Apartment Complex offer Strategy

7 Replies

Hello BP friends,

I need some help on how to proceed in making an offer for an apartment complex.

I spoke to the lady (53) looking to sorta retire.  I approached her about selling and she said she is in the process of upgrading the units to sell them off individually at $80K/unit.  She has an entire new plot right on the same property to build same amount of units (1.4 acres total) and owns the adjacent lot with a hall (1.6 acres)., not included in this offer.  She wants to sell but I have a feeling she won't go for $35-$40K/unit price I had in mind.  She is divorced and does all the work herself with her boyfriend.  She's not in distress, just considering.

12 Units (Townhouses - 900sqft, 2bd)

Rents: $700 (can be raised up to 900), very few apts. in the town.

100K gross/year

Fully rented

City Appraisal at $630K

Willing to do seller finance as well.

I haven't asked for any numbers yet, but following the 50% rule, The numbers I come up with is 450K-550K to make some cash flow.

$500k offer

$100k down

$400k @ 5% ($20k/yr)

Leaves me about $25-$30k/year if I run it myself.  

Of course these are numbers on assumptions (50% rule + mortgage)

Please help me check my numbers to see if it even makes sense to proceed.

Raj

You need to learn the market expenses in your area so you can make a better educated offer.  Expenses do not follow rents.  You may get lucky and have the 50% rule work but it would just be chance. 

For now you can use the expenses provided by the seller to make an initial offer.  Then verify all the expenses.  If they are different, negotiate a change in the price.

I'd give her a little time.  Sounds like she is trying for max $$ and doesn't realize what she is facing.  As she invests her time & effort and the headache factor rises on her, she may be more pliable.  To sell as individual units, is she planning a condo conversion?  As she sees who will have to manage the condo owners (her) and the restrictions still out there on condo lending...  I am running into unmotivated sellers like this a lot lately.  So glad I'm not just starting out, hungry for a deal!

@Steve O, the market expense is a bit on the higher end as its a small town and not many handy people around.  She is asking me to give her a number, but I don't want to make my offer sound real low ball offer if she's expecting to sell at 80k/unit and dont' want to turn her off completely.

@Steve V, I agree that I need to give her some time, as she's just started thinking about selling so might have a huge figure in her head.  She is going to sell as condo units, we didn't discuss as how and who would manage those, good point to use.  I was unaware of the restriction on financing an individual condo unit, i'll check that out.  

I figured I'd approach her and plant the seed and let her know I'm interested.  I'll sit with her again and see if she can show me the numbers and explain to her the points made so far.  She's not looking to get rich or anything, so hopefully she'll come around.  

Originally posted by @Raj Vajir :

@Steve O, the market expense is a bit on the higher end as its a small town and not many handy people around.  

Repairs are a small part of the expense equation.  Texas has high property taxes and high insurance rates compared to most states.  There are expenses in advertising, marketing, administration, management, utilities, repairs, turnover, property taxes, insurance, etc....  You need to get to know these expenses in order to play this game.

@ Raj Vajir

Is there anything like it in town that you could get comps off of?

Negotiation strategy. 

I would let her very know that you are very interested but you need to have full disclosure. Sit with her and go over all of her#.  If you can get # off someone else in town that would be great to be able to compare  # and see if her # higher or lower then her and why. Once you have the # I would utilize them and post them here to get feed back.  In that meeting after she has given you the # i would drop this line "in the past we have purchased property for 40k were not opposed to going over that we just need to know that it will cash flow".  This might shock her but in reality she probably just throwing out a #.  Also lets her know that you have bought property in the past and that you plan on negotiation. I would not be married to the 40K unit. look at what is going to be the real rate of return. i would make sure that i make at least 14% from the  start. Then when you write the contract make sure that you use the correct language in the contract to put in aparas and inspection terms that are favorable to you so you can cover you but. 

It is very promising that she is willing to owner finance. It usually means that the property is in good shape and that she not hiding too much. 

@Peter : Unfortunately not.  The only other apt. complex in town, is for low income qualications type.  Even house rentals aren't many.  There is a power company in town and a powerline company (unrelated), which are the main tenants, as she's very strict on who she rents out to.  There are a few neighboring towns that I'm doing comparisons with.  There was another apt. complex that was listed for $50k/unit, but they were literally apts and not townhouses.  I suppose, based on that sale, this property could be valued slightly higher.  But I have to see about cash flow as mentioned by the two Steves above. It is in good condition and there is space for expansion.   I do like your approach.  TY

Glad you like it. Let me know how it turns out.  

"Its all about the negotiations."

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