Investor · UT · Member since 2018 · 55 posts · 7 votes
Good evening BP!
I found an off-market multifamily property. The owner said that it has been mis-managed by a property management team who was new and were not able to successfully stabilize the occupants and it has been at 50% for longer than the projections and business plan outlined. The owners have had multiple low offers that they do not respond to. The other multifamily comparables are closer to 95% occupied. There is probably no way to get the property based only on the current NOI and market cap rates.
My question is, how would you come up with an offer price? Where would you start with your offer? Would you use projections on increased occupancy and gross revenue?
Property Manager · Indianapolis, IN · Member since 2010 · 1k+ posts · 1k+ votes
6y
It'd be a wonderful world if it sold for current NOI and cap rate. Then you just lease it up and make a ton of money, but in reality that is very unlikely. People usually aren't total morons. I once bought a 0% occupancy building and unfortunately it cost more then $0. A car that needs a new battery is worth more than a car with no engine yet they both don't run.
Offer what you think it’s worth. Could you get it leased up to 85%? What’s a healthy cap rate there? Maybe 8% to 9%? Offer based on conservative numbers and decently high cap and you’ll be protected and make some money. Offer like there are only half as many units as there actually are and you’ll end up with what you have. Nothing.
I'd start by getting a number from the seller. I'd then put together my number for the property. I'd look at the exit, duration and expanse of the project, discount risks involved, make sure I have a healthy contingency set aside and make sure this project will pencil out the same or better then my other opportunities. Good luck
Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
6y
@Kevin OBrien I don't know Utah all that well, and I invest in my immediate area. Having said that I hear the market most places in Utah is hot. So I would want to have a clear understanding of why that property is underperforming so badly and the story you have been given just does not add up. So dig a lot deeper.
Then I would do some projections on what is the market rent, what capacity can I expect-should be high-over 90% and do the math. Then work backwards from there. You probably can't expect a 50% offer to be accepted, and at 100% it is way too high. I don't know your investment goals or criteria but I would encourage you to not deviate from them. Sellers have been known to not always be truthful-shocking I know! So remove any jewelry before shaking hands! All the best!
Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
6y
@Kevin OBrien off market-look into the property history. Off market can mean different things.......when was it on market? It could be off market because no realtor want to list it or expect action at a price?
Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
6y
@Kevin OBrien projections are speculation. The value is a math equation based on actual income and expenses. Yes, you will want to add value and increase occupancy, but that is value that you will add AFTER you buy it. Today, it is worth 50% of it's potential value based on income. If you are willing to over pay for it, you are accepting the risks based on your knowledge and ability to increase the performance of the property. I suggest you make the offer based on NOI and cap rate, but making it easy on the seller to sell. This costs you nothing. For example, make your offer with no contingencies. The seller would know that you will not renegotiate later, based on the inspection. They also know that you are very confident in getting funding.
Rental Property Investor · Logan, UT · Member since 2017 · 47 posts · 19 votes
6y
@Kevin OBrien
If the seller isn't willing to sell for what it's current value is, see if they are willing to negotiate a type of seller/owner financing which would give them the price they want but give you the time to add value and stabilize the property.
Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes
6y
This really depends on the property, location, condition, age etc. For smaller properties you can use comps and work backwards from there based on those values and estimated income and expenses. Take the ARV and subtract repair costs, closing costs, stabilization and lease up costs to get fair market value. You then need to determine how much spread you want and back that out to get an offer price.
For larger properties you determine values primarily on CAP rate so you need to know CAP rates in the area for the type of property you are looking at then work it backwards like a new development. Start with estimating the gross rents and operating costs to determine the NOI. Calculate the value based on the market CAP in the area to get the true stabilized market value (SMV). You can also look at comps and replacement value to validate this number. Take the SMV and subtract the costs to get the property to stabilization which could be renovations, marketing, leasing commissions, concessions, management costs, etc. Subtract those costs from the SMV to get a base value. I like to have at least 25%-30% margin for profit on a deal like this so take the SMV x 30% and subtract that from the base value to get an offer price.
If the property is partially vacant you can adjust the formula above for vacant and occupied units and calculate values by the unit.
Realtor · Dallas - Fort Worth Metroplex, TX · Member since 2016 · 1k+ posts · 925 votes
6y
@Kevin OBrien. Just because the seller "says" they are low ball offers, some may be realistic offers. You still need to underwrite the property using all the required documents rolling T12, annual rent rolls, comps. Have you walked the property ? Is it a C class but the manager was a B PM or vice versus? Often times a seller will have numbers in their head that are not realistic.
Do your due diligence. The owner sees you as a newbie so be careful he doesn’t take advantage. Good luck !
Property Manager · Indianapolis, IN · Member since 2010 · 1k+ posts · 1k+ votes
6y
It'd be a wonderful world if it sold for current NOI and cap rate. Then you just lease it up and make a ton of money, but in reality that is very unlikely. People usually aren't total morons. I once bought a 0% occupancy building and unfortunately it cost more then $0. A car that needs a new battery is worth more than a car with no engine yet they both don't run.
Offer what you think it’s worth. Could you get it leased up to 85%? What’s a healthy cap rate there? Maybe 8% to 9%? Offer based on conservative numbers and decently high cap and you’ll be protected and make some money. Offer like there are only half as many units as there actually are and you’ll end up with what you have. Nothing.
Real Estate Agent · Joplin, MO · Member since 2018 · 112 posts · 96 votes
6y
@Josh C. I cannot applaud this comment enough! The goal is to acquire properties/wealth/cash flow. Generally in the value add category for BP members, right? Well, value add properties aren’t usually running 100% occupancy, manages well, and priced well under market value.
Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
6y
Also, note that long term commercial MF financing will want the bldg to be stabilized - so 90% occupancy .... you will need a different loan type if it is not stabilized or cash :)
Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
6y
@Kevin OBrien
Like others have said, we need more info. Is it a 4, 8, 36 unit property? What type of area? Why is it at 50% vacancy? Sellers may simply not be ready to accept reality.
Investor · UT · Member since 2018 · 55 posts · 7 votes
6y
@Dan Bryskin Thats a very good point, getting a number from the sellers. Great things to look over as well. Do you ever invest in unstabilized properties?
Investor · UT · Member since 2018 · 55 posts · 7 votes
6y
@Bjorn Ahlblad I like the idea that you mentioned about the local market being hot, so there must be some reason that this property is having issues getting stabilized. It definitely warants a deeper dive into the "why". The projections between 50% and 95% occupancy are huge, so I guess we will need to see where the seller would be willing to meet. Thank you for your post.
As for the "off-market", this property was a pre-foreclosure acquisition that was purchased direct from the owner.
Investor · UT · Member since 2018 · 55 posts · 7 votes
6y
@Anthony Dooley Good points with the risk associated with offering above the current NOI. In your experience, when you submit an offer with no contingencies and based on the current NOI, it gives you a stronger position in securing the property?
Investor · UT · Member since 2018 · 55 posts · 7 votes
6y
@Zachary Gwin Have you ever tried to get one of these underperforming properties financed? The seller financing options always sounds like a great option to me, if it could be negotiated. What are your experiences with creative financing options like these?
Investor · UT · Member since 2018 · 55 posts · 7 votes
6y
@Greg Dickerson so you are pretty much saying that in your underwriting, you are comparing current NOI's versus projected NOI's based on the local market, then factoring in your minimum profit margin to come up with an offer number. I guess my question is how do you determine how much projected increase in NOI do you want to pay for? Would this be determined by comparable market standards (local occupancy rates) as well? Overpaying is something that I've been told will be more likely for a market like this. Thank you
Lender · Salt Lake City, UT · Member since 2019 · 40 posts · 17 votes
6y
Private / bridge lenders are going to be less concerned with occupancy when it comes to a bridge or stabilization product. It could have 0% occupancy, for example if it needed some rehab. You would likely need to get it stabilized and then refinance into some better permanent terms.
Investor · UT · Member since 2018 · 55 posts · 7 votes
6y
@Lucia Rushton Very good point there. I'm learning from others mistakes hopefully, and making sure the T-12 and rent roll support an offer before trying to get it under contract. Thanks for the reminder there.
Investor · UT · Member since 2018 · 55 posts · 7 votes
6y
@Josh C. I like that statement. WHen I talk to these owners, even if they have an occupancy issue, alot of times their response is that they can wait till the occupancy goes up and they are not in a hurry. This motivation seems to be why they sit on these buildings. I would also like to offer $0.00 for a vacant building !
Investor · UT · Member since 2018 · 55 posts · 7 votes
6y
@Mary M. Seems to be that most lenders would say no to a value-add property. Mary, have you ever had to raise capital to purchase an underperforming property like this?