $200 a week as its only 2 unit..

? Makes no sense. Cap rate is NOI / property value. Cash flow is after debt. Let's just throw away this comment.

There could be some opportunity in this deal, I'd keep working on it. Consider checking with the city you are in to see if there is any way to obtain the permits that were pulled to remedy the damage after the fire. In Edmonton, you can perform a "Search of Record" for $100. I did it on a place I bought that had a fire. We were able to see all of the detail for the contractors performing the repairs. Insurance companies become involved with a fire and the house needs to be brought up to today's code. You can often end up with a good product after a fire.

 

[Alvaro Sanchez]

In most power of sales is buyer be aware or "as is" no guarantees.... being a first time investor, you should walk before trying to run. Unless you want to take a seminar in the school of hard knocks. Crunch the numbers and in case you don't have them then estimate (on the higher end).

 

[RE123RE]

makes no sense. Cap rate is NOI / property value. Cash flow is after debt. Let's just throw away this comment.

Hi,
It actually makes total sense if we assume 25% down and 75% LTV which is pretty standard for RE investments apple to apple comparisons.
The point I am sorry you missed, is actually a critical one business-wise. Therefore, I will elaborate for you a bit:
CAP is just a percent and the much more important figure is the $$ amount.
If in theory, just for our example, there was a $1000 home with 20% CAP. then while 20% cap is Amazing, we are only talking about $200 a year here or only $16.66 a month(!)
The point is don't buy a duplex for 200K because it's say 8% cap if you can buy a 1 million 9-plex even if the 9 plex is 'only' 7% cap.
Simply, you'll see more dollars coming in with the 9-plex. The other intention was to suggest not to buy small, especially if it's far from you and will require more time per unit compared to say 10-plex or bigger closer to home if possible.
Thanks

 

[Matt Crowley]

CAP is just a percent and the much more important figure is the $$ amount.

I do see what you are saying, thanks. There is definitely benefit in understanding final cash flow and I probably breezed through that comment too quickly. All I am saying is that "cash flow" adds nothing to the preliminary analysis. Lending options are not equal across all asset types. Interest rates, amortizations, terms, and prepayment vary. Most smaller investors max out leverage.

Gross $$$ matter. No doubt.

But "cash flow" is just something to sell newby investors. You see it often advertised: "WOW! $800 Cash flow per month!" As you know, nearly every property "cash flows". All you do is put down more cash so your mortgage becomes lower.

In part, yield (NOI / property value) reflects asset risk. Hotel revenues are much riskier than multi-family so we see 10-14% cap rates in Canada vs. multi in 3 - 6%. When it comes to smaller investors like us, we can do yield calculations on the assets we can afford with a set amount of capital to spend.

So if we start with $200k to spend we might be able to buy one multi building at 75% leverage ($800,000 property cost), or up to $1,000,000 of SFH at 80% LTV. Or, we could buy one personal residence after another at 5% down and grow the portfolio that way. The options are actually not that broad for smaller investors:

• townhome (nearly turnkey, low-high R&M, may have condo fees, yield varies on product type)
• condo (turnkey, low R&M, low PM, low headaches very low yield)
• SFH (detached home, suited)
• duplex (fairly turnkey)
• smaller multi-family (probably 4 plex)

That is all there is to it. Understand the yield on those assets. Cash flow is an investor choice and essentially a function of investor risk tolerance. The "yield" is the underlying productive capacity of the asset. You can't change it. You will top out at rents at some point and the operating expense budget is pretty much always fixed. R - E = NOI. NOI / property cost = yield. Choose the productive asset you like best then choose the amount of cash flow you want as a function of the amount for risk (or leverage) you are comfortable with.

3 sources of property return:
NOI: safest. Lower the leverage the higher the cash flow. The higher the yield the higher the NOI.
PPD: fairly safe savings. You will need to hold property for 3 years in flat market to pay Realtor fees and closing costs at liquidation.
Capital appreciation: hugely variable. Absolutely zero guarantees. Like the TSX.

When people talk about "cash flow" they are just sliding the risk profile away from the risky capital appreciation and lower on the risk scale up to NOI. Cash flow doesn't tell you anything about the asset - it just becomes another cloak you need to remove before getting to the bones of what is actually going on.