Need Help with Offer on a Multifamily

23 Replies

How much would you offer for a multi-family home that only appraises for $40,268 in Amarillo, TX? (Address 506 S. Florida St. 79106) It's currently occupied and total rent for both sides equals $1080.00; plus it has a lot in the back that is used by a local business for it's customers to park, this could be additional cash flow.

Hey @Jason L. it's good to see people from the area on here. Does it need any work? It seems like it's cashflowing pretty good.. I know they say u have to try and get it at 20% less for what they are asking for..good luck though!

Jason, Check your comps in the area and also make sure you find out all of your expenses on the property. it's a good idea to know what property rents for as well and how much you plan on putting into it cash wise. That's my .02 cents

I would be hesitant to include the parking income in any cashflow calcs, which you may not being doing anyways. Unless you can lock the business into a long term lease, it could disappear tomorrow if the business goes belly up.

Based on the rents as stated and the 2% rule you could pay $54,000. Using the 50% rule that would produce a 12% cap. Those are excellent numbers. I would be wondering why the low offering price.

If I am a buy and hold investor I look at the absolute cap rates and I am not so worried about the cap rates for that area. If the property can make my required rate of return I become interested.

In your due diligence you should determine whether this is really a bargain. Look at the leases, is there deferred maintenance, upcoming capital items?

Given that this looks like a great price I wouldn't haggle much on the price.

Good Luck.

Bill

@Bill Jacobsen, the owner is asking $58,000 for the property and it only appraised for $40,268 so that is the reason for the low offer.

Same here Edgar and 20% of his asking price ($58,000) would be around $46,500; so I will see.

@Jason L. ,

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@Jason L.

It passes some of the easy tests, 50% rule and 2% rule. Now dig in and find out the following monthly expenses:

Taxes

Sewer and Water

Trash

Heat/Utilities

HOA

Cap Ex and Ops (everything from mowing the lawn to eventually replacing water heaters and roofs. my personal minimum here is $150, no matter how much the place is worth)

Insurance

Mgmt Fee (how much of the gross rent is going to go to the property manager. it is generally held here on BP that you want to give this a number even if you plan on doing property management yourself)

Vacancy (as a %, generally 8% is a good number. That represents 1 vacancy per unit per year)

Post those numbers back here and I'll tell you how much I'd pay for it.

Sorry, I made the mistake. I would like to know when and why the appraisal was done. It wouldn't make sense for the seller to have it done and then list it at a higher price.

I also don't understand a property appraising at 3.1 times yearly rents but duplexes usually appraise based on comps.

Good Luck.

Bill

In addition to all the other great advice, I would look at the age of the home. For older homes that I manage myself, I am more comfortable staying with an A - B zone, primarily for maintenance reasons.

good luck!

@Aaron Montague The taxes on this property last year was $1002.00 and currently the sewer, water, heat and utilities are all paid by the tenants. There are no HOA and management fees. So, as it stands now my expenses would be mortgage, insurance, cosmetic repairs, it has a new roof and as well as update heating and AC. During my walk through I did notice some things that would need to be replaced or update for future tenants. Thank you for the vacancy percentage and your advice. Let me know if I'm overlooking something.

@Bill Jacobsen The appraisal I'm using is the one provide by the City of Amarillo and I missed quoted it, but it's $42,268. The property is listed for $58,000 and there are very few comps in this area for duplexes.

Originally posted by @Jason Lamons:
@Bill Jacobsen The appraisal I'm using is the one provide by the City of Amarillo and I missed quoted it, but it's $42,268. The property is listed for $58,000 and there are very few comps in this area for duplexes.

@Traxon Rachell This is an older duplex built in 1920, but it has been updated some what.

@Jason L.

What I know of the area and can see online says most the the properties in this area as "class C." Typically I have been able to find properties on the low end of class B that meet and slightly exceed the 2% rule. I have avoided this neighborhood in town because the hassle factor (lack of payment, vandalism, and tenant turnover) tends to be a little higher than I would prefer. If I was going to invest in this area, I would want to cashflow more than the numbers you posted to get me motivated to do this deal. I would want this one to exceed the 2% rule to get me engaged.

With all that said, I know some very successful people have been able to do well in this area. The numbers work on this one, but for me, I would like for them to be sweeter to get me rolling on this deal. Therefore why not shoot a low number and see if he bites. I saw on zillow that the current owner has two other homes near by that he is also wanting to sell. PRAD shows he has owned them for a while. This means he likely has a good equity position and might just be looking for an easy exit. Figure out a low ball offer that works for you and swing. Worst he can say is no. I wise investor once told me, "if you aren't embarrassed off your offer, its too high."

I think @Blake C. is right on this- the tax assessment value is not the same as an appraisal value. The tax assessment usually lags at least a year or two (or three) behind what is actually happening in the market. An appraisal of current value of a duplex (for the purposes of obtaining a loan, for example) would be based on current sale comps.

@Jason L.

This looks like a good deal at the 58k asking price, assuming those rents keep coming in on a regular basis. I'd offer 45k or so as an opening. I wouldn't count the lot in back for extra income, but more cash to you if you can get something out of it.

I see $1080/month income against the following expenses:

Mortgage Rate 5.00%

Length of Mortgage in years 30

Monthly Mortgage payment $225.47 (this is at full asking price + 5k in immediate repairs rolled in)

Taxes $83.50

Sewer and Water $- (are you 100% sure that the tenants pay this bill?)

Trash $- (is trash pickup part of owning in the city/town of Amarillo?)

Heat/Utilities $-

HOA $-

Cap Ex and Ops $150.00

Insurance $100.00

Mgmt Fee $108.00

Vacancy $86.40

Total Expenses $753.37

@Jason L. Hey i thought this link might help you as your seeking valuations. Shawn is a local wholesaler. Right now he doesn't have any multi properties, but at times he does. He has stuff all over the city. I figured this might help you get an idea of prices. I don't see anything currently thats a home run, but its worth looking at. If you talk to him, let hime know I sent you. He is a buddy of mine. He's fair and honest. In fact, the last rental I bought was from him.

http://www.amarillowelcomehomes.com/page05.html

@Aaron Montague The current loan I'm looking at is 15% down at 5.00 interest at 15 years. Do you prefer 30 years over 15, if so, why?

@Jason L.

With the loan over 30 years your payment is lower each month, thus putting more cash in your pocket and back to work for more investments.

There is something to be said fr 15% down however. Just bear in mind your monthly mortgage payment is going to be about $150/month higher at the 58k purchase price. With the numbers I ran earlier, your total monthly expenses would be about $923/month at 58k purchase.

If you could get it for $51500 + 5k in closing + 5k in repairs, you'd hit my minimum numbers of $100/door/month cash flow and 15% cash on cash return.

You'd be putting $204/month in your pocket with a 15 year mortgage. With everything else being equal, with a 30 year mortgage, you'd be putting $322 in your pocket each month.

I don't know if your bank would allow 15% down with a 30 year loan, but it can't hurt to ask.

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