16 units apartment complex new Fort Worth, TX - I don't get this...

16 Replies

Hello BP,

An apartment complex came on sale. Here are the stats:

Built: 2001
16 1bdr/1bth units, 729 sqf
Scheduled rent: $550/unit; $105600 annual
Current rent: $55550 (4 units are vacant and 3 are being evicted, 3 are late)
Current expenses: $52740
NOI: $2810 (0.47% cap!)
Pro-forma NOI: $49K (8% cap)

Asking price: $600K

I understand that the property is grossly mismanaged but is the asking price right? If the property was performing as proforma says then $600K would seem to be appropriate. Which means that buying it at $600K leaves room for income improvement but no room for forced appreciation.

What kind of a discount should this property sell for to warrant $2800 NOI as-is? If I use 8% cap then the value is just $35000. I'd buy but they won't sell.

Thanks
Nick

@Nick B. I have never seen something like this! Do you know where these expenses are going? Is this just this years expenses or did they provide previous years? The only thing I could think was if they had some major maintenance items that they took care of which crushed any margins for the year. You sure the current NOI isn't a mistake and it should actually be $28k?

Crazy! keep us posted on what you find out.

These are annual numbers. I am not sure if they are from 2013 or rolling 12 months. The expenses are $52K in total. The problem is 46% vacancy: 4 vacant units and 3 evictions as of now but may be more in the past.

From a P/L statement:

YTD rent: 24800
YTD expenses: 23400
YTD Net income: 1400

What is the market cap rate and/or the market GRM?

@Nick B.  

This is in interesting specimen you have found.

I would ask for 3-years+ of financials, but sounds like they will be rubbish anyway.

How is the area?  ... the tenant population (are the all like the current residents)? and the building (even if it were cheaply built, I would anticipate another 10 years before you would have major systems overhaul/replacement)?

Now here's a harder one: What are the CAP rates of comparable, performing properties in the area? I would start there and then work my offer reduction backwards for the non-performance. [BTW: At the moment it has an effective vacancy of 62.5% (4 vacant, 3 evictions, 3 late)]. My gut tells me you should be closer to 10% in its present state.

The last thing you want them to do is fill the building with yahoos to support their asking price and leave you with 30K worth of evictions.

The area is C class/blue collar. A major employer (a defense contractor) is located across the street. There are other employers in the area as well. I don't know how to compare current tenants with the general population but unemployment in the area is 4-5% and median income id 48K/yr - enough to afford 550/mo rent.

Cap rates of C properties are 8-9% throughout DFW for the most part. GRM is 5-6 for other properties for sale.

The owners are from California if that adds anything to the story :-)

Clearly they have priced it as though it were performing (at 8.8%).   If you give the benefit of the doubt that the three late payers will reform and not go the vacancy route, the performance is merely 54%.  If you are cynical about the three late units, performance is a starving 37.5%.

While you might give a little goodwill, I wouldn't pay them for the work you'll be doing to bring the property into performance.  Present cash-flow warrants a price between 225K and 325K, but I'm certain they think its worth more.

Originally posted by @Roy N.:

  Present cash-flow warrants a price between 225K and 325K, but I'm certain they think its worth more.

@Roy N   What are you basing that valuation on? 

Originally posted by @Bob Bowling:
Originally posted by @Roy N.:

  Present cash-flow warrants a price between 225K and 325K, but I'm certain they think its worth more.

@Roy N   What are you basing that valuation on? 

 Bob:

I probably should have worded it a little differently, the numbers were simply a {perhaps a  little too sarcastic} prorating the potential cash-flow based on the information in the OP & Nick's statement of comparable CAPs (which, as you know, could be a hole other discussion).

I have particularly short patience for vendors who feel they should be paid for me to fix their problems.

In reality, I would take the market price at performance (587K - 660K assuming the 8-9% CAP is correct) and discount it by what it would cost me (holding, eviction, repair, etc) to bring the property into performance.

@Nick B.  

Assuming that the proforma amount is correct and that the current p/l is correct as well, I would offer them a price point closer to a 16 cap rate ($306,000) due to the wide fluctuation of vacancy and the amount of work it takes to build up a good solid tenant base. Obviously, you can offer them more but why would you want to pay them for their laziness?

I'd appreciate if you would keep us informed of your decision.

The broker told me they already have offers for over $500K. Go figure...

Originally posted by @Roy N.:
 

In reality, I would take the market price at performance (587K - 660K assuming the 8-9% CAP is correct) and discount it by what it would cost me (holding, eviction, repair, etc) to bring the property into performance.

I posted before I saw @Nick B 's response on cap rates and GRM's. I agree that you should look at market value as if performing and then discounting by the costs to get to full performance plus a little bit for your effort. You are taking some risk there.

Originally posted by @Bill Pohl:

@Nick B.  

Assuming that the proforma amount is correct and that the current p/l is correct as well, I would offer them a price point closer to a 16 cap rate ($306,000) due to the wide fluctuation of vacancy and the amount of work it takes to build up a good solid tenant base. Obviously, you can offer them more but why would you want to pay them for their laziness?

I'd appreciate if you would keep us informed of your decision.

@Bill Pohl   A 16% cap offer would only show the seller you were inexperienced.  You would use market Caps, rents, vacancy, expenses, etc. to value and then after reaching a value thru direct  capitalization you would deduct the lease up costs etc. 

The California investor that owns it purchased it sight unseen for about $800k cash back in 2005.  At $600k ask, I guess we're not near a bubble yet. LOL!

@Nick B.    I'll send you the link.

I'd bet people are comparing the price to quads in the area ... and think they're getting a deal at 32k-35k a door.

This is a distressed property.  We just purchased one that was 85% occupied for 21k per door.  21k per door gets you down to a realistic price of $336k.  If and when you get it up to a 59k noi you will then have a 17cap.  So you may look for some middle ground between your 336k and his 600k and make a deal of it.  A .5 cap with the potential to be an 8 cap is not a deal.  A .5 cap with the potential of becoming a 17 cap may be worth the risk.

Have you considered a master lease.  This gets you in the door with a minimum up front and a purchase down the road.

Thank you for chiming in, Jeff but like I posted earlier, this seller already received 500+K offer. It's still not a good deal at 500K.

Here is another distressed property for a similar price: 

http://www.loopnet.com/xNet/MainSite/Listing/Profi...

At least this one has a potential NOI of $100K and may increase value to $1M based on 10% cap rate. The property itself is much older and the area is worse though.