Can't Understand This Deal. Expertise Welcomed.

8 Replies

BP Community,

I recently came across a deal in Ohio for over 100 units and need some help on it. 

The property is 50% occupied and currently doing about 80k in NOI (Seriously Underperforming). Cap rates in the area can range from 7-9% on average. The property was listed at $3.5M but was just reduced to $3M. I thought this was outrageous but I contacted the broker. The broker said that the owner received over 5 offers including a $2.5M cash offer (that was refused). My numbers say all day that this property is worth less than $1.2M as performing. If performing around 95% occupancy, the property should do about $300k in NOI.

Could anyone help me understand the $2.5M cash offer? 

I know there's a ton of upside on this thing but I obviously shouldn't be paying for value that I will in turn have to create.

I've analyzed a good number of deals and am just baffled by this one. 

Thanks for reading my long post and hope someone can help me make sense of this.

The owner would like to get that price.  If it was me 50% occupied I don’t walk. I Run   NOt worth our time.  

@Christopher Munn ,

Simple, there is more money than brains out there in the multi-family realm right now.  Although you're being smart and buying based on actuals, some people will buy based on how they project the property to perform.  You're not alone, we're finding that all over the place as well.  

Originally posted by @Robbie Reutzel :

@Christopher Munn,

Simple, there is more money than brains out there in the multi-family realm right now.  Although you're being smart and buying based on actuals, some people will buy based on how they project the property to perform.  You're not alone, we're finding that all over the place as well.  

That's really astonishing. I really want to get a nice value add play where I can stabilize a property but at that price, I'd have to completely turn the property around just for a 15% IRR. A turnaround project should yield turnaround profits imo.

Thanks for the input.

Originally posted by @Sam Shueh :

The owner would like to get that price.  If it was me 50% occupied I don’t walk. I Run   NOt worth our time.  

 The broker said the owner RECEIVED an offer for that price. So clearly he would like more than that price. I'm having difficulty understanding the offer. I know owners can ask anything they want.

@Christopher Munn ,

You probably already know this but, in my opinion and my experience, your best bet for those plays is off-market deals.  That's where we have found our best value-add and refi plays in this market.  

In the current market you have to be willing to pay the seller now for work you will be doing in the future. How much of that you will be willing to pay is where the negotiation comes in. Some stupid money is paying nearly all of it and unfortunately, that's who we have to bid against in a lot of situations.

@Christopher Munn in a distressed situation like you're describing you're going to have to shoot the difference of typical (NOI/Cap rate) and replacement cost. Depending on the vintage, size, condition, etc you're going to be hard pressed to find something for $12k a unit. Even $25k a unit is low. This is what brokers try to pitch as a pound for pound price. It doesn't make sense on a cap rate comparison but could make sense on a price per unit.

The $2.5M can totally work if it's 1031 money that needs to be put to work. How did you come across the deal? Most of time when I see deals like this I spend about a 5 minutes thinking about it and move on. No use in wasting time!

Good luck!

Originally posted by @Abel Sng :

@Christopher Munn in a distressed situation like you're describing you're going to have to shoot the difference of typical (NOI/Cap rate) and replacement cost. Depending on the vintage, size, condition, etc you're going to be hard pressed to find something for $12k a unit. Even $25k a unit is low. This is what brokers try to pitch as a pound for pound price. It doesn't make sense on a cap rate comparison but could make sense on a price per unit.

The $2.5M can totally work if it's 1031 money that needs to be put to work. How did you come across the deal? Most of time when I see deals like this I spend about a 5 minutes thinking about it and move on. No use in wasting time!

Good luck!

Thanks Abel. I found it through a broker. It intrigued me because it was a great way to grow my unit count without having to do a $2M raise or something similar. But yeah...pretty much moved on after the call with the broker. Just a high price to pay for something that may be worth $3.2M when all said and done.

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