I'm going to be looking for an investor for a large condo package (40 units, same complex) and I need help negotiating/analyzing the deal in order to make sure it's profitable and attractive for an investor. Are these types of deals analyzed by cap rate, appraisal of each individual unit or a combination? What experience do you have with larger package purchases (analyzing/negotiating/financing) that may come in useful?
This is the current, basic information I have:
Location - Phoenix, AZ
Seller is asking $49,000/door
Annual Rent: $414,000 <-- this is in line with market rent rates so not much room to increase without renovation
Annual HOA (includes all utilities): $180,000
@Recia Davis Id like to PM you. I have a buyer for you. I sold this investor a bundle of 52 condos a few years ago. The value was based on the NOI and a cap rate acceptable to the investor. In my case he walked through a handful of units first and based on what he saw he made an offer subject to seeing every unit. He is a national investor and pays cash or has no problem with financing. If you have a package you can send me I will share it with him.
I've bought this kind of thing before, but on a smaller scale. (The technical name is "fractured condos".) I would do it again in a flash if the numbers were right.
A very important question is whether the units are enough to control the HOA board. It's a huge negative if other owners could prevent rentals, for example.
As an investor I would analyze this like I would any apartment deal - NOI, cash flow and cap rate. The trouble comes with financing - many banks won't touch any deal with the word "condo" in it, and others will shy away from any deal like this that doesn't fit neatly into a real estate category. Appraisal is another related problem.
As a result of the financing issue you could not expect the sale price to be the same as for a 40 unit apartment complex. For the property I bought, it was an attractive property in an attractive locaton at an attractive price, and even so there were only two potential purchasers. The other guy had to offer ridiculously low because of financing constraints and I had to call 15+ banks before I eventually found one that would support a reasonable valuation.
I can assist you with seeing if the deal will debt ratio properly. Where is the deal located. What state.
Price is definitely going to need to be lower unless this is a super desirable area.
Gross Rent $414,000
Vacancy Loss $33,120 (8%)
Management $41,400 (10%)
Interior Repairs/Maintenance $20,700 (5%)
Property/Liability Insurance $12,000 (rough guess, used $300/door/year)
Property taxes $40,000. (you can probably fine the actual number, I used $1,000/door)
Annual Net $86,780, a cap rate of 4.4% on the seller's full asking price.
I have structured insurance programs for 2 of these types of deals in the last year. 89 in IL and 145 in Miami. In both instances, the lender was dictating the insurance terms. If the lender wants the market value insured, you are talking about insuring $50k X 40, or $2M. If you can get them to approve "Betterments and Improvements" only, just factor in the cost to build out the units, say $20k, and you are now only needing to insure $800,000 in building value. about half of the insurance companies do not like to do these deals as they do not fit the traditional Condo association policy or the traditional apartment policy, but it can done.
As others mentioned, the relevance is going to be how many total units that the 40 are part of. If its 40 units in a 50 unit complex, that is a completely different scenario that 40 units in a 240 unit complex. Controlling/voting interest will be defined by what the Condo docs say.
The seller and I are at a standstill at the moment. After reviewing his rent rolls and taxes per unit, his current offer yields a 3% CAP. Although having the largest ownership in the complex currently is an advantage to the deal, this CAP rate is unattractive.
If you've PM'd me, I'll keep you posted if there are any additional developments.