Disruptions in Oregon Real Estate Episode 6:
Selling an Apartment Complex in Eugene: Out-of-State Owner
Selling an Apartment Complex in Eugene: Out-of-State Owner
As an investor, it pays to remain informed about the state of the multifamily market in Lane County. Understand the factors that can impact sale price and what it will take to put your property on the market. Both buyers and sellers should be aware of the silent market at work in Eugene/Springfield and the value of connecting with a broker who can help you understand your goals and evaluate your options.
What You Will Learn in Episode 6:
- Considerations when selling an apartment complex: number of years of ownership, whether there’s an onsite property manager, recent capital expenses, current rent roll, last three years of operating statements
- The importance of having an LLC to limit your liability when you own an apartment complex
- What a buyer should look for when evaluating an apartment complex for purchase
- Cap rates and sales comps in Lane County
- The silent market in Eugene/Springfield
- The benefits of triple net commercial properties
There are numerous considerations when it comes to selling an apartment complex. A good broker will help you navigate those issues as well as the cap rate and sales comps in Lane County. For buyers, a broker can guide you as you evaluate goals and opportunities and decide what’s right for you.
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Selling an Apartment Complex in Eugene: Out-of-State Owner
Barry MacGuire: Welcome to the Disruptions in Oregon Real Estate Podcast, with your host, René Nelson, helping you stay in the driver’s seat of your investment portfolio. As a commercial real estate broker and investor herself, author René Nelson’s passion is to keep your hard earned real estate investments working for you. Her goal is to help Oregon real estate investors analyze and measure the value of their current real estate portfolio while exploring available opportunities.
Now your host, René Nelson.
René Nelson: Hi Barry.
Barry MacGuire: How are you doing?
René Nelson: I’m really good. Hey, let’s talk about the apartment market in Eugene and Springfield.
Barry MacGuire: Okay. You’ve got a little story to tell us, right?
René Nelson: I do.
Barry MacGuire: Tell us a story please, René.
René Nelson: So I recently received a call from an investor out of the California area. She has owned a fairly large apartment of a couple of 100 units in Eugene.
Barry MacGuire: Oh that’s big.
René Nelson: Yes. It’s really big. Couple of 100 units, and she’s owned it for over 30 years, and she wants to retire. She just wants to cash in and take the money and run. So she Googled how to sell an apartment complex in Eugene, and I popped up because I do a lot of promotion and I’ve talked on my website about how I help people buy apartments, sell apartments, buy RVs, buy mobile home parks- because that’s really my niche, the multifamily world where it’s apartments, mobile home parks, and RV parks. So she called me and said, “I’m interested in selling this apartment complex,” and I was able to walk her through how I go through that analysis. So do you want to talk about that?
Barry MacGuire: Please, yes. I’m from out of state, I’ve got a complex, I don’t know the first thing about how to sell that. How do we do it?
René Nelson: So the first thing that I like to do is find out a little bit of the details: how long have they owned it? Do they have an onsite manager? Have they done any recent capital expenses, like added new roofs or completed siding? Just to get a general arms around the property, find out how many units, and then what I like to do is ask that client to send me a current rent roll and the last three years of their operating statement.
Barry MacGuire: Current rent roll is how far back?
René Nelson: I like within the last 30 to 60 days. Basically what I’m looking for is twofold. I’m looking for how much are they pulling in in rents because I want to compare their current rents to the market rents. Then what I also want to see is whether the tenants are month-to-month or on year-long leases and when the last rent increases were. When I analyze a property, I’m looking at it through the eyes of a potential buyer, even though I’m analyzing it for the seller, because we have to have what I call defendable numbers.
Barry MacGuire: Okay. Those questions will come up as a buyer. So you mentioned real quickly about three years, what was it? Three years of taxes?
René Nelson: Yeah. Three years of their tax statements. So people will either file their real estate under a schedule E if it’s in their personal tax return, or if they own the property in the name of an LLC they’ll typically have that in their form 8825, which is the LLC tax returns.
Barry MacGuire: That’s very common, right?
René Nelson: It is. Most people own larger complexes in particular in an LLC because it gives you that protection that if something happens on the property, let’s say … Well, I had a client that had a property up North and one of the tenants kidnapped his girlfriend, and there was some domestic abuse issues there. Luckily, the lady came out okay, but there were some issues there. If you have violence or something that happens on your property, you want to make sure that your liability and exposure is limited to just the assets that are in that LLC.
Barry MacGuire: LLCs are really important, aren’t they?
René Nelson: It really is, because if you have other assets like other real estate, other property or even cash, your personal residence, you want to really protect that, and that’s where a good real estate attorney comes into play because they’re going to advise you how to put each property in an LLC.
Barry MacGuire: Okay. So you look for the rent roll, you look for the taxes, what else?
René Nelson: Yep. Then I also like to see the most recent year to date operating statement from either the property manager or the individual owner. When most units get about 40 units or bigger, I see that most owners use a professional property manager.
Barry MacGuire: Understandable.
René Nelson: Yeah, because that’s a big complex and there’s lots of tenants, there’s lots of things to deal with. So we’re just starting in the year 2020, I asked this particular person to give me her year to date through 2019, the income and the operating expenses from her property manager. The reason I needed that is she hasn’t of course filed her tax returns yet, but I needed to see how the property performed for last year. The reason that I do that deep analysis is I’m looking for trends. I’ve built this unique software system where I have the ability to analyze and basically spread out three or four years worth of tax returns to look at.
I’m looking for trends for income and expenses. I’m looking to see if the expenses are higher than the industry norm. Because what I see for a lot of buyers is they always think, “Oh, that seller doesn’t know what they’re doing. I can operate that property more efficiently.” Well, is that really true? The only way we’re really going to know that is to do a deep-dive analysis and take a look at that property.
Barry MacGuire: As a buyer, is there a way to see some sort of documentation on how the property management company has been dealing with the issues with the renters?
René Nelson: Yeah, that is a great question. So when I represent a buyer, we put together a document requesting certain things from the seller once our offer is accepted and we’ve entered our due diligence period. So typically, you’re given 25 to 30 days to do the complete due diligence on a property. What I do with my clients is we look at the rent roll, we look at the leases, but then in addition to that, I also ask that the seller provide any documentation that they have where there has been a complaint by a tenant to either the city, the state, or a federal agency as well as the labor and Bureau.
Because if you’ve got a tenant that’s going to make a complaint, they may make it at the state level, but they may also make a complaint at the level called BOLIM. It’s Bureau of Labor in Management, and they’re the ones where tenants can make a complaint against a landlord. So I just put in writing that we want anything that would affect the property itself, property ownership, or any future claims against the property. So if the landlord has been notified that they’re going to be sued or if they have a disgruntled tenant, we want to know that now going into it.
Barry MacGuire: I think that gives you a good cross section of not only the management company but also the tenants that live there. If there’s a ton of complaints from certain tenants and stuff like that, it’s just nice knowing that as a buyer going into the situation.
René Nelson: It really is, because that also helps us understand whether it’s the tenant mix or whether it’s the lack of attention from a property manager. That’s pretty rare in Eugene-Springfield right now. I feel like every property manager is really working hard to meet the needs of the owner and also meet the needs of the tenants. I haven’t heard any bad complaints recently. I just think most property managers are working really, really hard right now to just keep a happy home front for the tenants and also manage the property well for owners.
Barry MacGuire: What’s the next step?
René Nelson: So after I get the rent roll and the tax returns, then it takes me a day or two to analyze that property. If it’s 20 units, I could do that fairly quickly. But when it’s 100 to 200 units, that’s a pretty deep dive that I’m doing, and I’m analyzing it several ways. So the first thing that I look at is something I would almost call forensic accounting, because I’m looking back over the last three years of how the property has performed.
I’m looking for those trends and I’m looking to see whether the expenses been what I call market-level or industry-level. Are they in-line with what everybody else is using to use for maintenance and repair, property management, and utilities? Then, going forward, I look at it from a buyer’s perspective. That is where my defendable numbers come into play.
Because if I represent a seller and I give them a most probable sales price, and we get an offer from a buyer, I have to be able to help my seller defend those numbers to an appraiser, a lender, the buyer, and the buyer’s agent. So I’ll be doing a deep-dive and looking at recent sold properties that have occurred in the last six to 12 months. Those are called sales comps.
Barry MacGuire: In that area?
René Nelson: Typically what I will do is go through Eugene-Springfield. I try not to go out of Lane County, because I don’t feel like it’s really fair to compare a property in Eugene to something in Salem. I’ll see appraisers do that sometimes if it’s really, really big. There was a 300 unit apartment complex that sold December 31st for 51 million and they did have to go out of Lane County to pull one or two of those comparables because a 300 unit complex is pretty big for Eugene.
Barry MacGuire: Okay, so you compare?
René Nelson: Yep. So then we compare and we look at like and similar properties that have sold. What I’m doing there is I’m looking for trends, I’m looking at price-per-unit, I’m looking at the sales price, and then I’m looking at the cap rate that was used. So to refresh everybody’s memory, a cap rate is a snapshot of how a property performs at this date in time. It’s not five years down the road, it’s not even two years down the road. It’s today. If I bought this property today, how would this property perform for me as the buyer?
I use a cap rate. So the cap rate is not something that you can Google or look up. The cap rate is set by the market, and that’s one thing that I’m pretty engaged with because I continually talk to other brokers and appraisers to find out what are they looking at in properties and what are cap rates for properties that they’re bringing onto the market or selling, because that helps set the price per square foot and the price per unit.
Barry MacGuire: The higher the cap rate, the better?
René Nelson: When the cap rate goes up, that is a better rate of return for the buyer, but that also can drive the price down. So cap rates can be tricky, and I like to really look at what’s happened over the last six months for cap rates, because a cap rate can change pretty quickly. The other thing you have to look at with cap rates is that it’s based off of the condition of the property, so it’s not just the net operating income. If the property is older and has some deferred maintenance, that’s going to have a higher cap rate.
The reason is there’s more risk. So in a healthy market, like right now where we’re at in Eugene, a lot of the multifamily properties and apartment complexes are selling off-market. They don’t hit the open market where they’re listed in LoopNet or CoStar or some of the other traditional marketing sites that we use.
Barry MacGuire: Why?
René Nelson: Because a lot of people, brokers in particular, have what I call a silent market. So I have a list of buyers that are looking to buy, who are pre-qualified or cash buyers, and they say, “When you see 60 units that are 1970 or newer, call me, I want to buy them.”
Barry MacGuire: So it’s a case of supply and demand. It’s just such a hot demand right now.
René Nelson: It is. I have a whole list of sellers that I’ve analyzed properties for and they’ve said, “I’ll sell, but I don’t want to openly market my property.” They don’t want their property manager to know, or more importantly, their tenants to know, that they’re marketing the property. I call that my silent market because the sellers will call me, we’ll do a deep-dive analysis, I’ll give them a most probable sales price, and then they’ll say, “Yes, I’m interested.” So I’ll give you an example. I have a client right now that has a newer property in the campus area. It’s 32 beds. It’s within two blocks of walking distance to campus.
It’s in the $4 million range. But he doesn’t want it openly marketed because students are they’re tech savvy, so they’re Googling all the time and they’re on the web and everything else.
Barry MacGuire: They can get information pretty quickly.
René Nelson: Yes, and he doesn’t want his student tenants to see that and think, “Oh my gosh, the apartment I live in is going to be sold. They’re going to jack my rent up,” because you can’t do that anymore.
Barry MacGuire: No.
René Nelson: You can’t jump those rents up. Most students are in a 12-month lease, so they’re protected. But they’re young so they don’t know that, and so-
Barry MacGuire: A little panic sets in.
René Nelson: Yeah, exactly. A lot of my sellers just say, “I want to sell, but I don’t want to openly market it,” and so I have this list of silently available properties. In the last 12 months, I’ve done probably $35 million in real estate that I have helped my clients either buy or sell that has never hit the market.
Barry MacGuire: Wow.
René Nelson: That’s what a silent market is.
Barry MacGuire: Okay, real quickly, back to the cap rate. Is there a particular cap rate range that you’re looking for?
René Nelson: Yes. Thank you. Right now, on an average, we’re seeing cap rates around five to five and a half percent. That’s the average cap rate. So as an example, if it’s lower than that, if it’s four and a half percent, what that indicates is that seller is being aggressive and they’re asking for a high price and the cap rate is low.
Well, here’s the problem. If a buyer needs financing, they’re going to go to a bank or a credit union in town, and the banks and credit unions right now are loaning interest rates around 4.25. So if you’re buying at a four and a half percent cap rate and you’re borrowing money at 4.25, the spread isn’t enough. There’s too much risk in relation to buying that property.
Barry MacGuire: Well, you’re looking for a little cashflow too, aren’t you?
René Nelson: Yeah.
Barry MacGuire: Yeah.
René Nelson: Yeah.
Barry MacGuire: The cash flow is not there with those numbers.
René Nelson: That’s exactly it. Typically, what I see there is that the seller is happy with their property. They’d sell it if the right person came along, but they’re happy enough that they don’t want to get in line with market reality, which I’m okay with. I mean, you know what? It’s one of those things where they say, “Hey, if you find a buyer, I would sell, but this is my price.” Really that indicator, if they’re below a five cap in this market, is that I’m really happy with what I have. If something better came along, I would consider it, but I’m pretty happy with what I have.
So I just add them to my silent list at that point, and when a buyer approaches me … I have had situations where buyers are in a 1031 exchange, they’re in their last two to three days, maybe their property that they were pursuing fell apart or something came up in the due diligence and they’ve got two to three days to identify or they cut a big check to the government.
Barry MacGuire: Oh boy.
René Nelson: In a situation like that, it may make sense to buy something at a four and a half percent cap rate. But market cap rates are really between five and five and a half percent, because at that point you can get cheap money at 4.25, you’re buying at a five and a half cap rate, and there’s still opportunity to make money on those properties.
Barry MacGuire: Okay. So you’ve crunched a little bit of numbers. What’s the next step?
René Nelson: Then at that point, what I also do is an analysis for the location and the demographics. So, is it in a good location? Are you going to be able to attract quality tenants and retain quality tenants?
Barry MacGuire: Is that property going to appreciate?
René Nelson: Yes, that’s exactly what I look at. What’s the opportunity for the market? Is it in an established neighborhood or is it right on the fringe of a changing neighborhood, where maybe it’s a little industrial or a little rough? Your tenant pool is going to change continually if you’re on that fringe, and that of course makes a difference in the cap rate.
If you’re on 12th and Main or corner of Main and Main, you’re going to be able to get a 5% cap rate. If you’re in an outlying area and you’re in that fringe changing neighborhood, you’re probably looking at a six to 6.25 cap rate, and that’s just one of those things that it takes years of experience to learn, to know how to price it, and where the most probable sales price is.
That really is, in my opinion, what I have to offer to clients. I do a deep-dive analysis that generates a 14-page report for someone that will show them how their property is performing. It shows the income through an analysis standpoint, it gives them the most probable sales price, and then it also shows them the opportunity that’s available to them as well as any risk and exposure. I put that together in a 14-page report that’s really designed to help people that are debating about whether they should sell their apartment complex in Eugene.
You can give me a call, I can run that analysis and then walk you through it and say, “Okay, here’s how your property is performing compared to other properties in the market, here’s your most probable sales price, here’s three other properties that are like and similar that have sold in the last six months, here’s how long it’ll take us to probably get an offer.”
Most of that happens within 30 days. When I put the word out and we start advertising it, we will typically get an offer. If it’s priced right, we often will get an offer within just a few days, and then we know within 30 days, because at that point the buyer has completed their due diligence and we know if that deal is going to stick or not.
Barry MacGuire: It’s pretty exact science here.
René Nelson: It is, it is.
Barry MacGuire: What’s the next step?
René Nelson: Really at that point then, I give the analysis to the client and walk them through it. I really ask them to make a gut check, make sure that this fits what they want to do, and of course, then we also look at where will they go? Are they going to do a 1031 exchange? Do they want to buy up and buy more units? Do they want to go to a different location? Do they want to go out of state? So that’s also part of my analysis, is what the seller wants to do.
Frankly, what I’m seeing for a lot of people is that they’re just deciding that it’s the right time to sell and they want to take the cash and move on. Some people are putting their money into municipal bonds because they’re tax free, and they’re just steady-Eddie to get a paycheck in the mail.
Barry MacGuire: Sure.
René Nelson: Other people are buying triple-net commercial property where the tenant is responsible for those three triple-net things, which are the taxes, the insurance, and the maintenance. That really just gives that owner peace of mind, that they can segue or 1031 exchange at a multifamily. They go into commercial property and the tenant is going to take care of the maintenance of the property and the taxes and the insurance so that seller, when they own that property, they’re just going to get a check in the mail.
I’ve got a client right now that owns a small portfolio, so they own an eightplex and a series of duplexes, and they’re going to 1031 exchange out of those properties and they’re going to go into a single asset that has a national tenant in it, and that tenant is responsible for everything, taxes, insurance and maintenance.
Barry MacGuire: It’s like a retail business or something?
René Nelson: It is a retail business. My clients are going to buy a Dollar General. It has a brand-new 15-year corporate guarantee lease on it, and for my clients, it’s peace of mind. They’re just going to get a check in the mail for the next 15 years and they don’t have to do anything. It’s turnkey.
Barry MacGuire: Fantastic.
René Nelson: Dollar General doesn’t even want you on the property to pick up a popsicle wrapper. They specifically ask owners not come to their site. I mean, you can visit, but they don’t want you showing up with a toolbelt saying, “Hey, I’m here to fix the roof.”
Barry MacGuire: I’m here for the gutters.
René Nelson: Yes, exactly. Exactly.
Barry MacGuire: Well, that’s fantastic. That’d be a great situation to be in as an owner.
René Nelson: Yeah, so for an owner who has literally rolled up their sleeves and painted, screened tenants, mowed lawns, and cleaned out gutters and done all that hard, heavy lifting over the years, a lot of those owners are starting to age, and they need retirement, they need ease of management, and they need that steady, dependable income that their properties have generated for them.
Barry MacGuire: After going through the whole process, that’s a little light at the end of the tunnel. It’s like, “Okay, there we go. Dollar General, we’re coming your way.”
René Nelson: Yes, yes. Frankly, that’s the reason that I do that deep dive analysis for my clients. They give me the information and then I become like the mad scientist behind the curtain from Wizard of Oz, where I’m just over there crunching numbers and digging through the information twofold, because I want my clients to understand how their property has performed up to this point, and then more importantly, where they’re going. What’s the light at the end of the tunnel for them?
Barry MacGuire: We need people like you because most of us, to be honest, we don’t like doing that kind of stuff. You’re vital.
René Nelson: I love that.
Barry MacGuire: Really?
René Nelson: I get up every morning, eat cereal, and think how many numbers do I get to crunch today?
Barry MacGuire: If people are wanting to sell or buy or what have you, if they want to get in touch with you, how can they do so?
René Nelson: The best way is to call me at 541-912-6583, or you can go to my website, which is eugene-commercial.com.
Barry MacGuire: René, thank you so much.
René Nelson: Thanks, Barry.
Barry MacGuire: You can tell René’s got a real passion for what she does. Once again, the phone number is 541-912-6583, or go to the website, eugene-commercial.com. Thanks for listening.
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