Opportunity? Or nightmare waiting to happen

14 Replies

I found a 36 unit apartment complex in a class C neighborhood that is being sold with owner financing. So i thought opportunity right? So i contacted the number they sent me a package with all the numbers and what not. They asking price is 800k. The package i was sent said 10.8% after repair proforma cap rate. The crazy part to me is that only 9 units are occupied!!!! What would you do?

@Jason Hill I would not trust any proforma numbers from the seller, and do your own due diligence for repairs, market rents, etc.  

Consult with your team (brokers, lawyers, GC, etc.) and make sure the numbers work for you before you sign into anything.  

@Jason Hill , this all comes down to what the market looks like.  What is the vacancy rate for similar buildings in that market?  How much rehab would you need to get it to that condition?  As @Andrew Beauchemin said, you should be consulting your team for this information.  A good team should be able to tell you market cap rate, market rents, market vacancy rates etc.

Once you get those numbers you can more accurately underwrite the deal. 

Last thing is to ALWAYS only offer based on ACTUALS, not pro forma.  

Good luck!

there is a reason its vacant.. its probably really D or F class I would think .. given how hot texas is .. not literally but in the MF space.. use extreme caution.

Im new to the killeen area just moved here due to my military obligation. So im not to sure of the area but ill go check it out tonight. Jay i completely agree 9 out of 36 being occupied their has to be mite to this picture.

The owner may be offering to carry back financing because he knows conventional banks won't lend on it due to deferred maintenance issues. Perhaps a deal already fell apart over this and the owner's getting desperate. Due diligence will be key there. Line up your own title insurance, your own third party appraisal and home inspection. Be extra careful investigating any environmental or structural issues that could be expensive to remediate. Best of luck!

@Jason Hill - I concur with the above. Only 9 of 36 occupied is a concern and don’t trust the numbers they give you (they can be manipulated or spun to sound good).

I’ve lived in that area three different times (just moved a month ago). Feel free to contact me with questions about the neighborhood. I would guess it’s in one of two areas. 

Killeen can be a minefield to navigate. Boom, bust cycles, etc.  I have an associate that has a few rentals (quads etc.) there but I've never had the time to dig in and research what works best up there, and in what sub-areas.

One note, if in 76541, do be careful and do lots of homework.

@dennis m I have not seen the inside of any of the units I was going to take a ride by in the morning to at least check out the area.

The down payment is 115k 

@5% interest and 30 year amortization 

I believe the monthly mortgage is 3600 and some change 

with their pro forma of 10%, did they assume that all the units would be occupied? if so, given that way way wayyyyy less than half are currently occupied, i would be very cautious about thinking the roi would be close to that

This has got ‘disaster’ written all over it-and given all the risks it does not even come anywhere close to breaking even at 800k. No wonder the current ovner is offering to carry-no one else will. Time to say “next”!

jhon you nailed it on the head with that zip code. I drove buy today and it's not that great of a neighborhood. But i did see a roofing company putting on a new roof if that means anything lol.

Most sub $1M apartments in Killeen are in 76541, and there are quite a few. And indeed, in my opinion, they are more likely to be on the nightmare side rather than the other way around.

$800,000 is about right if everything else checked out - I looked at MLS complex sales in 76541 the past two years and median $/unit is just under $23,000.

I don't know if Fort Hood keeps an active blacklist anymore. 

But yes, you would want to get right with whatever property management solution you are going to be using, because this one is going to consume a lot of time and attention if it does work out.