Buy-and-Hold Rental Investor · Santa Fe, NM · Member since 2015 · 438 posts · 352 votes
About to write an offer on a 32-unit in Colorado. Mom-and-Pop seller with bad records, of course. I have a rent roll and 2015 expenses for maintenance, supplies, management, and utilities, which equal 63% of rent rollx12.
Property manager tells me that, based on income, no way it's worth the asking price. Problem is, seller has 2016 appraisal that says it IS worth the asking price, based on 8% cap rate. However, the appraiser used an average expense rate of 43%, when the actual expenses are more like 63%. (The property is older and maintenance costs are running about 12%. Seller also pays for gas heat.) As a result, there will be negative cash flow at the appraised value (esp. after property tax reassessment).
WHAT to offer? I was thinking maybe I make the offer (LOI) near the appraised price, to get it tied up, "or the property's 2016 net operating income divided by .08, whichever is lower." And then define NOI according to IRS Schedule E ("Line 21 less lines 12, 13, and 18"; [interest and depreciation]).
Anyone ever done that? I could also try to educate the seller by showing the appraiser's error in calculations of NOI and how they aren't near what his 2015 expenses were.
Flipper/Rehabber · San Francisco · Member since 2014 · 124 posts · 49 votes
9y
Make your best offer according to YOUR numbers and if the seller wants it, he'll take it. If not, you can't financially justify it, so rest easy this guy wanted an unrealistic price. Or perhaps get the seller to agree on seller finance terms to make the deal profitable for you, despite a higher purchase price.
I talked myself out of a 10-plex once because it appraised for 675k. My highest I could go was around 500k, but I just didn't make the offer. It was under contract the next week with someone else for 420k, and eventually negotiated down to 325k.
Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
9y
ALWAYS use actual instead of proforma (the seller's or agent's dream numbers). The sch-e are great to to have. Regardless of the appraisal, the lender will get the actuals also and underwrite a loan on those numbers - - and yes, the 63% expense ratio is high and tells you there's LOTS of maintenance due in the future too.
Write up a Non Binding LOI at a price based on financials that make sense to you, request the schedule E as part of your due diligence, then adjust your offer based on your findings.