Are sellers out of their minds or am I missing something?

Question

Hi all, so I have been scouring MFs listings that I see in my area and find that it is almost impossible to make the numbers work.  I am curious to get your thoughts on a property that popped up on Loopnet.  Now, I know MLS, Loopnet, etc. are not necessarily the best sources, but I am just baffled by the numbers that I see.  So much so that I wonder what is going through the seller's mind.  Are they 1)Completely oblivious, 2)out of their mind, or 3)are looking for a sucker.  Anyway, here is the deal that I saw today.  On the left is what the listing agent (who I think is also the owner or at least a partner) provided and on the right is my analysis.  I would appreciate all of your general thoughts on this seller's motivation (or lack thereof) and on my breakdown of the costs below.  Granted, I have not seen the property or verified all costs so this is just a rough sketch.  Am I not seeing something here???  Thanks.

Property Detail

6 unit multifamily in Broward County, Florida, 5 1/1's and one 2/1, Owner pays water, garbage and electric (I assume for common areas).  From the pictures the property looks clean and well maintained.  Based on tax records looks like it was last sold in 2011 for $300K or so.  Current rents average around $760/month/unit.  I looked on Rentometer and looks like the 1 bedrooms are at or near market, but he 2 bedroom could be a few hundred below market.  3 of the units have one year leases, other three are on month to month.

Financials

Asking price $450,000

Listing/Agent #s         My numbers

Gross Rent                               4,560                          4,560

Taxes                                       (620)                            (713) – I know tax rate is ~1.9% of purchase price

Insurance                                 (190)                            (375) – Owner provided seems very low especially given hurricane, flood and the high rate of insurance in Florida

Utilities                                      (750)                           (750) – took as given, but would verify

Mtce & Misc                              (320)                           (456) – Owner low, assuming 10%

Capex reserve                             (0)                             (456) – assume 10%

Prop Mgmt                                   (0)                             (456) – assuming 10%

Vacancy                                        (0)                             (364) – assuming 8%, appx 1 month

Total Exp.                                 (1,880)                          (3,570)

NOI (Mnthly)                              2,680                             990

NOI (Yr)                                     32,160                         11,880

Cap Rate%                                  7.1%                           2.6%

Now, if I assume a traditional commercial loan, just for comparison purposes I’ll assume I put 25% down, plus 3% closing costs (not sure if this is reasonable), and am assuming no immediate repairs needed.  Total initial out of pocket is $126K and total loan amount is $337,500 @5%.

Mnthly PI                                   $1,812                           $1,812

Mnthly CF                                  $868                               ($822) – negative cash flow!  All you need is a major repair for this to happen.

Annual CF                                $10,416                          ($9,864) Ugh!  Imagine losing $10K a year

COC                                             8.2%                               -7.8% loss!

Hope this makes sense.  If it doesn't let me know your thoughts.  I would appreciate your feedback if I am missing anything, or am being too conservative w/ my assumptions.  Based on my numbers not sure I would pay more than $250K for this property.  Then again, I do have a ton of reserves here that if the property is well maintained can convert to cash flow.  I look forward to your comments.

Edgar Collado · Answer

Aly NA Thanks for the note.  I'm relatively new to the area and don't know Palm Beach County well.  I'll have to start researching.  Maybe if you don't mind we can get together for coffee and a quick chat at some point.  I'll PM you.  Thanks.

Wayne Brooks · Answer

Aly NA is absolutely correct.  Particularly in Dade, but also in Broward foreign money has driven prices above what we normally look for.  They're just looking for a safe place to park their money to keep it away from their South American gov't.s.  3-4% returns, and hopefully some appreciation is fine with them.  Even here, 1-1.25%/mo is typical for SFR's, a little better for multi's.

Edgar Collado · Answer

Hi Aly NA That's a good point.  I know there is a lot of competition from foreign investors, but never thought about the fact they would rather just invest in something than have the money sitting.  Tough to compete with when I'm actually looking to make a good return!  I was hoping to stay in Broward for now and will keep trying to learn the market.  Might have to consider SFRs if the numbers don't work on MFs.  Uhum... (clearing my throat), you wouldn't have a property you are looking to sell by any chance. :-)

Aly W. · Answer

Maybe we can all get together in late November, when my husband and I are in FL :)

Aly W. · Answer

Hi @Edgar Collado , we only have condos ;) We sold one last year and will likely sell another early next year, so I'll keep you in mind if you're interested.

Aly W. · Answer

Hi @Edgar Collado , my husband and I have invested in the Broward/Miami area for the last 5 years, and yes, sellers are now out of their minds ;) We looked at several multi's when we were there in July, and the number of foreign investors just looking for a safe place to park their currency aren't concerned with cap rates, COCs, cash flow, or any other metric...just putting their money somewhere so it doesn't devalue in their own country. They'll pay just about any price. This has really skewed the market.

I've heard Palm Beach County is a less frantic place to invest these days.

Edgar Collado · Answer

@Kevin Tran I agree with you 100% and my focus on this was on cash.  @Bob Bowling was asking about cap rate so thought I'd justify my use of it a bit, but it is no way how I would base this decision.  I think both cap rate and GRM on their own are meaningless, but either one when compared to another property or market will provide insight (or feel) to whether the price of the property is in line or not with the market.  End of the day, decision is made on whether the $$ out of the property justifies the purchase price.  Like you said, on this one I just can't see it.  The seller and agent is trying to use cap rate to lure someone in, but they ignore reserves and vacancy in their allowance...and are using their current taxes (maybe fair), but I know the taxes will be based on my purchase price not the current rate.  Thanks to both of you for your feedback.

Kevin Tran · Answer

Edgar,

I do look at cap rate because it's a metric to compare two similar properties versus market averages.  But, at the end of the day the main question I asked myself is "will this property makes me money if I buy it at this price?"  If I have two properties to compare, then I'll ask myself will property A makes me more money than property B?  It's a simple yes or no answer.  With the calculation that you did above, does it matter what cap rate that property has?  Even with 11% cap, I wouldn't buy that property if I am going to lose money.  Go with your gut feeling, if it doesn't feel right, walk away.  And you're right, the sellers are crazy or they are looking for a sucker, I'm just afraid that someone will gladly pay  that price.

Edgar Collado · Answer

@Bob Bowling Cap rate on it's own means nothing to me...I simply use it as another metric to compare properties.  To your point, however, it is difficult to know what is a good cap rate without knowing market cap rates, but the way I see it if "market" cap rate is 6-8% (major assumption) and I can get 10% then I'm doing better than market.  Either because I got in at a good price or can maximize NOI somehow.  I do look at GRM...for this deal using my numbers and the $450K price the GRM is almost 9, which if I recall is very high.  During my real estate days we were looking for GRMs of 5 or less, but again it is all relative.  At a GRM of 5, the price would be the same $250K I derived using the cash flow.  GRM would definitely be easier to discover if I could find sold properties and determine gross rents.  For this example, however, my focus was on the cash flow and COC.  And the difference between the stated returns and my numbers are vastly different.  Thx.

Account Closed · Answer

You won't get reliable cap rate comps for small residential properties.  Stop trying to use cap rates.  GRM's are the way to go to determine what market values are.  Your target of 10% is meaningless.  What do you think that number means?