Need to react on a property now and have no contacts in that area. What can I expect to pay?

Question

I want to look at an Income Property today or tomorrow and it is a very big property.

Problem is: I have no Contractor to do a complete Inspection of this property and I need to ACT FAST. Being a newbie, this could be a road block that could cause me to do NOTHING.

What offer to pay a contractor to inspect an 13,000 sq ft property? They are not going to do this for nothing. They could win the bid for the work if their bid would be competitive.

The property is not in my back yard and I do not want to waste my time viewing it, if it is not a good deal. Owner's claim is $9,000/Mo income.

Thanks for your assistance.

Ronald H. · Answer

Sorry made an error in the 960K. I meant 96K.  Owner is asking 31K under an appraised value that was done in May 2014. He is telling me that it was appraised conservatively and that the appraiser should have used comps from other props. Normal seller type stuff. New appraisal is the new value as far as I know.

He seems to be low on his expenses. $200/mo for for electric service for 19 units? WOW! How does he manage that?  It has to be 5 times his stated amount.

He has his oil heat expense at $1,250.00 per month. He says that he shuts the furnace off in the end of March when it gets below 50 degrees. He uses 5 months @ $1,250/Mo for calculations. I don't believe this either. I would use a Sept 15th thru April 15th to be safe. I know it varies, but this is a good scenario on heat usage time.

Yes, I have EMD money and some for an attorney, but I don't think I am going to need it now, because I am leery of this seller and his expenses. I would never use his expenses.

I was thinking that maybe I could live in it and maintain it for me and a partner, but I would need a partner to put up over half the cash. This would require me to sell my own property as well, which I have been contemplating for the last month or so. I though maybe an Equity Participation offer might work.

End result. Owner is trying to make the expenses look very low, and I know that they are too low. I could not flip this, because it is nowhere near the 70% rule, and no repair figures are known. He is also giving me examples of other properties and telling me what they are getting and how his deal should be similar. If it cash flows great. How much work is needed? Who knows. All he has said is that the 1 vacant unit he has, is vacant, because it needs work.

There is one commercial store unit that is vacant and could supply an additional $9,600/yr gross income.

Owner seems to believe that he may not be able to verify vacancy rate by documentation, therefore, this would need to be supplied by a realtor or another Investor of a similar size property.

Annual Income  $103,500

Annual Expenses: $46,200  I know these are low. A few thigs are left out of here.

He claims the current NOI is $57,300

There is $12,600 in annual losses due to 2 vacant units. So the potential NOI if his expenses were accurate could be $69,900/yr

He first claimed that it was $8K per month or 96K/Yr, but has since backed off and I have not questioned him on it.

He wants all cash for 236K and he wants the new buyer to pay his overdue taxes off, which are 33K.. So his asking price is 269K. 31K under a one month old appraisal.

Who is this deal good for?  Possibly a buy and hold Investor.

Have not heard how much in security deposits he is holding? Waiting on that.

A new owner could use $8,625.00 plus any security deposits to put down as a deposit, if the property could be closed on July 1st.  If he has security deposits and they are the same as the rents, then this figure could be $17,250.00 or 5.75% to go towards the purchase price.

Mike Hepburn · Answer

Hi

This would be a very complex undertaking for a newbie. How far from home? You are going to buy and hold? Do you have EMD? Money for good attorney. Many many things to consider. All of the above and more.

Jeff Greenberg · Answer

@Ronald H. even at an 50% expense ratio you are showing an 160 Cap.  This is too outrageous to be realistic. No one sells a property that brings in 960K in revenue for 300k. If you are in total fear that someone else will scoop it up put in an Letter of Intent (LOI) for the asking price and make sure you have a 30 day inspection period.  In the mean time request a 12t P&L broken monthly(trailing 12 month profit and loss) and a current rent roll. The bank statements and tax returns can come after to verify the requested info.

You haven't revealed the type of property. A little more information might help us help you.

Ronald H. · Answer

Got call from a friend of the owner and he said that he would send me the financials to this property in 15 minutes.

They want less than 300K and the claimed income is 960K a year. If I am right on this one, it will be gone in no time.

Any suggestions from a seasoned Investor on how to flip this property or perhaps use the current rent roll and security deposits in conjunction with a an equity partner to buy and hold?   Help appreciated.

Ronald H. · Answer

Thanks and point taken, Joel

That is exactly how I want this to go down, IF IT goes down at all. If it is a good deal, then I probably will be too late. Owner said he was going to call me, but it is an hour now, and no call yet.

I do not want to waste any time or money until I know that the property and financials are sound.

Should I expect him to show me his schedule C?

If I do then maybe with this prop, I should run it by an accountant or lawyer to check the validity of the deductions and the contract details, if I get there?

Joel Owens · Answer

13,000 sq ft isn't that big of  a property. If you have 12 units at a 1,000 sq ft apiece and common space of 1,000 sq ft that is only 12 unit building.

What type of property is this??

Why would you even schedule and inspection before looking at the sellers bank statements and tax returns??

With my clients we do not spend ONE CENT until the returns are validated. If the returns are validated then we look at condition of the property in detail of any findings to ask for repairs or a reduction in price.