First Multi-Family deal or no deal
Hey BP family. I have a deal in which a contract is close to being signed, all-cash deal. The return looks great but for some reason, red flag are coming up. Heres the run down. This apartment building I'm interested in is in a rural part of Nevada, the population of about 5000. Ill put the breakdown of the deal below. Keep in mind this will be my first deal. In my contract i put "Agreement is contingent upon the Property appraising at no less than the specified purchase price". Seller wants this removed. Mind you the last time is was appraised was back in 2006 which that is what the offer price is being based on. He wants me to put in the contract that I agree to buy as-is. Not sure if that's a normal request. Also just found out one of the units needs complete electrical rewiring. To me, he seems like he wants to close fairly fast without proper due diligence period. Feels rushed. Like I said I'm new. This may be the norm but I wanted to run it past you guys first. Thanks for the help.
14 unit
Sales price $565,000 (Cash Offer)
Total monthly rent $6720
Annual Gross $80,640
Expenses $27,000
@ 5% vacancy NOI will be $49,608
@Brian Cain - I can’t speak from experience (like you I’m also new to multi family) but it may be worthwhile to find out what his motivation for selling to see what the imposes rush is all about. Like you, i would definitely be hesitant in that situation but finding out “why” might open some additional conversation and understanding. Maybe it’s sketchy, maybe it’s all above board, but it sounds like you may not have all of the information available.
All of this said, are there other offers on the table? Based on the stats you mentioned I’m guessing you actually have more leverage than you think, given that you’re a cash buyer in a small, rural community. Don’t be afraid to walk away or push for more details.
- Andrew
Hey @Brian Cain! I'm here to answer any questions for you regarding your deal as I do this on the regular with my investment group.
Generally the property should appraised based on the cap rates in the area and NOI provided by the seller's T-12 and current rent rolls.
What's the current cap rate for comparable properties in the area?
The expenses seem a bit low on this, do you plan on managing it yourself or have professional management? Be sure to budget for that, even if its not in the current sellers T-12 P&L
Buying as is, is normal. However, during your 30 day due diligence period, you will dive into all financials, have a thorough inspection of the property done, figure out deferred maintenance, unplanned capex work, etc. So depending on what you find, you can justify negotiating a lower price with the seller to help cover some of the unplanned expenses.
I'd definitely request a 30 day inspection here.
Based on your Cash offer, you are saying the Cap rate in the area is about 8.7%, how accurate is that?
What's the area like? What's the average vacancy? Is there room to increase rents? What's the current tenant base like?
If the seller is really trying to rush things, I take that as a bad sign but if he really wants/needs to sell it, he should be open to your contingencies and requests.
Find a rockstar RE attorney and work with him on this as well.
Any reason why you are doing all cash on it?
@Andrew Fernquist Great advice. From what i understand the gentle is 70 years old and ownes this building and a motel in the same town. He's tired of the business and looking to retire and possibly relocate. There are no offers as of yet. He reached out to me from a letter i sent. He says if we cant close then he will just list with a broker. The returns look good on this deal but all that glitters is not gold.
@Brian Cain buying as-is just means he won’t make any repairs and you acknowledge this. That doesn’t have anything to do with appraisal value
@Jake S. Wow you dropped some real gems Jake, thank you. From my reaserch current cap rates in the area are around 8%. I plan on using a mangment company and didnt budget for that so good call. This town is a small quiet mining town. Average rent in the area is around $700 - 750 per month. Current rents at the property are $500 per month so theres room to grow. Seller wants all cash offer for faster closing. Yet another red flag.
@Brian Cain
I’m also new here but just a thought. Would it be possible to do owner financing on this over 30 years? It’d be less cash flow but might be worth it in your circumstances. Then you can negotiate some money for repairs and such at closing.
Another thought is with the town being a mining town- what are they mining? What happens if that resource runs out?
Best of luck to you!
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#5 Multi-Family and Apartment Investing Contributor
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@Brian Cain Mining towns come and go in Nevada like fleas on a dog! I would investigate the potential longevity of the town along with the rest of the due diligence. There are 600 ghost towns in Nevada. All the best!
It is very common, at least in CO for all cash offers to complete due diligence in 2 weeks. One of the major benefits for a seller with an all cash offer is less contingencies. Because there is no loan, it is typical, at least here, to waive the appraisal. Personally, I would not call this a red flag.
The red flags that I see, is the location. Being a small town, I would definitely be concerned about the town dyeing. What is the major economic driver in the town now?
I am going to assume that you are offering cash then plan to do a cash out loan. If I am correct, have you done research on a commercial loan and have a good idea of the interest rate/amortization schedule and know how it will play with your numbers?
I would also ensure to walk thru every unit. It's not unusual to be shown a couple of the best units to be blow away later by the rest of the units.
It seems odd to me that only 1 unit needs re-wiring. why is that? I would expect if one needs it then most or the entire building needs it.
Get on regional and see what permits have been pulled for the property. When was the roof redone, water heaters, furnaces replaced. You should also be able to see any electrical work that has been done.
Finally, request at least 2 years of rent histories and copies of the leases. Sometimes a seller will get rents up to raise the CAP rate to sell. That's not a problem, but sometimes it's not sustainable for that area/building without massive turnovers. As you know turnovers are very expensive. It sounds like you have researched that areas rents, but neighborhood to neighborhood sustainability changes.
If you are very clear about the work needed and the local economy, I would say the number are fantastic! I hope it works out. If all is good, I'm jelly. 😉
In a very hot seller’s market it is common for sellers to expect to sell at the contract price regardless of appraisal, and no repairs. In a rural mining town, he probably doesn’t have buyers beating down his door. lol
Most cash deals don’t involve appraisal. Cash deals can easily close in 2 weeks.
If you are using a real estate agent, their standard contracts include an appraisal contingency, due diligence period, etc. These things are negotiable of course.
If you know the place needs repairs, figure that into your price. I’m not sure I’d be too excited about a poorly maintained building in rural Nevada. Where will you get contractors to do repairs needed? That could be a nightmare.
@Casey Powers Hey Casey. The property is in Ely, NV, roughly about 3.5 hours from Vegas. Are you familiar with this area?
I don't deal with anything outside of Las Vegas metro, because it's a whole other market. One would have to build relationships with repair vendors, locksmith, cleaners, etc, in that market. I'm betting there is a lack of good vendors in that market, which would make it difficult to manage. If you don't live nearby, how will you get things done, and make sure they are done right?
The place is poorly maintained already, so you'll have to find people to get work done right from the start. I personally wouldn't even consider this property.