JAMES ROBERT DEAL ATTORNEY PLLC
PO Box 2276, Lynnwood, Washington 98036
Telephone 425-771-1110, Fax 425-776-8081
EARN 9 PERCENT INTEREST ON 100K
HIGHLY SECURED LOAN
Dear Potential Lender,
My wife and I have owned the rental home at 4926 212th Street SW, Mountlake Terrace WA 98043 since 2004. The time has come for us to develop it into a 15-unit apartment building. We are applying for a $100,000 loan to be used for further development costs.
The suggested interest rate is 9.0% but is negotiable. The note will be secured by a deed of trust, by assignment of rents, and by assignment of the architectural plans, survey, and other documents. At an 9.0% interest rate the monthly interest-only payment would be $750.00.
We bought this home because it was on a busy street with a high traffic count and because the Mountlake Terrace sign ordinance allows erection of a large, unlighted sign. I had given some thought to establishing a law office there. However, I have chosen to focus instead on listing and selling real estate with KW Everett. See www.WashingtonAttorneyBroker.com.
Currently the property is rented to a family for $2,400 per month. Potential lenders lender should not go onto the property unless I am there. Do not knock on the door or talk with the tenants. They would just tell you to call me.
We believe that the value of this property is around $950,000. I will discuss valuation below. It is worth $950,000 because we have architectural plans for the construction of a 15-unit studio apartment building. Plans been approved, subject to reasonable conditions, by Mountlake Terrace Planning.
Zillow says the value of the property as a rental house is around $486,000. NWMLS said that it is worth $942,000. With approved architectural plans, survey, and city approvals in place it is worth $950,000.
We owe $225,000 on this property. We want to borrow $100,000. Total debt will then be $325,000, which when divided by $950,000 produces a low 34% loan to value ratio. If the property were worth only $500,000, the LTV would be 65%, still a low LTV.
For development purposes we want to borrow this $100,000 in second position, with interest-only payments, and with a payoff in 24 months, by which time we will obtain construction financing and pay off the $100,000.
The lender will be named on the fire and liability insurance policy. There will be mortgage title insurance through Ticor Title to verify there are no liens against the property other than the first position mortgage. Escrow will also be handled by Ticor Title. There will be a collection account through which we would make monthly payments. There will be a penalty for late payments. The collection account will then transfer monthly payments directly into the lender’s bank account. We will pay for all closing costs.
We could get a new first-position mortgage, but we like the current 4.5% rate on the first-position mortgage.
We reserve the right to sell the property and pay off the $100,000 loan early. In fact, we currently have the property listed for sale for $950,000. See NWMLS 1582236. If we find a buyer for $950,000 before we get the $100,000 loan, we will sell the property for that amount. If we get the $100,000 loan, we will pull the property off the market and invest in final engineering plans, and other work that will increase the value of the property. After doing that extra work, we might then put the property back on the market at a higher price. Or we might continue with Daniel S. and build out the apartment building.
If you have $100,000 to lend for two years, with a good interest rate and good security, feel free to call or email.
Take a video walk through of the property on YouTube at this link:
See photos, videos, plans, survey, and cost calculations at this link:
Find links to everything here:
This property can be developed into an apartment building because the lot is large, around 10,450 square feet. The property is specifically zoned for apartment buildings. Mountlake Terrace wants more housing built, and is cooperative.
We will partner with Daniel S., our favorite general contractor, for development of this property. Daniel will build the building for $100 per square foot, provided that he will receive 25% of the equity in the property. Daniel S. would probably make the same deal with someone who buys the property from us.
Valuation and construction cost estimates:
We have prepared a spreadsheet showing estimated rents, costs of construction, cash flow, and valuation. It is posted on App.Box.com. It is entitled “Financing-Rent, Values, Cash Flow 100-150”. The spreadsheet figures are estimates. They are subject to revision.
There are two construction cost estimates based on two different costs per square foot, $100 and $150.
The $100 per foot construction cost used in the first column of the spreadsheet assumes that Daniel S. will be the general contractor. Daniel S. has offered to hold construction costs at $100 per foot, including materials, in return for 25% equity in the finished building. Daniel S. has a background in architecture and engineering, and so partnering with him would reduce design and engineering costs.
The $150 per square foot cost in the second column of the spreadsheet assumes that the buyer will be a contractor or will be experienced in construction. In that case the cost of construction would be higher, but the buyer would not have to share 25% equity with Daniel S.
At a $150 per foot construction cost, a buyer would have to put around $1.0 million down to get a solid net income, which I estimate would be around $4,068 per month after PITI, 5% vacancy factor, 5% repair allowance, and 10% management fees.
Given estimated net income of $184,400, after paying all these expenses, and assuming a CAP rate of 5%, the value of the completed apartment building should be around $3,688,000.
If we choose to sell the project to someone else; if the buyer keeps the vacancy factor below 5%; if the buyer is handy and can do his own maintenance; if the Buyer will manage the building himself; his cash flow would be significantly higher and the value of the completed apartment building would likewise be significantly higher.
If the buyer is not experienced in construction and if the buyer is going to hire a contractor who will give the buyer a fixed bid, the Buyer might have to spend $200 per square foot.
The real value of this property is in the land and the approved permits. Fortunately, the lot is big enough for 15 units and 17 parking spaces. Fortunately, this corner lot is zoned for apartments.
The reason for building 15 studio apartments instead of a mix of different sizes is that studio apartments require only one parking space per unit, whereas one-bedroom apartments, for example, require 1.5 parking spaces per unit. Building all one-bedroom apartments would reduce the number of units to only 11 (17/1.5). Although rents are higher for one-bedroom apartments, the total rent for 11 one-bedroom apartments would be less than the total rent for 15 studio apartments. Research indicates that demand for studio apartments is strong. Many young couples starting out, single parents with a child, or college students will be interested in a smaller and less expensive studio apartment. The property is just uphill from a bus stop, with buses that go right to the transit center and from there to other destinations.
The ceilings will be high, creating room for storage cabinets along the interior walls up near the ceiling.
The building will have an extra room which will serve as a common area.
Part of the building roof will be flat, which will afford tenants and guests a place to relax, with an expansive view of the neighborhood.
The buyer will have to advance around $70,000 for a performance bond. I did not included the cost of the bond in my calculations, because it is refundable once the building is completed.
Because the property lies on a busy arterial with a high traffic count, and because a large non-lighted sign can be erected on the street, another potential use is a professional office or mixed use.
Current rental status:
This is a four bedroom home. It is rented for $2,400 per month. The living space is 1,770 square feet in size. One bedroom is huge. Two bedrooms are large. One bedroom is medium in size. This is a one bathroom home. It has a washer, dryer, dishwasher, garbage disposal, and all other customary appliances.
The floors are hardwood and ceramic tile throughout the home, except for linoleum in the bathroom. The home is equipped with ADT security.
We repainted, updated, and remodeled this home in 2019.
There is no garage, but there are three off street parking spaces on the west side of the home. And there is a huge front yard big enough to park several RVs.
Feel free to call me at 425-774-6611 if you are interested in funding this secure loan or buying this property.
James Robert Deal
WSBA # 8103
DOL # 27730
NMLS # 64871