Negotiations and Cap Ex

Multi-Family and Apartment Investing
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Negotiations and Cap Ex

Chase Gruening
Nashville, TN · Member since 2019 · 30 posts · 3 votes

I am getting close to getting a contract on my second multifamily deal. I am having trouble estimating a accurate cap ex and we are about 20k apart on 330k counter offer. The deal involves 3 separate duplexes (6 total units) all next door to each other....


One of them needs a new roof. The total rents can be raised to the low end of the market about $350 total. AS IS it will cash flow about $150 per door with the worst month of expenses and 5% vacancy rate (great location), fully rented right now.  I have proof of annual expenses from water, tax, insurance companies that I used to calculate expenses. I have only estimated 1,000 per month in my cap ex (3,000 total) per year in my calculations. 

I know this is not very accurate and would like opinions on how get that more accurate. More from experience the a general rule of thumb. These are good properties in above average condition. All updated. 

Also in terms of getting closer in negotiation. Any ideas or suggestions in order to get closer to a contract?

Thanks.

Chase  

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  • Hai Loc
    Specialist · Toronto, Ontario · Member since 2012 · 2k+ posts · 891 votes
    6y

    Its really hard to be accurate on a cap ex.. But I would high ball it at 10% just for yourself. You cannot use 10% during negotiations unless it is justifiable 

    What is useful during negotiations is if you are really good at pricing replacement costs for like roof, windows, furnace, hot water tanks etc.. and divide the cost by life expectancy and have a good idea of how much it would come out to per year then you can use that number to justify a cap ex amount. 

    This is the appraisers approach on figuring out the value on those common cap ex components. 

    Remember you don't have to do this upfront. You can always renegotiate after an inspection or when you can get estimates and figure out how much life is left on those structures/mechanicals.

    I don't recommend this but I know investors who agree to a contract at asking price and adjust it according to inspection results. The danger in this is you can be so far apart on price after inspection and the deal flops and you wasted a lot of time when the seller was expecting a sale price very close to initial offer. 

    Good luck

    0Reply
  • Tj Hines
    Specialist · Tampa, FL · Member since 2012 · 933 posts · 492 votes
    6y

    @Chase Gruening if the seller is firm and tight there's no other way to get to the closing table other than give the seller what they want. Or ask for a 10-20K repair allowance back from the seller at closing out of the 330K PP

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  • Chase Gruening
    OP
    Nashville, TN · Member since 2019 · 30 posts · 3 votes
    6y
    Originally posted by @Tj Hines:

    @Chase Gruening if the seller is firm and tight there's no other way to get to the closing table other than give the seller what they want. Or ask for a 10-20K repair allowance back from the seller at closing out of the 330K PP

    What is the advantages/disadvantages to seller by doing this opposes to just lowering the sale price. I am not familiar with this approach.

    Thank you

    0Reply
  • Chase Gruening
    OP
    Nashville, TN · Member since 2019 · 30 posts · 3 votes
    6y
    Originally posted by @Hai Loc:

    Its really hard to be accurate on a cap ex.. But I would high ball it at 10% just for yourself. You cannot use 10% during negotiations unless it is justifiable 

    What is useful during negotiations is if you are really good at pricing replacement costs for like roof, windows, furnace, hot water tanks etc.. and divide the cost by life expectancy and have a good idea of how much it would come out to per year then you can use that number to justify a cap ex amount. 

    This is the appraisers approach on figuring out the value on those common cap ex components. 

    Remember you don't have to do this upfront. You can always renegotiate after an inspection or when you can get estimates and figure out how much life is left on those structures/mechanicals.

    I don't recommend this but I know investors who agree to a contract at asking price and adjust it according to inspection results. The danger in this is you can be so far apart on price after inspection and the deal flops and you wasted a lot of time when the seller was expecting a sale price very close to initial offer. 

    Good luck

    Thanks for the response. You are using 10% of what? Monthly rents?  

    0Reply
  • Chase Gruening
    OP
    Nashville, TN · Member since 2019 · 30 posts · 3 votes
    6y
    Originally posted by @Hai Loc:

    Its really hard to be accurate on a cap ex.. But I would high ball it at 10% just for yourself. You cannot use 10% during negotiations unless it is justifiable 

    What is useful during negotiations is if you are really good at pricing replacement costs for like roof, windows, furnace, hot water tanks etc.. and divide the cost by life expectancy and have a good idea of how much it would come out to per year then you can use that number to justify a cap ex amount. 

    This is the appraisers approach on figuring out the value on those common cap ex components. 

    Remember you don't have to do this upfront. You can always renegotiate after an inspection or when you can get estimates and figure out how much life is left on those structures/mechanicals.

    I don't recommend this but I know investors who agree to a contract at asking price and adjust it according to inspection results. The danger in this is you can be so far apart on price after inspection and the deal flops and you wasted a lot of time when the seller was expecting a sale price very close to initial offer. 

    Good luck

    Thanks for the response. You are using 10% of what? Monthly rents?  

    0Reply
  • Tyler Weaver
    Investor · Cincinnati, OH · Member since 2008 · 319 posts · 243 votes
    6y
    Originally posted by @Chase Gruening:
    Originally posted by @Tj Hines:

    @Chase Gruening if the seller is firm and tight there's no other way to get to the closing table other than give the seller what they want. Or ask for a 10-20K repair allowance back from the seller at closing out of the 330K PP

    What is the advantages/disadvantages to seller by doing this opposes to just lowering the sale price. I am not familiar with this approach.

    Thank you

    Really it is purely psychological for the seller.  But it can make a difference.  They still see the full price offer. It is easier for them to justify full price with a specific budget to fix deferred maintenance. 


    It creates an extra item that can be negotiated as a benefit for the buyer.

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  • Hai Loc
    Specialist · Toronto, Ontario · Member since 2012 · 2k+ posts · 891 votes
    6y
    Originally posted by @Chase Gruening:
    Originally posted by @Hai Loc:

    Its really hard to be accurate on a cap ex.. But I would high ball it at 10% just for yourself. You cannot use 10% during negotiations unless it is justifiable 

    What is useful during negotiations is if you are really good at pricing replacement costs for like roof, windows, furnace, hot water tanks etc.. and divide the cost by life expectancy and have a good idea of how much it would come out to per year then you can use that number to justify a cap ex amount. 

    This is the appraisers approach on figuring out the value on those common cap ex components. 

    Remember you don't have to do this upfront. You can always renegotiate after an inspection or when you can get estimates and figure out how much life is left on those structures/mechanicals.

    I don't recommend this but I know investors who agree to a contract at asking price and adjust it according to inspection results. The danger in this is you can be so far apart on price after inspection and the deal flops and you wasted a lot of time when the seller was expecting a sale price very close to initial offer. 

    Good luck

    Thanks for the response. You are using 10% of what? Monthly rents?  

     Yes.. that can be above and beyond what's necessary but should be a good rule of thumb if your unsure. What will impact this number is how much Cap Ex you spend after closing. If you replace a roof and change the furnaces the % will be much lower because you don't need to build up much a reserve having replacement for those elements in decades. 

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