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Time for serious due diligence

Saturday, May 15

This week I negotiated a purchase sale agreement (PSA).  There was some back and forth because the numbers were not adding up.  The seller had higher expectations for what they might get for the apartment. Also it became clear that the NOI didn't make sense.

Now that I have a signed PSA, I have 60 days to insure that this property is what I think it is.  The agreement does allow for a time extension if something major comes up that requires additional investigation time.

What are my expectations?

  • Have a good understanding of the rental market, vacancies now and into the future.
  • Have a good idea of where my tenants are likely to come from.  Nearby employers, schools, tourism
  • Be sure that the financial information accurately reflects what the seller has given me.
  • Review what I can do with the property, but don't let that effect what the purchase price should be.
  • Insure that the building is in sound condition and if not determine what repair allowances should be requested.
  • Interview tenants, talk to neighboring apartments, contact the police department, check for wany violations.
In short understand what I'm really getting into makes financial sense now and into the future.  Determine what I'm going to do with the property is their any ways to add value? 


 

 


 


Comments

  1. Colleague_thumb_avatar-jonk

    Jon Klaus Reply
    almost 4 years ago

    Charles, 60 days seems like plenty of time, but get after right away, you know how unexpected delays or issues almost always arise. I'm looking forward to hearing all about your experiences with this.

  2. Colleague_thumb_avatar-inspectagator

    Alison Feliciano Reply
    almost 4 years ago

    Excellent post Charles. Keep us posted on this project.

  3. Colleague_thumb_avatar-cperkcpa

    Charles Perkins Reply
    almost 4 years ago

    Jon, I think 60 days will be adequate. This is my first apartment purchase though and I will want to spend plenty of time getting to know the property. The financial statements are only part of the picture. I want to insure the long term success of this property.

    Allison, thanks for dropping by. I will have many more posts as I go through this deal and hope to share my experience here.

  4. Colleague_thumb_avatar-tod

    Tod R. Reply
    almost 4 years ago

    Now that you have it under contract, can you share some round numbers with us?

    Are you able to find a source for sales comps?

  5. Colleague_thumb_avatar-cperkcpa

    Charles Perkins Reply
    almost 4 years ago

    The apartment is 47 units with one unit currently being used as an office. Each apartment has a large storage space approx 8x10 that has been included with the rent for free.

    The bldg was constructed in 1920 and is in the heart of downtown Bremerton. It is a three story brick bldg with a basement current zoning allows for a 6 story bldg. The basement exterior walls reinforced concrete and above the basement are 12 1/2" reinforced walls. The basement ceiling is a concrete pan joist system.

    There is approx. 24146 sf of occupied areas. Bldg make up 20 -studio units, 20 1-bdrm units and 7 2-bdrm units.

    Purchase price $1,600,000

    Gross Scheduled Rent $287,450 Vacancy @ 5% -14,373

    Net Rent $273,078 Operating Expenses - 143,228 NOI $129,850

    I will be reviewing books and records this week to confirm that financial records, rental history, maintenance logs and other supporting documents support these numbers.

    I have access to CBA and will be reviewing comparable sales and market cap rates for similar properties sold.

  6. Colleague_thumb_avatar-cperkcpa

    Charles Perkins Reply
    almost 4 years ago

    A correction. the concrete walls above the basement are not reinforced, but are 12 1/2" thick. The bldg was built before seismic bldg codes were adopted in 1927.

  7. Colleague_thumb_avatar-spirrie

    Scott Pirrie Reply
    almost 4 years ago

    An 8 cap in Washtington is tough to find! I have learned from talking commercial brokers at the REIA masterminds the Puget Sound region averages $4000 plus per unit per year for expenses according to them and latest survey by Dupre Scott.

    It might be worth it to purchase their report. http://www.dsaa.com/productsservices/publications/er.cfm

  8. Colleague_thumb_avatar-cperkcpa

    Charles Perkins Reply
    almost 4 years ago

    Scott, I agree that finding an 8 cap in Washington is very difficult. It took me quite awhile and it was necessary to review a number of sources. Several times I thought I might have found a deal only to discover the neighborhood was poor or the building was vacant.

  9. Colleague_thumb_avatar-tedakers

    Ted Akers Reply
    almost 4 years ago

    Good post. Do you see opportunity for rent increases, other income options, or expense reductions to increase the NOI and cap rate?

  10. Colleague_thumb_avatar-cperkcpa

    Charles Perkins Reply
    almost 4 years ago

    Ted based on my survey of neighborhood apartments, it seems that the apartments here are at least $50/mo below market still. Nicer apartments are going for more than that. Updating the apartments would increase the rents as well.

    They have been giving away storage and the storage is quite large. The laundry facilities seem inadequate and there is likely some potential there especially if I find my own equipment.

    I intend manage the apartment myself and hire maintenance help as needed.

    All in all, I see a lot of opportunity to increase the NOI. Overtime there is a lot of opportunities to increase the cap rate as well.

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Colleague_thumb_avatar-cperkcpa

Charles Perkins

Building on Tax & Accounting
Landlord
Seattle, Washington


Website: http://www.charlesperkinscpa.com
Phone: (206)422-5504

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