I'm looking at a 24 unit in a small town. The property is bank owned and is ~50% full. The bank has been telling the onsite manager not to lease the property for the last 6-8 months. I'm assuming one would just have to utilize pro-formas to come up with the value of the property. I'm wondering what kind of parameters / assumptions I should make in the proforma to come up with a proforma NOI and subsequently the price I would off

What's the price and the rents for the other 12 units?

Banks typically have no records as the previous owners give them the finger as the property is being taken away from them.

Have to do worst case examples when buying. Plan on all tenants leaving and having lost rent and excessive repairs especially If rents are under market currently.

Pay attention to the tenants that are there at 50% to see if the bank is "puffing". This is where they half fill it with questionable tenants to show 50% occupancy for example instead of 25% to try and extract a higher price from a cash buyer.

If the bank is local you might try to see if they would finance you for 18 to 24 months and then you cash refi them out of the property or sell off and 1031 exchange. They might work with you more because it's THEIR problem property. If they will not do this then the price comes down more for you to pursue other options that make them whole right away.  

Banks must file a financial report with the FDIC at the end of each calendar quarter. The report is known as the "Call Report." The Call Report includes information such as delinquent loans, non-performing loans, non-performing assets, and REO (real estate that has been foreclosed and taken back by the bank). This data can give you an idea as to whether the bank is distressed and whether or not they might be extra motivated sellers in order to get the non-performing assets off their books, especially when quarter end is right around the corner. Regulators come down hard when the bank's ratios are out of line (too high). The higher the ratios the more motivated they are to get rid of property. You can review and download most bank's Call Reports here: https://cdr.ffiec.gov/public/

The proforma is going to show you what could be, what it might be if you put in the time, effort, and work to bring the property up to rentable condition and then market the units.  You don't make an offer to the bank based on this.  This is what it might be worth to you after you have done all the work.

What I would do is make an offer based on what they occupied.  Surely they can tell you what those units have been rented for.  But I would be careful even with that number, because as said above, the tenants can all leave, depending on condition maybe you'll want them to leave so that you can rehab.  And of course, there's the cost of rehab which you should reflect in your offer.

You base your offer on what the building is now, not what it could be.

Thanks all.

Evan,

Price is $435k and rents are $4,650/month for the 12 that are presently rented. The other 12 vacant are the same configurations (bed bath).

4,650 month / 12 = 387.50 unit

Very low income units at that level.

They are asking 18,125 a unit which is half vacant and is high for price.

Say the remaining 12 need 5k each of work and then exterior grounds another 40k ( roof, windows, parking lot, etc.)

So 100k.

Let's say full rented 350 X 24 = 8,400 month X 12 = 100,800 gross expected income

100,800 x .40 (60% annual costs) = 40,320 NOI

At a 10 cap for resale the value is 403,200 fully stabilized

You would need to buy at 300k just to break even almost after rehab costs and stabilization. It's all about what rents are now and what you could get after the rehab. If market rents are 400 then not much to go up but if this place hasn't increased in 10 years etc. then maybe rents are 550 now.

As the property sits now it seems the bank has it way overpriced. It depends on the work needed for the other 12 units  and deferred repairs on the existing 12 with tenants in them. Just because it is a bank owned property does not make it a deal.  

Thanks Joel. 

Parking lot, roof and 1/2 of the a/c was done 3 years ago.  New windows would be good so for that and rehab on the 12 vacant units, I would say $60k.  I think this would take it into "B" rents which I believe on average would be $430 per unit. 

Therefore, fully leased proforma: 430 X 24 = 10,320 month X 12 = 123,840 gross expected income

123,840 x .40 (60% annual costs) = 49,536 NOI

At a 10 cap for resale the value is 495,360 fully stabilized.

There is also another $7,200 per year in laundry machine revenue (not sure the expenses or if we could assume the 60% expenses would include that).

The electric is direct bill (tenants pay directly) in one of the buildings.  Gas is included in the other building (1/2 the units).  Water is included in monthly rent.  So 60% is probably conservative. 

Right now there is an onsite manager (i'm not sure what his compensation is).  He seems pretty capable at running things at the 'c' level (ie. he mows the lawn, shows the apt., cleans them out, hires the repairment, etc.  I live approximately 1 hr. and 20 mins from here and I have 3 kids so it might not be the best investment for me. 

All this info is just on touring, I would conduct more in depth during due diligence post Letter of Intent agreement.

Thoughts?

You say 1/2 of the A/C. Was this a conversion?? One of my clients was going to buy a 70 unit before in a good area. Site inspection showed 40% of the units were replaced. The other remaining had a patch job done to last a few more years. The problem was the older units were not in compliance and once these quick fixes went bad in a few years each unit would need a complete new system costing 3,500 apiece per unit. Needless to say the seller didn't want to reduce price or pay almost 150k to replace remaining systems so we cancelled the deal. 

You have to watch sellers as they will patch things with a quick fix and try to sell you on the cash flow but if you do not account for these things the gains you make in year 1 and 2 will be wiped out for years 3 to 5 with such big capital hits. Then when you sell someone else will get the nice product on the benefits and expense of your mistake.

Tenants use around 30% more water when they do not pay the bill. That doesn't include any leaks they don't report.

I have been there before with a similar size but rents were double what you are looking at per door. I will never do that again.

Charles maybe do an option with a pre-determined time and price to buy. This way you can throw a little money at it and run it but if it turns into a nightmare real quick you can walk away. If it works out after 3 months etc. then exercise the purchase option. Sellers trying to dump a property that are not confident in the tenants and hiding things won't go for this etc.

No legal advice. 

One building has window units the other was rewired with new electrical panels and each has there own individual ac heat pump unit.   I think the main reason this building was converted in this way was to be able to remove the boiler and convert that room into a laundry.   

I like the option idea.  It needs a good bit of work though to do what I want to with it. 

so that might be complicated to work out with a bank.