I've come across an off market 30+ unit apartment complex. My question is how should I approach negotiations when I'm speaking with the family directly? The details are outlined below.

It is currently owned by a group of family members who purchased it from their relatives in order to keep it in family. The new owners all have full time jobs and not really looking to be landlords. 

I just received an email from the head of the family group spelling out the situation and asking although they did not do an appraisal, because it was between family, what would I offer them for it. 

I've only been able to ride through the property at this point. I don't know rent roll, unit mix, market cap rates, etc. 

Derek,

See if they'd be willing to finance it and let you manage it and say you need time to evaluate the property and their asking price. 

Originally posted by @Derek Caffe :

 I don't know rent roll, unit mix, market cap rates, etc. 

 Figure this out before you think about making an offer. 

I would do my best to evaluate the property same as any other commercial property of the same type. You might ask to see the rent roll, the maintenance records and ask to be allow to have a look at the systems, HVAC, electrical and plumbing. Ask about any recent or past major repairs. Once you can ascertain the rental income as how long each unit has had its present tenant. This may give you an idea as to how well you can count on the current rents coming in and totaling any figure you might use to valuate the property. 

Be prepared if the family owners are not aware of how this kind of property is valuated. 

Have a figure in the back of your head as to what you can afford, how you will determine your Maximum allowable Offer. Remember for you it will be an investment and you are not emotionally tied to the building. 

You can work your way around to asking to have the property appraised. 

If you are not really versed in determining system conditions then ask to be allowed to have a GC accompany you on a walk through. 

Do not offer to buy what you do not understand, that is first. If you can work your way to fully understanding what you might be buying then offer to buy it for the right reasons at what will be the right price for you. Do not romanticize about owning a 30 unit building because in the end its only business or should be. 

Hey Philip, great advice, as of yet, they haven't put out an asking price. They're simply looking for an offer from me. I'm not looking to throw out a random number so I'm looking to get them to talk some more to really get a good idea of all the options on the table to get this deal done. 

Seller financing may be a great option, but at this point my knowledge is limited. All I know at this point is that it's in a great location and the sellers are motivated.

@Gilbert Dominguez , @Bryan H. I'm definitely looking to put in my due diligence on the property and find out rent rolls, maintenance records, etc. I'm more concerned with how to approach this considering it's more of a family business where I'm certain to see little to no maintenance records, financial statements and less professionalism (more emotional) when compared to owners of larger apartment complexes. 

I'm really seeking advice on how to proceed under those conditions. I purchased rental property before (though this would be on much larger scale) so I'm familiar with the due diligence. It's more dealing with mixing soft skills (people management) with hard skills (deal/ financial management) right now while moving through the negotiation process considering I'm a newbie at apartment investing.

I cannot tell you exactly how to go about it but one thing I have used in the past is to put the requirements as asked of me by my lender and insurance company. 

Example:

Joe first I want you to know that I am serious about buying your property. You asked me how much I can offer you for it. Well I will need to finance the property and also insure it and my finance or mortgage company asked me to get the following;

. rent rolls

. Maintenance records

. Number of units currently rented

. Number of vacancies

. rental history

 etc. etc. 

Joe ! would you mind too much helping me put all this together so I can make a determination with my bank, mortgage company , insurance company etc. about how much we can offer you for the property?

I will need to do a walk through with a contractor that I use for maintenance and needed repairs. Would you mind allowing me to do that?

Usually with family owners you might try to make it a more personal thing. Ask permission rather than make demands. 

Also do not underestimate your seller simply because they appear to be doing family business only. They may be very sharp without you thinking it. 

And that @Gilbert Dominguez was the type of advice I was looking for. Thank you very much sir.

I would ask them about the rent they get (total) monthly and then you can apply AT LEAST the 50% rule of thumb to ESTIMATE the NOI - Net Operating Income (This can be way off either way depending on condition of property and other factors). If you can find out the cap rate for the area (there is a podcast on #AskBP about that topic), and then apply it to your building you can at least have a starting point. Then you have to do the best you can to confirm the numbers both from the income and expense standpoint. The last mid-sized multi that I crunched the numbers on they were willing to share the rent roll and some of the expenses (you can get the taxes and some other numbers on your own).

You also need to know who pays the utilities, and what those run. Owner may pay water, sewer and trash, which adds up. You may also have some lights for common areas, water for maintenance, etc. These all have to be part of your expenses when figuring your NOI

One more thing (as if you needed more to think about) -- are there any other income streams? Is there a coin operated laundry? Vending?  

Here's how the calculations work:   

Income - Expenses = NOI (calculate it for the year)

NOI/cap rate = value

Cap rate could be viewed as return on invested capital, but that includes your down payment AND your loan, so it's not the same as cash on cash return.

So if your desired cap rate was 10% (again an ASK BP episode about this!)

And your rent roll showed $144,000 per year (I took $400/unit/mo x30 x12 mo)

Apply 50% rule of thumb to get $72,000 per year NOI (again this could be HIGH depending on expenses, who pays utilites, etc etc etc)

At a 10% cap rate:  $72,000/.10 = $720,000 value  IF rents are somewhat stable and expenses are exactly 50%.  Chances of that all happening are slim, but its at least a starting point!

Lots more questions than answers, but it sounds like its time to dig in and see what parts of the puzzle you can figure out, and try to estimate the missing pieces to come with your potential offer price.  

Great advice above from @Gilbert Dominguez and others about not letting your emotions get the best of you, its a business deal after all.  

There are tons of other threads on calculating value of a multi, and there are also some spreadsheets to look at on the FilePlace.  Also several great podcasts on the main BP Podcast about multi's.

Good luck!  And most of all -- Have Fun!

This is why I typically like deals of 70 doors or greater.

Smaller 20,30 units unless the owner has multiple building in other locations for 100's of units tend to have poor records. They do not think about exit plans and how a lender would underwrite for a borrower and the reports they would want to see formatted in a particular way to get loan approval.

30 units you usually have repair problems not being able to afford a full time person with the income coming in.

If you can't verify you MUST assume the worst when it comes to records. I tell the sellers if you want a higher price you MUST have pristine records that are audited. Anything that can't be validated 100% reduces the sales price. If a lot of unknowns you have to go worst case and price in risk with a much lower offer.

If you do consider owner finance look at an option period before you buy, get estoppels signed by tenants, and do not give a personal guarantee so that if it turns into a money pit you can hand it back and walk away.

No legal advice given.

@Tom Shepard thanks for the great response! Bringing me back to the basics of coming up with a starting point. Huge help!

@Joel Owens , I was waiting to hear your thoughts on this. I understand your thoughts on the smaller complexes and I'll be moving into the apartment community ranks soon enough. I'm just taking my time and learning the ropes bit by bit. So you would recommend, perhaps a master lease option?

Plus, I guess I should mention, there is a lot of deferred maintenance.

When you cannot verify 100% you want multiple outs and to offload responsibility.

For example if I have to be on the hook for a personal guarantee or even a corp. that property had better show 100% records and be an amazing deal.

If it's a marginal deal based on turning around and that doesn't happen you want to be able to walk away unscathed. This way you turn it around you win. If it doesn't happen at least you gained experience and hand the money pit back without draining your time and capital resources.

If a seller sells you  a bill of goods with a PG then they will stick it to you.

@Joel Owens could you go into a little more detail about how the option period works? Does this apply only in case the seller is financing the deal entirely (i.e. no bank involved)? What are the typical terms of such an agreement?

Thanks!