Sorry for how long this is going to be. I'd like to get as much pertinent data in as possible.
I'm looking at a deal, and I need to determine a valuation for the formal offer.
The deal is a 52 unit apartment complex, spread out over 5 buildings.
Condition of Buildings:
The buildings are mostly from the 1980s, and some have not been well maintained. I'll do a break down by unit count here:
8 units are in reasonably good condition. Only minor / cosmetic stuff required; I'd estimate around 2K per unit to get them to a standard I'd be happy with. Also, there's common areas in the building that would need to have the once over; carpet, paint, and so on. Probably $5K worth of work, total. That's $15K roughly to turn them around as I'd like to.
There's 8 more units that are in a similar state, but slightly more distressed. For the sake of simplicity, let's say $20K for the turn around.
The remaining 36 units are in bad shape. I haven't been in any individual units in the buildings yet. I can say that from the outside there's a nightmare going on. There's several decks that appear to be falling off the building. There's a section on one (perhaps 20' x 30') where the siding has blown off, and needs to be put back up. The common areas need a complete overhaul: flooring, paint, and so on. All the apartment doors need replacement. The common areas feel scary, as they've painted the doors all black, done the floors in black tile, and there isn't good lighting. You get the idea here, but I cannot even estimate the cost of getting all this turned around as I'd like to.
One thing about them all is that the roofs are in good shape; they're newer, so won't need replacing.
Of the 52 units, the rent rolls show 14 as vacant, and most of those not ready to be rented due to the condition of them. All the unrentable ones are in the 36 unit bunch of problem buildings.
So, how to value all this? Last time I made a large purchase it was done by simply calling it $35K per unit; the building was in great shape (built in 2002), but had tenant/management issues.
I could come up with something similar here, perhaps break it down by which building it's in. I'd also have to reduce that for any unit that isn't rentable. So for instance, say $27,500 per unit for the buildings in decent shape, $20K for each unit in a bad building, subtracting something to account for the ones that aren't rentable. My per unit numbers there are probably low, but it's just an example.
I could also do it based on Cap Rate. Given the condition of all the properties I'd use their incomes from their 2016 Schedule E forms, and put it at a 12% to 15% cap rate.
I really am investing here for cash flow, so I could also take a cash flow approach; again based upon their 2016 Schedule E forms.
What are your thoughts on these approaches?
One other caveat to the valuation. I've worked this out so that it'll be seller financed. That gives them some additional sway in setting the price. They are very motivated to be rid of all these buildings however, so I'm not without leverage.
I'd very much appreciate some advice here!
Hey @Johnny Hastings , exciting! I would really focus on getting actuals from the seller. Get a rent roll for 2017, figure out actual gross income and vacancies. You could estimate expenses at 50% but that might be a mistake for this building as you describe it. I would get actuals for expenses (they will be way low) as well and then start building your proforma based off of reality. Personally, I wouldn't feel comfortable purchasing a building off of rules of thumbs or estimates like per unit cost, I would want to plug my numbers into an apartment deal calculator like @Michael Blank 's http://www.syndicateddealanalyzer.com/ OR @Gino Barbaro 's https://jakeandgino.mykajabi.com/store/zdt9X8o2 OR Frank Gallanelli's https://www.realdata.com/p/reia/reiafamily.shtml. Any of these are well worth the time savings and money.
One simple mistake can throw your whole investment off and make it a loser.
Something you need to be very careful of on this deal. Rebuilding the "down" units may not (likely not) be financially feasible. Basically for your deal to work, the seller is going to have to discount the rentable units (and charge $0 for down units) for you to take on the added risk/cost of the down units. I think you understand that with saying that you'll buy on in-place income capped at 12-15% assuming the cap rate should be more like 9-10%. I'd take a contractor along with you as @Scott Meitus is suggesting and then add a 15%-20% profit onto the construction costs and reasonable lease-up costs. So say the property is worth $35k per unit stabilized ($1,820,000 total) and construction costs are $2k for 8, $2.5k for 8, and $35k for the remaining 36 ($1,555,200 for costs + 20% profit). So your offer would be $264,800 or $16,550 per rentable unit. This doesn't account for lease-up costs which will vary based on what the absorption rates are in your market.
@Johnny Hastings I purchased Michael Blank's SDA, it is an excel spreadsheet and capable of handling apartment syndication deals. It comes with a small learning curve but he has a lot of videos that explain how to use it. I love this tool and use it every day, even for evaluating small 10 unit deals with no other partners. It might be overkill for what you are looking for but it is well worth the $129 price, or $99 with a discount code.
I have not had a chance to really dig into the the other two analyzers. Jake & Ginos tool is an online calculator, I plan on giving it a test drive over the next week. Real Data is also a spreadsheet.
I didn't mention this before but of course if you are looking for something quick and easy there are a lot of free spreadsheets available on the BP site. It is just cumbersome to go through all of the files and I did not find something that was sufficient for apartment investing.
@Johnny Hastings if you want me to run the numbers let me know. That size is really hard and the occupancy scares me because you are looking at a construction bridge loan.
Just an update here. I've been trying to negotiate with the sellers, but they're holding this at a rather high value. They're refusing to go below the assessed value of $1.48M. The best valuation I've been able to offer is a touch over $700K. So far, we're getting no where, as they won't cave. I'll keep at it though. Going to see about some other possible tweaks to the deal to make it look better to the seller.
@Johnny Hastings , considering you are buying for cash flow, I'd base all decisions off that. If you were to give them the $1.48M they are asking, would the building cash flow in its current state? Would you have enough cash to pay the note AND the contractor for rehab/construction costs? Would you be able to pull all (or most) of your money out of the building if you refi once it is stabilized?
Also, if the property is really in the shape you describe and the owners want out but won't go below $1.48M, there might be a reason for that aside from them just wanting to make a buck. Have you asked them what they need the money for? Maybe you guys are talking past each other by negotiating price when you might be able to solve the real problem the sellers need solved?
Finally, the market is hot in many places of the country and these guys might just be greedy. In that case, you may want to break contact and re-engage them in a few weeks. They still being unreasonable, wait a few weeks and contact again. The longer the place sits, maybe it will indicate to the owners that they want too much for it and will be more willing to negotiate?
One final note, keep looking for other properties. It will help you negotiate and see things more clearly. When you find one deal and put effort into it, you get one-itis. Keep working for and on other deals to keep from mentally committing to this property before you agree to win-win terms for you and the seller. Or, your best move might be to use this as motivation to find a real deal around the corner.
@Russell Gronsky Thanks much for the info! That's very helpful with my direction here. I sort of got myself into analysis paralysis; that's mostly due to over thinking everything, and some weird desire to feel like I'm getting a decent deal here.
Based on my numbers, the cash flow answer is 'yes'. They still cash flow reasonably well even at the assessed value. I'm just a bit worried about blowing all my available funds on the down payment, and having to limp along with a property I'm not happy to tell people that I own (due to condition).
The market here is generally stable. When things were popping off elsewhere, it stayed really level here. The only real difference I noticed was that lending dried up. Property prices didn't fluctuate even remotely close to what you hear about in the big markets.
I have been looking for other properties! I try to do something every day to make some progress toward that goal. I just sent out a direct mail to several property owners around the county, after a few weeks of steady research on each of their properties.
I'm going to give her a call tonight, and discuss their motivation to sell. I think that's a great idea, and perhaps we can come to some agreement after that type of discussion.
Thanks again for the wisdom! You're a credit to BP!
Id offer about 200k down and carry a $700,000 note max
I wouldnt really go higher than that based off of what Ive read
Paying 1.48mil is too much unless theyre asking for 0% down payment which I doubt they will
Look to make a killing, not the other way around
@Johnny Hastings , glad you found something you can use in my post. Analysis paralysis wraps me up sometimes, even to this day. Being conscious of it and recognizing when it's happening to you, and taking proactive steps to counter its effects will take you a long way.
Looking forward to seeing a post from you in the future how you bought a commercial multi-family property. Hopefully, I'll have one of my own soon too. haha.
@Johnny Hastings - Did you ever end up reaching an agreement and buying the 52 units? If so, would you mind sharing how your negotiations went and how the property is doing now?
@Jason Bilbrey Sadly, or perhaps happily, lol, it never came to pass. The property was pretty run down, and very mismanaged. They set a price, and wouldn't budge, and it was several hundred thousand dollars over the assessed value (which I didn't thing the property was worth in the first place). I'm sure I could have still turned a profit had I scooped it up, but it was a lot of work, and would have cost several hundred thousand just to get it back to a B class property. The property also had a rather bad reputation in Wausau, so finding decent tenants once the physical property was improved would have been a challenge as well.