I would suggest understanding that brokers are selling the building and will use future best case numbers to sell the property at and it is up to you to decide what is realistic. It sounds like your rubbing it in their face or tying to prove them wrong.
Gather the information, put together your underwriting, come up with the purchase price you can pay and then have a discussion with the broker showing them your underwriting. Don't try to prove them wrong, just let them know that you're operation will look like the underwriting and therefore you will need to purchase at the price you offered.
@Avtandil G. your experience negotiating the 6 units is unfortunately common. It's really important to pay attention to what the owners are excluding from expenses in their marketing. In my experience, most of the time it's not intentionally deceptive, but the owners are so unorganized and/or they don't register that they should factor utilities into their costs. It always amazes me but it's just how it is most of the time. I advise all of my clients to get really good at estimating costs that are typical in our area so they can buy right.
@Todd Dexheimer - i think it's well understood that sales brokers represent sellers and will paint rosy pictures.
@Jeff Zimmerman - i don't know how much of this is the owners and how much is the brokers - when sellers provide rent / expense information, i'd presume broker would at least glance at it to make sure numbers add up before proposing a sales price and marketing unrealistic cap rates.
just from today - listing claims 5.69 cap rate. got financials (1mo, rest proforma obviously) - $5,500/mo rent ($66k proforma), expense $1,451/mo ($17,412 proforma), insurance plus taxes - $9,623/yr. Asking price is 695K. or 5.69 cap if we take NOI based on the above numbers. Except, above numbers don't include management fee, don't include _any_ repairs / capex, don't include any vacancy, and use 0.7% tax rate instead of 1.1% actual. after adding missing numbers, end up with 2.6% cap - in other words, the property is overpriced by ~300K at the same 5.69 cap rate, that's 40%
What I gather from the thread is that broker pro forma cap rates are embellished, and as a prospective purchaser you need to do your own due diligence / homework on income & OpEx.
With that said, most if not all proper underwriting will price you out of a brokers range for the asset....So how does one win deals?
Overpay for the first few?
First of all, where are you finding MF in Los Angeles for 7-8 CAP's? The average CAP for MF in LA hovers around 5, with flex + or - 100BPS depending on asset class and location, other factors. There are many factors that impact the yield and a big part of that is OPEX. Operating expenses are going to be radically different depending on what the property goes through or if it's self-managed or through a management company. Age of the asset, number of units, there are just so many factors if you are trying to gauge upside, you need to consider them all. I didn't even get into market dynamics, the impact of competitive supply, and projected rent growth. It goes on and on and on.
@Brian Juris - I don't believe I ever said that I'm finding 6-7% caps in LA ;) and I'm surprised there are even 5% caps in LA, last I looked it was more like 3%
@Avtandil G. , i get your frustration with it all. unfortunately, there are brokers/agents who aren't quite qualified to sell MFH but their license allows them to do so, so you are right. A lot of times they don't actually understand cap rates or GRM's and they don't know what to look for. i.e. when i take a listing for an MFH i always ask the seller if they pay anything out of a personal or business account that isn't on the financials, if they do we add those up and include them the best we can. it's common for small business owners to send their own employees out to properties they own to make repairs, then the expense washes into their business account and they never think of it unless i ask directly. Most don't know to do that they just take what the owner gives them. again, it's why buyers have to get really good at projections so they know how much things should cost, then they know when to walk from the deal or keep moving forward.
Originally posted by @Merritt S. :
Originally posted by @Avtandil G.:
@Joe Splitrock - the issue is not in the ability to calculate the property value at a specific cap rate - that's straightforward with current rent roll. the issue is that brokers calculate the price and corresponding cap off fudged income / expense reports - it does not really matter who fudges the numbers
just yesterday I was negotiating on a 6 unit in Fresno - the seller's broker is adverting it as 6.6% cap @ 460k on revenue of 41k. At 6.6% cap, this should be priced in the ~310k-330k range. so i request detailed income / expense - got it and discover that reported expense is only 25% of gross. there's no market in the world, where rental property expense is only 25% of gross (and if there's, nobody will ever sell such property), but the broker took the number 30.5k and arrived at the asking price using that reported NOI. After digging into the expense, I find out that there's no management fee, no property taxes and no vacancy allowance included. i make an offer at 325k and explain the rationale and the numbers, instead get back a 'we will not even talk about your offer' type of an answer.... And by the way, 325k turns out to be only 5.7% cap because owner eats cost of utilities.
"...we will not even talk about your offer..."
Uhm...aren't brokers obligated to present all offers to the seller?
not in commerical real estate.. they march to the tune of their own drummer..
You sound like you may have done this already. But make sure you’re dealing with brokers who specialize in Multifamily.
Dealing with any ol commercial broker may not be the best use of your time as well as the brokers.
@Tj Hines - I deal with whoever lists the property I'm interested - unfortunately, with smaller properties, i.e. up to 10 units, it's 50/50 - some commercial brokers but also some residential who once in a blue moon end up with MFRs for whatever reason.