Analysis please: 8 unit building

75 Replies

Looking to make my first offer on a multi. This is an 8 unit, C-D class, concrete block in Florida. Half the tenants are section 8. Five tenants have been there for 10 or more years. One tenant has been there for 23. One is the on site manager. Gross rents should be 61,200. Current rents are 52,800 with one unit vacant. Expenses from last year 14,250 (about 23% of gross income). Asking 349,000. Pro forma puts it at a 13.5 CAP.

With current rents and 50% expenses it's a 7.5 CAP. Current rent, 50% and $325,000 gets me in at an 8 CAP.

Any thoughts. These type of buildings are being gobbled up at asking or just below in my area and I'm afraid to go very low and lose out. My plan is to get into SOMETHING with the intent of getting a track record for brokers / lenders and then get out and into stuff that makes better sense on paper.

I have no idea about your market.  I would just say that you need to get a firmer grasp on what the "actual" expenses are.  The 23% the seller states is probably irrelevant.  The 50% rule is just a rule of thumb.  

Who is paying utilities?  Can you verify actual utility costs that owner is paying with the local agency who is in control?  Have you visited property? Any deferred maintenance? 

@Darren Budahn  I can't see the property until it's under contract. So no idea on deferred maintenance. I can contact the utility company and get that info but I don't believe I can get any other more in depth stuff from the seller other than what's in the pro forma. The seller pays all utilities. 

Most of tenants are long staying - it is good, it means it is rentable and livable. Rent is below market and tenants are staying forever - and building is a good performer even at this below market rent - this is good. Just double check real leases and order inspection for understanding future expenses. You have better feeling - should you bid up or down.

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That's how I see it too Jane. The problem is that everyone else can see that as well. If I don't go in at full asking price and try to knock the price down by a measly $10-$15,000 does that put me out of a good deal?

So the seller of a C/D building who pays all utilities is claiming that expenses are only 23% of gross rents??? Hard to believe.

What do you mean "you can't see the property until it's under contract"...that's absurd.  You should be able to see the property grounds, walk all of the common areas, and see at least one unit before making an offer.  Then, the contract needs to be contingent on a 30 day due diligence period where you get to perform "any and all due diligence necessary" to accept the property.  This will  include access to all expense records, tax returns to verify income and expenses, walk thru of every unit AND  I do interviews with tenants to get some real world info on the place ("ANY and ALL due diligence..."  The seller may not like it, but at this point you have it under contract, you have the control, and he did sign off on that contingency....

R J. I'm new to this commercial game so I'm not sure about what you're saying. All I know is that I was told by the broker that the owner asked that the tenants were not to be disturbed, a non disclosure must be signed and no walk through would occur until after the building was under contract and in due diligence. I'm I being fed a line of crap?

I understand he doesn't want you to be walking through units if you're not under contract, but you should be able to see common areas, basement, exterior. But I still don't believe 23% expenses.

Darren, obviously 23% is way too low. I'm not basing my valuation on that number. That's typical pro forma BS. I'm evaluating on 50% and based on that number I'm trying to make an offer that puts this at a very realistic 8 CAP. My original post is just to see if anyone in my market might have any insight, point out a red flag.

I've seen the exterior. There are no common areas other than the lot and parking. 

You need to see at least one "representative" unit to help decide if you want to pursue this property.  The less you see, the greater the chance of you backing out of the deal due to disappointing findings during your due diligence.

I'll talk to my broker on Monday. One unit is currently vacant so maybe I can push the issue and get them to let me see that one. 

And thanks for the answer on the timeline. 30 days seems reasonable for due diligence. 

Sometimes, the seller will push for 15 days, not wanting to take the property off of the market for an entire month, only to have to start back at square one.  In that case, the onus is on him/her to provide all of the paper documentation requested in that tight 15 day period.  It's plenty of time for you to do your inspections.  Remember, you want to see actual bills for the past 12 months of all utilities and expenses.

ok. Good to know. 

If seller is interested in something like to sell as is, you could bid with discount to current market price. Ask broker or any realtor to show you comparable sells in your market for last 6-12 months. Some info you could find at zillow.com You may need to make a decision very quickly if this is really a good deal. Have a preapproval letter. Put first draft of contract with your terms and after be ready to continue to negotiate
By the way - how long is this thing on the market ? Are there anything like this on the market right now? Are you comfortable with this location and this kind of tenants? May be ask few local property managers what do they think about this building ? For may location these numbers are very good and would not stay on the market a day, I am not sure about yours.

Hi let's break it down one step at a time.

  1. 1. You need to verify the numbers being fed to you by the seller. Typically I ask for access to the accounting records, their CPA, or even the bank statements. If they squeal, You tell them that the reason for this, is that you want to offer them top dollar for their property and in order to do this you need to conduct some financial due diligence.
  2. 2. You need to assess the viability of renting the property. If the building were empty, how long do you think it would take for you to rent it up? And what kind of rents could you collect? In the past I have posted Craigslist test ads to see what kind of action and demand I can generate.
  3. 3. Ask for a copy of their rent rolls, by unit. How much the tenant is paying and when is their lease up?
  4. 4. You need to access each unit and make an assessment. Ask the owner if they are serious about selling? If they are, let them know you need access to a few random units. Landlord's have the right to inspect, provided the tenant is given sufficient notice.
  5. 5. Bottom-line, you can spin your wheels all day long, or you could make a best guess offer on what you think you know. If they accept, do your due diligence and if it does not meet your expectations, pull out, or renegotiate with your due diligence ammunition in hand.

My experience has been that most building owners ask for a number that has nothing to do with anything. It's what they think their building is worth, or, what they heard a similar building in the local area sold for. What they really want is for you to make it worthwhile for them to walk away. With a motivated seller that number might be less than what the true value is. Essentially its a numbers game, make enough offers and eventually a few will stick.

By the way when you are calculating out what your offer should be (hopefully based on net income), take into account whether it's a total cash deal or, if you are financing, at what LTV and what rate, and take this into account when calculating out what your offer should be. The Good News, is that even if this guys says no to your offer, there are plenty of properties for you to make offers on, until eventually someone says Yes.

if you take gross rent and / by asking price of 349 000 = .15 rate of return or cap rate before expenses. 

Originally posted by @Mike Campbell :

if you take gross rent and / by asking price of 349 000 = .15 rate of return or cap rate before expenses. 

Mike, there is no cap rate before expenses. You cannot have a cap rate without NOI . If you want a metric without expenses use a GRM.

Here's how you need to think about this:

Current cash flows put this at 7.5 CAP - this may be very inaccurate since your are using 50% expense ration to arrive at the NOI, which is likely a load of BS. But, for fun, let's just say the currently this thing is a 7.5 CAP.

Pro Forma makes it 13 CAP - let's understand what pro forma is:

Pro forma is the most aggressive supposition of what income and expenses will be - it is the best case scenario. So here is the question:

If the best case gets you to 13 CAP, looking at this asset - do you think you're ever going to get to experience the best case scenario. Why or why not? And if not - why not? And depending on those reasons, how and how much do you discount your cash flows?

And don't forget, your worst case scenario is being left with that which is currently there, and something tells me it's worse than 7.5 CAP by a good margin...

I could talk for hours, but I'll stop here. This should be enough to get you thinking :)

Originally posted by @Ben Leybovich :

Here's how you need to think about this:

Current cash flows put this at 7.5 CAP - this may be very inaccurate since your are using 50% expense ration to arrive at the NOI, which is likely a load of BS. But, for fun, let's just say the currently this thing is a 7.5 CAP.

Pro Forma makes it 13 CAP - let's understand what pro forma is:

Pro forma is the most aggressive supposition of what income and expenses will be - it is the best case scenario. So here is the question:

If the best case gets you to 13 CAP, looking at this asset - do you think you're ever going to get to experience the best case scenario. Why or why not? And if not - why not? And depending on those reasons, how and how much do you discount your cash flows?

And don't forget, your worst case scenario is being left with that which is currently there, and something tells me it's worse than 7.5 CAP by a good margin...

I could talk for hours, but I'll stop here. This should be enough to get you thinking :)

Oh Ben.  It's Sunday and I can't use expletives.  Damn!  There is no information here.  Just a bunch of bullsh*t numbers that even if you call one bunch of them by a fancy name "Pro Forma" still means absolutely nothing.  Made up expenses, made up value, made up crap rates!  There is ZERO analysis here.  

The OP needs to know market expenses, rents, vacancies and cap rates first just to determine market value before he takes any action.  It is obvious from his post that he has no idea what he is doing.  What's worse than buying an unprofitable property?  Overpaying!  

The OP would be best to stick with something simple like a GRM. I doubt there is reliable market information to value this property by direct capitalization.

Originally posted by @Bob Bowling:
Originally posted by @Ben Leybovich:

Here's how you need to think about this:

Current cash flows put this at 7.5 CAP - this may be very inaccurate since your are using 50% expense ration to arrive at the NOI, which is likely a load of BS. But, for fun, let's just say the currently this thing is a 7.5 CAP.

Pro Forma makes it 13 CAP - let's understand what pro forma is:

Pro forma is the most aggressive supposition of what income and expenses will be - it is the best case scenario. So here is the question:

If the best case gets you to 13 CAP, looking at this asset - do you think you're ever going to get to experience the best case scenario. Why or why not? And if not - why not? And depending on those reasons, how and how much do you discount your cash flows?

And don't forget, your worst case scenario is being left with that which is currently there, and something tells me it's worse than 7.5 CAP by a good margin...

I could talk for hours, but I'll stop here. This should be enough to get you thinking :)

Oh Ben.  It's Sunday and I can't use expletives.  Damn!  There is no information here.  Just a bunch of bullsh*t numbers that even if you call one bunch of them by a fancy name "Pro Forma" still means absolutely nothing.  Made up expenses, made up value, made up crap rates!  There is ZERO analysis here.  

The OP needs to know market expenses, rents, vacancies and cap rates first just to determine market value before he takes any action.  It is obvious from his post that he has no idea what he is doing.  What's worse than buying an unprofitable property?  Overpaying!  

The OP would be best to stick with something simple like a GRM. I doubt there is reliable market information to value this property by direct capitalization.

GRM is the worst indicator of them all :) But, you knew I was going to say that, Bob..lol

Originally posted by @Ben Leybovich :


GRM is the worst indicator of them all :) But, you knew I was going to say that, Bob..lol

Well it's all about the comps. Here Mark has a value range between $222,000 and $400,000 assuming $30,000 NOI AND 7.5 & 13.5% cap rates. And if the market cap is say 15% then he is overpaying by $22,000 at his lowest valuation.

If you have good comps your GRM range should be within a point or two. $60,000 x 7GRM $420,000. $60,000 x 8GRM $480,000. Easy to adjust. Say 8GRM has newer roof and updated kitchens deduct $30,000. Value range only $30,000!

What could be as accurate and as easy except for direct sales comps?