Value Add: putting my first offer together

4 Replies

Hello BP community! Well, I am exited to possibly have a property worth an offer and am once again turning to the expertise and experience of this wonderful community. 

I have a 6-plex with 2x3 beds and 4x2 beds in my area that I am getting ready to put an offer on. The ask is $450,000 and the seller is willing to finance. His asking terms would be 15 yrs at 4% with 20% dn. After walking the property and through the units I estimate it is going to cost me around $60,000 and a lot of my own sweat and time to get the building to where I want it and pulling the revenues I want. right now the current tenants are living cheap at $620 for the 2 beds and $675 for the three. One 2 bed just rented for $725 last week and the available 3 bed is going up for $850. These are market for a property of this size and condition.  After the updates and improvements I have planned I believe this property could potentially pull between $65,000 and $69,000 gross scheduled income.

I am here asking people's thoughts on price and terms for this deal. I have since lost one of my partners and may only have about $40,000 for a down payment. So, this deal may be a lesson on creativity and negotiating skills. If of course, it actually gets that far.

last year the seller report operating expenses of $9,570. I think this is very low. But may be truthful considering he has managed EVERYTHING himself. All be it not very well, but it did keep expenses down. The vacancy rate was 6.8% and is typical for the area. But I expect rents to continue to be depressed in the area due to the closure of a technical school and the large number of new units built in the last 5 yrs. Not sure of the numbers on that but I do know that it has had an obvious affect on the market.

After applying a management fee and a 10% vacancy rate I brought operating expenses up 50% of GSI for rents expected after current leases expire ($56,400). This gave me a value of $331,632. This is calculated using an 8.5% cap rate, which is what the county assessor uses for properties in this area.

I plan to write the listing agent an email explaining my valuation to justify my offer. I am thinking an offer of $350,000 would be appropriate. It is higher than my valuation in hopes that it may spark some negotiation for flexible terms. I am hoping that I can negotiate a deal that will keep my debt service at or below $1,900 per mo. The reason is so I will have room to use cash flows to make the improvements I have planned. Knowing that I will be managing this property myself, I think this would be doable. 

Having stated my goals with the property, I also don't want to overpay but know that I may have to be flexible to get the terms I need. I was hoping he would take the lower down payment and a mortgage amortized over 30 yrs with a bubble at 10.  Or, take a note to cover the amount I would need down to get a traditional bank loan. I believe this would give me the flexibility in cash flows to accomplish what I want and have enough equity through increased value to refinance into a shorter term loan. 

So, let me have it. What are your thoughts? What suggestions do you have? I'll take anything you got and stuff it in my toolbox. Some constructive criticism would also be much appreciated. 

@Kyle Dutson I'll break this down is order of significance. 

1) Wyotech going out of business is a huge hit to the rental market. All those students stay somewhere and those properties will be looking for someone to live in them. I would not be buying multifamily in Laramie until that all shakes out. You could see vacancy rates quadruple and rents decrease by 25%. That is a huge hit. Do not ignore it.

2) I seriously doubt a seller is going to take a $100k hair cut off asking price. There are situations where the might work but there is nothing here to indicate that it could happen. You should hear things from the broker like :"Just make an offer, the seller wants out." Typically seller carry people are looking to sell higher or at above market terms.

3) You expect to need to put $60k into it and have a $40k down payment. That is $100k. Do you have that much money plus contingency or 25% of your estimated repairs.

4) You plan to do the work on the property yourself. Do you have a contractor's license? If not, you probably want to get one. I know people do work all the time without one but if something goes wrong there is significant risk for you. Tenants you get xways with can report non-permitted work to the City and then it really will cost you. Probably 5X what your budget is. 

5) You should talk to @Jeff F. about how his project of similar size and scope has gone. I'm guessing you are way under estimating your improvement budget. 

Keep us posted on how things turn out. 

Thanks for replying @Bill S.  

Yes, Wyotech is a concern that I have thought about. But concerning this, Wyotech has been in decline for some time and is now down to 400 students at the time of this writing. Down from 1,085 in 2016 and and 1,800 students on 2013. So, the market should, in theory, have already made most of its adjustment. On that though, there are at least 60 units I know of that Wyotech has under contract for lease to their students that sit empty at this time. 

On the other hand, UW saw a 9.3% growth of freshmen to total 1,696 and an increase of transfer students by 12.3% to total 1,086 this fall.  That is 265 more students enrolled as compared to last year, over half of Wyotechs student population. Also, UW is projecting more student growth for fall 18'. Will Wyotech affect the market? Yes, but not as much I believe people expect. I have found in my experience not to try and "time" markets. You may end up in a worse situation. But hind sight looks clearly both ways I suppose. 

As for rehabs, you are most likely right. It will probably cost me more than expected. But I am going to be conscience of not overspending due to the area and potential market influences. It is in a high density of rentals (N9th and Downey) so competition may limit my ability to raise rents much, if any considering the Wyotech variable. If I can't raise to my target I do expect to at the least be able to keep a lower vacancy rate than the surrounding units.

The idea of getting a contractor's licence is intersting. My plans for my own work would be simple but not sure if this is the type of work you mean. I plan to just update mainly. i.e. Counter tops, bathroom vanity, 2 units need shower tile, paint the exterior, new appliances etc... Things like that. All of which I was hoping to pay for with cash flows over the next several years. So, if the market reacts to Wyotch as you seem to think it may, I would be in a bad spot.

As for price, I think you are right. The market seems to be pretty inflated price-wise. Especially down by you. Being new to the REI world, everything I'v read in my research on investment shows instances of people buying 9% cap rates or higher. And paying around $60,000 a door. That is just unrealistic in this market IMO. Even up here in little ol' Laramie.

I know I'm playing devil's advocate here. But I don't want to not get into the market based on fear of something that is uncertain. I also don't want so be brash and jump into a bad deal. So, I am proceeding with caution and doing as much research as I can. I am touching base with the listing agent from time to time so she knows I'm out there. But if it goes before I'm ready, I won't hurt about it.

Just got off the phone with Wyotec housing. A total of 232 units will open up if they shut down. These units are mediocre at best and have no common areas. The 60 units previously mentioned were said to be "not very nice" and in need of repair.