Buying first apartment building at auction, how to fund

Buying & Selling Real Estate
7yFollow

Buying first apartment building at auction, how to fund

Tony Maro
Investor · Greenbrier County, WV · Member since 2016 · 14 posts · 9 votes

A local "investor" has about 15 properties going up for auction in the next couple of weeks.  One of which is a 5 unit apartment building that I'm interested in.

Buying any decently priced real estate in my area is a rare occurance to begin with, and finding even a duplex for sale is a once every 5 years thing.  This may be the only chance I have to jump into a 5 unit for the next 10 years.

I currently have just SFH's and even though I've done a bit of reading on apartments I'm not even close to comfortable with figuring out what a building is worth, so I have that risk. I've guessed at the rents ($650 / mo conservative per unit) based on our local market, etc. I'm pretty sure I could push that to $800 to $900 with a little effort but the market here won't support more. Then again he might already be renting them at $900 for all I know or even doing it as a section-8.

So, my back-of-the-napkin approach says it's probably worth $300k to $350k at $3250 rents but since I've barely even scratched the surface on multifamily valuations and not even sure on the rents I'm terrified I'm wrong.

My cap at auction would probably be $250k. I've got $100k in cash, clearly not enough to win the auction, and I don't have time to set up a line of credit - which I probably wouldn't be able to do anyway given what I've recently borrowed on a personal level. The most I could probably get a personal unsecured loan for would be $40k and I don't have time to get a HELOC or for that matter have the equity in my primary since I just bought it this year. Top it off I'm sure I'll need a chunk of that $100k as reserves to handle maintenance and renovations.

Would you guys n gals suggest I attend the auction just to see what happens or should I be prepared to bid?  And if I'm going to bid any suggestions on how to deal with this?  

Do I need the cash in my bank account on auction day?  I have one friend I could approach about either partnering with me or making a hard money loan who might be able to make up the difference until I can mortgage it, but I also don't want to waste his time either and as I mentioned, I have low confidence in myself for this type of deal.  Is there a way to purchase at auction without having the cash in your account on auction day?

My alternative is to check out the other SFH's he's auctioning, I'm sure there's several of those that would be worth the investment and fall within in my cash budget, but part of me really wants to jump into multi-family.

0Reply
21 views

3 Replies

Jump to latestLatest
  • Jaysen Medhurst
    Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
    7y

    @Tony Maro, you need to know what you're getting into before you jump into any of these. Have you reached out to the auction house or owner for current financials? He may not be willing to provide for the SFH as their value is based on comps. But the multi-family is a different story. You have to know the NOI to determine it's value.

    No matter what you find out, go to the auction. It will be worth the experience.

    1Reply
  • Tony Maro
    OP
    Investor · Greenbrier County, WV · Member since 2016 · 14 posts · 9 votes
    7y

    I started digging, contacted the auction house and got more details.  The property was just appraised at $195k.  Now, how an "appraisal" works on a commercial property like this is beyond me, or if they're just having an agent pull a number out of the air and call it an appraisal.  It's possible it's based on a comp sale from last year that I'm aware of, but that building was in a bad area and in disrepair.  I've asked for more info on that appraisal but haven't heard back yet.

    I was wrong though - it's 6 units, not 5.  I drove by and counted the doors to make sure.

    No details on rents, etc. but again, at least $650 is a conservative estimate for the area with a possibility as high as $800 or $900 if in good shape.  I am familiar with rents here.  30 days after auction for closing, with possibility of extending that at seller's option.  10% of auction price due at close of auction.  That makes it a lot easier on me.  5% auction fee surcharge.

    My biggest fear now is outstanding maintenance.  It's got a flat roof that I haven't seen replaced in the past decade.  I drive past this building every day.  I know the crawlspace was flooded 2 years ago, but I don't know if water got inside; I don't think it did.  No info on heating system, probably baseboard heat though.  I also don't know if the water / power are metered separately - I plan to drive by today and look for meters.

    Now that I know I have time to secure funding, it boils down to getting the pre-approvals done and deciding on what I'd bid.

    So to update my back-of-the-napkin conservative numbers:

    Rents:  $3900 / mo or $46,800 / yr assuming fully rented which isn't hard here.

    Expenses: 

    Lawn care ($400 /mo during summer, or $2800 / yr est.  Probably lower.
    Taxes / Ins - unknown at the moment, researching
    Trash collection - This goes with the water bill here, so if metered separately, zero.
    Accounting, legal - $2000 / yr est
    Property management - $250 / mo or $3000 / yr

    Obviously I still have blanks to fill in.

    0Reply
  • Farrukh Amini
    Rental Property Investor · Jersey City, NJ · Member since 2018 · 176 posts · 80 votes
    7y

    Hey Tony,

    What did you end up doing with this property?

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free