Is this a deal you would throw the regular equations away on?

Question

I have found a mostly off market multi family deal, the property is not on the market but the property managers have permission from the owner to start looking for perspective buyers. I actually sat down and talked with the property management team and the seller for about 2 hours yesterday afternoon and discussed their property and how I might go about purchasing it. After a few hours of talking we and discussing the property I decided that I wouldn't be able to go after this purchase for a cash flowing property but I could go after this as a value add property. the property ha the potential to build 3 more duplex's. currently there are 2 duplex's and a single home that matches the duplex's. So 5 units currently. There Is also a garage on the land that is rather large that could have something done to it.

Obviously based off the numbers from the head line this deal is no go. That being said there is always more to the story and I would like to run this deal past all of you fine folks to see if this actually is a value add opportunity or if it is still to much. So after sitting down with the owners for a while theses are the numbers that we are currently at.

Asking Price : $500,000

Cash at closing : $45,000

Owner Financing : $455,000

Terms of owner financing loan 5.25% for 25 years fixed rate.

Monthly payment : 2726.58

Income from 5 units Year to date : $12,700 or $3175/M

Yearly income for 2018 : $36,875

Expenses in 2018 : $4982.52 (they did not add in their insurance, taxes or maintenance)

The property is in a very nice area right outside of my town in one of the few markets that saw growth last year in Missouri.

The property is tax assessed currently at a value of about $294,000 and their taxes last year were $2687.17

They have not provided me what their insurance is and I have not secured a quote for insurance yet.

So after all of that is this something that could be a good value add opportunity. If you use all the equations like the 1% rule, the GRM, or the Cap rate it doesn't look solid but because its seller finance and I told them that we would have to make sure the property could handle its own expenses with 5% of rent set aside for maintenance or cap ex then we would have to get the mortgage down to be covered by the NOI. What are your thoughts? We are not under contract or anything yet but they told me they would give me time to sit down with me again and do some more negotiating to see if we could further work out a deal.

Owen Dashner · Answer

This is not a deal at all - they are fishing for a sucker. Big picture here, it sounds like you are thinking the land is what would make this into a good deal. If that's the case, why not just look for other suitable land lots to build on and forget about the overpriced duplexes and house that go with this property? Unless the area it is in is smoking hot and there is no other buildable land, I would pass on this deal. It seems like they want about double what it should be worth.

Jacob Sampson · Answer

Also, remember the more creative you have to get to make a deal look good the more risk you are, likely, taking. You want obvious deals not ones which require creativity.

Jacob Sampson · Answer

No deal. Based on what you state, you are in a market like mine, little to no property appreciation. You buy for cash flow. Appreciation may or may not happen over the long term, but that is just icing on the cake. No cash flow, no deal.

Chris Marshall · Answer

Those are all very good points, To address the possibility of large expenses I’m adding in a set back of 5% of the rents for Cap Ex.

In regards to land availability there is just enough land to add 3 more duplex’s ( 6 units) there is already rough plumbing and electrical ran for one of the potential duplex’s (apparently, I have not verified this).

And as far as the slimness I am trying to think of a more creative way to structure the debt with them to make it look a little better. Such as the example above of paying a higher price with 0% interest or a lower price with a higher interest.

There is a 2000sqft garage on the property that is not being rented out right now and built onto the side of the garage is a small self storage space for each tenant that is included free with their lease. I do believe that currently each unit is about $50ish under value and then I could make utilization of the self storage and extra fee.

Those are a few of my value add ideas and then different ways to structure the debt to make this property better. Any further thoughts on that?

Spencer Gray · Answer

Is your plan / strategy to build and develop duplexes? If it's not I would not get distracted, move on and stick to your plan. If you do want to develop I would probably just be looking at analyzing the land.

Will C. · Answer

@Chris Marshall

Like the others, this seems very slim. have you analyzed the numbers on the buildings individually? If you were to build three more duplexes, what does the calculation look like now? how much land are you talking, 5, 50, 500 acres? timber?

At this time its hard to build new vs buy existing and renovate. Do you have the capital to throw at a development?

If one or two of the duplexes are making money see if he will break off and sell apart from the rest.

Greg Dickerson · Answer

It looks a little thin to me. Add a vacancy or two and or bad tenant, major repair expenses and your upside down pretty quick.

You need to be at 4.5% or structure a straight payment till paid no interest owner finance. Offer a little more in exchange for this option.

Either way you need a lower monthly payment.

Is this a deal you would throw the regular equations away on?

Is this a deal you would throw the regular equations away on?

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