Interesting Deal...What to offer?

Question

So there's a 10plex that is 30% occupied and in need of extensive work.  The owner wants 450k with only 65K down.  There are estimates that the scope of work will be around 100k.  A local bank is willing to finance the rehab for a 1st lien and the owner will deffer payments until the rehab is done and the property is cash flowing.  The remaining 385k will be at 6% over 25 with a 10yr balloon.  I would imagine that I would refi out long before then.

I am having trouble figuring out how to approach this.  If you base price on actual income this place is essentially worth the ground  it's on.  The city appraisal is around 360k.

I am new to all of this, so this is not very straightforward for me.  Any insight on how to approach this would be appreciated.

They are all 1br, 1ba in a C type neighborhood that is going through some renewal.

Sam LLoyd · Answer

Greg,

Happy 4th.  I've got a similar deal for a similar price... except backward.  It's fully rented, but there is no room for any repair/improvement.  If fact, I think the rents are a little high, so I'm trying to figure out what to offer since I can't cover myself against any market correction or bad numbers by improving the property.

Since you're only a few miles away, maybe we should get together and look at each other's numbers.  I'm pretty familiar with market rents and such in the area.  And yes 45k/unit does seam high, but that depends on how much work you need to do.  Around here, if you can redo each unit for 10k... putting you around 55.. that's close to market I'd say.... not a 'deal'... but I'd need to know a lot more.

Greg Scully · Answer

@Anthony P.  Can you expand on "ideal return" for me.

I understand that you should buy on actual performance.  Based on local CAP rates and it's minimal NOI this place should be worth 220k.

It seems like the asking price is based partially on the completed rehab, which I don't agree with.

Anthony Palmiotto · Answer

45k/unit sounds a bit expensive for a distressed property. I'd back into the price by figuring out what your ideal return is for this type of property and then factor in your rehab costs. Make your offer based on that.