Deal Analysis - Tax Assessment Challenge

2 Replies

Hi - I recently purchased a rental in the Dayton area and I am looking to do more off market deals but am struggling in a specific neighborhood in my target market.  This neighborhood was required to convert from well/septic to city water and sewer.  The tax assessment was approximately $2k per year and now the owners also pay an excessively high monthly water bill.  I have contacted several owners and have strong leads but we continue to be on different price points.  Per area comps, prices should be higher ($240k-$260k) but due to the tax assessment and high water bills, these items kill the financials and are only valued at $200-$210k per my calculator.  

Has anybody faced a similar situation or have additional insight on how to make this deal work? The owners want the higher price points but the NOI just doesn't back it. They point me to comps but I try to explain as an investor I have to focus more on NOI and meeting my cash on cash/cap rate metrics. I have not been able to successfully close the gap.

Thanks,

Mike

  

@Mike Russ you aren't the only investor struggling to make the numbers work right now. The reality is that this is a strong seller's market and a lot of inventory is trading whether or not the numbers make sense. Keep in mind though that there is a story to every property, and sometimes you can buy something where the numbers aren't there as long as your business plan can get the property to where you need it to be. I recently acquired and turned around a 19 unit deal in Berwyn, IL. The NOI was about 30k off during due diligence from what the broker put in the OM, but that really wasn't the determining factor for us on a renovation play. We knew what the NOI would look like on the back end, which is where our focus was.

@John Warren thank you for your insight, it is very much appreciated. I ran future scenarios after improving some operational items (rents up to market) but I believe we will still be far off on the sellers price point.

I am thinking about laying out a couple different options for the seller and see if we can come to an agreement.

Scenario 1 is an increase in price based on my long-term model. This will increase our offer $20k from the original. I increased my vacancy/capex budgets since I am likely to lose tenants.

Scenario 2 - I get closer to his number but ask for concessions such as a roof and driveway which are needed. I don’t think he will want to go this route but it might push him towards my other option.

I know his interests are in retirement income and not being a landlord any longer. I wish I could help work that into the deal but I am not sure what exactly I could do to help other than pay him a fair price.