What am I missing with the pricing of Multi-Family Property?

Question

Greetings everyone!

I am a licensed real estate agent in Columbus, OH. I have primarily worked on the residential side of real estate and now I am interested in investing in multi-family.

There is a Multi-Family property that has 17 units, 4 buildings on 2 parcels. 15 units are currently occupied ($475/unit), 2 of them are Section 8.

The property is listed at $549,900 and it has been on the market for 1,176 days--it is also a foreclosure.

The assessed value from the auditor's site is $290,000.

Why the BIG discrepancy? I have never seen this on the residential side.

Any thoughts?

Thank you in advance for your comments.

Joshua Springer · Answer

I assume Columbus schools?

LaTonga Smith · Answer

@David Swygert Thank you for your comment. The property is actually on the Northeast side of Columbus--I don't know if you are familiar with that side of town. I can only imagine the repairs because $475  per unit is NOT the going rate in that area. It's more like $575-$625 for a 2 BR.

David Swygert · Answer

I am  familiar  with the East Columbus area. MOST properties there are older.  The expectations at $475 are what they are. I have a few duplexes that I put a few dollars into and are free and clear so I pocket all of the rent less lite expenses. Assuming that there is adequate plumbing,electrical and working furnaces, I don't see where else she would spend the $300 extra per door. If this property could be purchased at appraised value I really don't see why she wouldn't make at a min $5000 a month . And that's with a mortgage. That's based off my experience with duplexes that are free and clear. Again I could be wrong.

Account Closed · Answer

I believe there are 17 units and after vacancy and bad debt you will probably collect less than $90,000 annually. Given the overall low rent, I assume that this is an older property and while $300 per unit/per month is a bit high on operating expenses, the property was in foreclosure so I assume that maintenance is deferred and will need higher than normal cost for while until the tenant quality improves. Even if you do use a lower operating cost, the initial repairs will simply reduce the investment value.

As for the $290,000 assessed value, I am not familiar with the Columbus Tax Office but, I have never relied on that number as an indication of value. Mass Appraisal technique is not a good indication of value for investment purposes. My guess is that the Tax Value is representative of the area. At less than $20,000 a unit, this property is probably heading down a death spiral in which the rents can not maintain the property so more maintenance is deferred hence rents continue to decline, hence less maintenance, hence less rents....... in the end you have land value.

David Swygert · Answer

I'm sorry Nicolas Paez, just curious,and I'm sure your right btw, but how did you come up with the 30,000 a year cash flow. $475x15 units x 12 months.  I'm new to multiple unit investing( over 5 units) . What formula do you use. Thx

LaTonga Smith · Answer

@Nicolas Paez Thank you for your insight. I was thinking the same thing about the listed price. The auditor assessed value definitely seems more in line with the property.

Account Closed · Answer

Property looks like it generates less than $30,000 annually in cash flow. On a 10% cap rate the $290,000 value appears right. As for the asking price, I think the 1,176 days on the market says that it is over priced. Is this a land play or is the bank just listing it at its loan balance so as to avoid the large write down? I would not worry about the asking price. If you have a potential client, make an offer, all they can do is say no.