Seeking Advice! How Much Should I Offer for the Remaining 2 Units in the Building?

[Account Closed]

Hi Everyone,

I recently purchased the 4th unit in a 6plex and now I'm considering buying the remaining 2 units. So far, I paid below market rates because the building was severely under managed. Now, the other 2 owners know I want to buy their units so I anticipate they will be asking for a premium. I could really use some guidance on how to approach this.

To provide some context, the building is in a premium location, with easy access to lakes, restaurants, bars, grocery stores, and public transportation. I've recently had the roof replaced and fully updated the common areas.

Here's a breakdown of the situation: The units are currently marketed as furnished rentals (cashflow well), and based on the current income of the 4 units I own, I anticipate that all 6 units combined will gross $182,400 annually. That is considering 15% vacancy and pricing seasonality. I currently manage the property so, I know that the operating expenses amount to $67,204 annually.

I've done some research and found that the cap rate in our area typically falls between 7-8%. Considering the building is still legally set up as condos and they are rented at much above market rates, I'm wondering if I could still demand $1.4 million for it? will lender consider actual rent roll or will they be using market rates? If they do consider market rates, that means I have a huge margin (my basis $705K) and I can pay any price to buy out the remaining 2 units? Market rate is $190k per unit.

I'm really excited about the potential of this investment, but I want to ensure that I'm making sound financial decisions. I am also fine with keeping only 4 cash flowing units and not overpay. Any insights or advice you could offer would be greatly appreciated.

Thank you in advance for your help!

[Charles Carillo]

@Account Closed

I would contact them to see if they are interested in selling and ask what price they would want for their unit. This way, you have an idea of where they are at. When you speak to them, see what their plan is, and what is most important to them. Maybe they will sell, but they want to live there for another 6 months or pick their ideal sale date. Price is sometimes not the most important factor for home sellers.

In regards to your valuation, I would verify your expenses since I would imagine most potential buyers will question why the expenses are so low (even though you mentioned you have rented the units over market rent). 

[Evan Polaski]

@Account Closed, as Charles noted, the seller's price really comes down to their own motivations.  You bought four of 6 units, so realistically, you are the most direct comps to their units and the true value.  But, if the owners have no reason or desire to sell, then you being the comps are irrelevant.

I am curious, since you don't own the whole building, but are doing work to roof and common areas, that all owners benefit from, did the other two owners share in your expenses?  Admittedly, if I owned a unit in a building that the other owners were upgrading things that I benefited from, without charging me for them, I would even more reluctant to sell.  

[Bill Brandt]

I’ve never seen such a small building with individual owners. Does it fall under the same rules as large buildings where owner/occupant buyers won’t be able to get a loan because half or more of the units are rentals? That may give you a leg up if you are a cash buyer or using irregular financing. 

[Jacob Sherman]

are they considered condos ? 

[Matthew Paul]

If its condos , each unit gets 1 vote .  You hold 4 out of 6 votes . So if you raise the condo fees , they have to pay . You have enough votes to change all the rules . 

You , in theory could make it so they have to sell to you 

[Account Closed]

Quote from @Bill Brandt:

I’ve never seen such a small building with individual owners. Does it fall under the same rules as large buildings where owner/occupant buyers won’t be able to get a loan because half or more of the units are rentals? That may give you a leg up if you are a cash buyer or using irregular financing. 

Exactly. I got the first one with conventional and the other ones with seller financing. Its possible but very hard to find financing for this now. Unless one want to put 35% down for a DSCR loan which doesn't sound like a great deal to me.

[Account Closed]

Quote from @Jacob Sherman:

are they considered condos ? 

 Yes, they are. separate meters and property tax bills.  

[Account Closed]

Quote from @Matthew Paul:

If its condos , each unit gets 1 vote .  You hold 4 out of 6 votes . So if you raise the condo fees , they have to pay . You have enough votes to change all the rules . 

You , in theory could make it so they have to sell to you 

Yes, i do have the vote now. 

 I did think about getting a property manager and have added WIFI to the building through the hoa. Not sure what else should i include in the monthly due. In unit cleaning? lol

[Jacob Sherman]

Quote from @Account Closed:

Quote from @Jacob Sherman:

are they considered condos ? 

 Yes, they are. separate meters and property tax bills.  

The more you own in the same building will push them towards being non warrantable condos . How are the reserves looking with the hoa ? 

[Account Closed]

Quote from @Charles Carillo:

@Account Closed

I would contact them to see if they are interested in selling and ask what price they would want for their unit. This way, you have an idea of where they are at. When you speak to them, see what their plan is, and what is most important to them. Maybe they will sell, but they want to live there for another 6 months or pick their ideal sale date. Price is sometimes not the most important factor for home sellers.

In regards to your valuation, I would verify your expenses since I would imagine most potential buyers will question why the expenses are so low (even though you mentioned you have rented the units over market rent). 

I agree, that is my concern. 

Expenses do not included management fee as it is self managed but other then that not so low. it is the rents that are relatively high. Most guest are from Airbnb but some from my website too https://www.furnishedmn.com/.

[Account Closed]

Quote from @Jacob Sherman:

Quote from @Account Closed:

Quote from @Jacob Sherman:

are they considered condos ? 

 Yes, they are. separate meters and property tax bills.  

The more you own in the same building will push them towards being non warrantable condos . How are the reserves looking with the hoa ? 

 After the remodel we are back to 0 cash. That is why other owners sold. Next capex will be furnace and boiler (~20k)

[Account Closed]

Quote from @Evan Polaski:

@Account Closed, as Charles noted, the seller's price really comes down to their own motivations.  You bought four of 6 units, so realistically, you are the most direct comps to their units and the true value.  But, if the owners have no reason or desire to sell, then you being the comps are irrelevant.

I am curious, since you don't own the whole building, but are doing work to roof and common areas, that all owners benefit from, did the other two owners share in your expenses?  Admittedly, if I owned a unit in a building that the other owners were upgrading things that I benefited from, without charging me for them, I would even more reluctant to sell.  

 I did ask one owner if he would be open for an offer and he said no. A day later, I called in the assessment of 40k ( I have the vote). I now have 70% share and they have 30%. They were actually receptive of the assessment and paid within 30 days.

I am considering solar now and that will be something I pay on my own. the reason is HoA does not pay taxes and it wont benefit from the renewable energy tax credits.

[Michael Smythe]

BE PATIENT!

An investor should rarely be in a rush.

You also may have to balance patience vs them piggy-backing on your efforts - which may drive up the market price for their units.

Also, these will be hard to finance. You'll need a DSR loan for non-warrantable condos. Get that lined up first unless you're paying cash.

[Joseph O'Sullivan]

Yair,

As a newbie to real estate, it is exciting to see experienced investors using the forums as a peer sounding board for big decisions!

I am enjoying the discussion/advice shared regarding your 6Plex and I hope you share how it all turns out later on!

Sincerely,

Joe