How to value a property with no financial stmts

Question

Is there a way I can value an apartment building that doesn't have any financial stmts?  A building in my area is on the market but it has been vacant about 8 years so there are no financial stmts to view.  I think the building is overpriced.  I think the seller is asking that much because it's located in a nice area.  But I can't justify an offer on that.

Should I base the value off of proforma stmts?  I'm a little weary about that so I wanted to know how to get a good valuation.

Also, the building needs to be rehabbed.  I have an appointment to inspect it so I will know how much work needs to be done at that time.  And this will affect the offer price.

Account Closed · Answer

If you have experience landlording in the area, you should be able to estimate how much rent each unit will bring.

Keep in mind that it might take you a long time to fill an entire building with good tenants. You will have to support that building out of your own pocket while you are renovating and while you are finding tenants to fill it.

I suggest that you do not pay utilities, so if utilities are not separated, figure the cost of doing so into your expenses before you decide what you want to offer.

You should be able to get a close estimate of taxes from the assessor's office-- taxes will go up when you purchase, but taxes are usually a % of assessed value, so not hard to figure.

I suggest you check with the local fire marshall to see if the building needs to be brought up to code.  Fire supresion systems in commercial can be quite expensive.

Also check with the local health office to make sure the apartment hasn't been closed down for some sort of health or safety issue (sewer problems, mold, unsafe construction)

Kevin Kinton · Answer

With apartment buildings there is no doubt that doing your own due diligence regarding comparable property rents, expenses and sale prices is the key. It's a lot of work but it will pay off.

Frank Gallinelli · Answer

Damien - Consider looking at this as a development project using the "back door approach."  If you believe you know the potential income stream once the property is re-habbed (i.e., you have a sense of the likely rent structure, operating expenses and financing costs), you capitalize this income stream to estimate the value of the property after re-hab.  Then you subtract the cost to re-hab and that leaves you with the maximum value of the property before re-hab.

I have an article about this approach under the "Learn" tab at realdata.com. It's called, "Real Estate Project Feasibility - What's Behind Door #1?"  I also discuss this at greater length in a case study in my one of my books http://www.amazon.com/Mastering-Real-Estate-Investment-Examples/dp/0981813801   Hope this helps.

Diedre Williams · Answer

Damian, you got some excellent advice.  In this market,  Bottomn line, be very, very careful.  You know you can pick up apartment buildings that are bank owned.  There are a lot of builder buy-out opportunities.  Explore the reo world before you buy retail these days.

Ron Lerman · Answer

Find comp sales in the area and find out the sales price per sq. foot.  From the comps you should also be able to find out the expenses per sq. foot.  After this process have a contractor or inspector give you a quick idea of the repairs needed.  Don't forget to add in a vacancy factor.  From this number you will have a potential value of the property.  With it vacant for 8 years, I would offer no more than 50% of the proforma value.  I think you will also have many more repairs than are found initially.  8 years is a long time for a property to be vacant without major damage being done to the property. This being said, I think you may also have a difficult time getting financing, in today's market, without a financial history on the property.  Point this out to the seller.  He has probably had many deals fall through over the years because of the vacancy. This may further encourage him to lower his price.

Michael Rossi · Answer

Damien,

I NEVER believe financial statements even when I do get them.  Besides the fact that sellers lie (early and often), if you're buying from a distressed landlord, they often have not kept up with maintenance and have put a bunch of deadbeats into the building just to fill it up.

If I were evaluating this property, I would determine the monthly market rents for similar units in the immediate area and divide that by 2 (to account for the operating expenses).  That would be the NOI once the building is up and operating.  Then, I would subtract $100 per unit per month from the NOI (your positive cashflow).  What's left is the amount you could spend on the debt payment.  I would then determine the purchase price that would result in that payment.  That gives you the maximum purchase price for an OCCUPIED building with no deferred maintenance, no code issues, etc.

From that number, I would subtract the repairs needed.  Finally, since the building is vacant, I would subtract an additional amount to account for the start up costs: carrying costs while rehabbing, initial lease up period, etc.  That amount would depend on the length of time estimated for the rehab and the length of time estimated to fill the building (based on rental demand in the area, etc).

As the others said, a thorough due dilligence is definitely needed.  In my area, a building that has been vacant that long can revert to alternate zoning!  The building could even be scheduled for demolition - that recently happened to a friend of mine and it cost him a bundle (they even charged him for the demolition - UGH!)

Good Luck,

Mike

Damien Hall · Answer

P:

Thx for the advice.  I'll look into those as well.

Account Closed · Answer

I also forgot to mention, after eight years of sitting vacant I doubt they have a valid operating permit for it, that further justifies the lower offering price.

Damien Hall · Answer

Tim, thanks for the info!