How to Price Wholesale Deals To End Buyers

24 Replies

Hey all!

I'm picking up what I believe to be some pretty turnkey rental deals BUT I'm not quite sure how to price them to the end buyer.

Here's one of my deals:
4 Unit Multifamily in Ohio

CURRENT RENTS OF $1150 A MONTH ($1500 when the other apartment is rented out)

2 – 2br efficiency units (1 rented at $350/month)
2 – 1br full units (both rented at $400/month)
The unrented 2br efficiency needs a little work. (around $1k)
Month-to-month leases.
Tenants pay their own utilities.
Taxes are $1826 a year

(not trying to promote this deal... just posting numbers to get feedback).

I have it under contract for $15k. I was told that a 20% Gross ROI is a good number to shoot for where investors will pick it up fast but I'm not sure. Trulia is showing a value of $43,562. A 20% Gross ROI to the end buyer would mean selling it for $69k to the end buyer (at the current rents).

Any help would be greatly appreciated! :)

Could you clarify what you mean by "2br efficiency"? 2br makes me think there are two separate bedrooms. Efficiency makes me think it's studio apartment where everything is in one big room. Which one is it? Or is there a weird hybrid I'm not aware of? Maybe efficiency means something different in Ohio?

@Brian Bagnall  Looks like a great deal.  How did you get this under contract ? Just curious. It looks like you're from California ?

It just has a small kitchen with studio type appliances. It still has a living room and 2 separate bedrooms. The seller just called it an efficiency so I went with it. lol.

I'm actually in Virginia but I just started wholesaling deals virtually (used to be in the market before the 08 crash). Have someone on the group in Ohio doing the inspections, taking pictures, etc.

Any help on pricing would be appreciated. :)

Thanks everyone!

Hi, Brian!

Have not did a deal yet, but lots of education. My message is a bit lengthy, but intended to help as well as hopefully get some feedback and to learn more.

Can you determine from the previous owner what the avg occupancy rate has been for the last two years? If you can verify that he is not padding this, that will be good for you. If he says 2 % and the avg around the area, is really 5% and your new buyer knows this, he'll question you.

There are 365 days in a year. If the apartment that needs the 1K in work has been vacant for four months and it should have been earning $350/Mo then $350 x 12 mos=$4,200/Yr $4,200/365 = $11,50/Day $11.50x120days=$1,380 in lost revenue from vacancies.

Is he going to manage it himself? He still needs to factor it in, so if he needs to resell he can demonstrate it to others, and besides that he wants to get paid for his time, doesn't he? Can someone find a Prop Mgmt company to manage a property for others, and for 10% of the N.O.I.? I don't know to be precise, so I used 10% below. If the Prop Mgmt companies are charging 20% of the Gross NOI, just change the formula to reflect that. F

Deduct your Taxes. I used $2,000 below? Too high? Just change it.

Insurance, I used $2,000 to simplify

Accounting and Legal to have you accountant keep your books. Can we peg that at $400/yr. Probably a bit conservative, but how am I doing?.

Office Supplies. Figure we got tenant's who stay with us and we can prove it, so lots of collection letters and house rule docs don't have to be printed. We'll peg that at a conservative $150.00/Yr

Does this home require a dumpster? Don't forget that. If it does, include it. I omitted it below.

Are the sewer charges included in the Taxes? If not, include them. Same with water.

Snow removal? Not included here, but it should be, if it is Ohio.

There will not be Janitorial, because the tenant's all clean their own bathrooms, but who is going to clean the common areas? If Proper Mgmt does it, just exclude this. I assume they do it below.

I am betting that any Investor who is wise is going to factor in a % that goes into an emergency repair account, just in case they missed a defect on the furnace and it goes on the blink next week, or three months down the line. I used 2% of the NOI for an emergency account. I wait until I include the Prop Mgmt to figure this, and I wait to calculate the Prop Mgmt until I add all the other expenses first, to give the Prop Mgmt a figure

Total expenses that we know now are

1. Occupancy Rate/Vacancy Loss = $1,380

2. Taxes $2,000

3. Insurance $2,000

4. Accounting and Legal $400

5. Office Supplies $150

Total of above = $5,930.00

Gross Annual Income of $18,000 - $5,930 = $12,070.00 in NOI before Prop Mgmt and Repair Fund Acct

$12,070 - 10% or $1,207 to Prop Mgmt = $10,863/Yr

$10,863 - 2% for Emergency Repair Funds = $2,172 If you want to leave this to your buyer go ahead, but he should be factoring it. If you leave it to your buyer the deal looks sweeter. $10,863 - $2,172 = $8,691/yr is the figure you need to work with, unless you leave that Emergency Acct out.

If you decide to offer the property for double your money $16K, then your offering at 32K. Provided that you don't need to buy newspaper space.

Final NOI of $8,691/Yr divided by his initial Cash Investment of $32,000 = 27% ROI. If Property Mgmt will cost 20% then it will be 23% ROI

NOTE: I don't know what Property Mgmt companies are getting in that area, these days. I also don't know if they accept an NOI figure with a 2% Emergency Fund in it. They may want a bigger piece of the pie.

Correct me, if I my math here is off. I checked it.

Income will be the selling point, which I am sure you know.

I don't think Debt Service is factored in when calculating the ROI. It is used when determining the CAP Rate


Forget Trulia

Your buyer will use the Final N.O.I. to determine.

If you wanted to sell to him at 69K with the above expenses, which seem reasonable to me, then his R.O.I. would be 12.5% with a 10% Property Mgmt expense.

Total expenses above are assumed to be $9,309.00 at a 10% Prop Mgmt expense.

Everything above assumes that you have a Cash Buyer's list built up, and you will not be using a R.E. Broker to sell. If you use a Broker add his commission to the expenses.

One thing, I could be off about is the Property Management. If they want 10% or more of the Gross Operating Income, then there fee would be much higher. I know that Carelton Sheets pegs 30% of N.O.I. for a Property Management Expense for Multi Family homes.

Congratulations on getting it under contract. It sure seems like the numbers will work to me. If you can find comps for similar props it will help, but with a good cash flow and ROI, it should attract Investors as long as the Expenses are not too light. As long as the rents are reasonable as compared to other similar apartments, you should have room to raise the ROI and property value with the flick of the pen.

Hopefully, I have it right, but what better way to learn, while trying to help others.

Hey @Ronald H. ... quick question. So are you saying that the comps on a property like this doesn't matter? It simply sells on the ROI?

Here are true numbers:
Current Rents: 1150 per month (1 unit is currently vacant)
At full Occupancy: 1500 per month
Insurance: 700/year
Taxes: 1826/year
Water/Sewer: 250/month
That puts total expenses at: 460.50 and
Monthly Net Profit at 689.50
(based on current occupancy numbers)

Also, do you calculate at full occupancy? Or current occupancy? Current occupancy brings in $1150 in rents and full occupancy brings in $1500 in rents.

So if I sold this thing for market value (what the comps say) at $45k, the buyer would get an 18.39% NOI.

If I sold it at a 15% NOI (which I think is still really good), I could sell it for roughly $55k

(all calculations using current occupancy rents)

Thanks a bunch for your help! :)

Hey @Ronald H. ... quick question. So are you saying that the comps on a property like this doesn't matter? It simply sells on the ROI?

Here are true numbers:
Current Rents: 1150 per month (1 unit is currently vacant)
At full Occupancy: 1500 per month
Insurance: 700/year
Taxes: 1826/year
Water/Sewer: 250/month
That puts total expenses at: 460.50 and
Monthly Net Profit at 689.50
(based on current occupancy numbers)

Also, do you calculate at full occupancy? Or current occupancy? Current occupancy brings in $1150 in rents and full occupancy brings in $1500 in rents.

So if I sold this thing for market value (what the comps say) at $45k, the buyer would get an 18.39% NOI.

If I sold it at a 15% NOI (which I think is still really good), I could sell it for roughly $55k

(all calculations using current occupancy rents)

Thanks a bunch for your help! :)

Hey @Ronald H. ... quick question. So are you saying that the comps on a property like this doesn't matter? It simply sells on the ROI?

Here are true numbers:
Current Rents: 1150 per month (1 unit is currently vacant)
At full Occupancy: 1500 per month
Insurance: 700/year
Taxes: 1826/year
Water/Sewer: 250/month
That puts total expenses at: 460.50 and
Monthly Net Profit at 689.50
(based on current occupancy numbers)

Also, do you calculate at full occupancy? Or current occupancy? Current occupancy brings in $1150 in rents and full occupancy brings in $1500 in rents.

So if I sold this thing for market value (what the comps say) at $45k, the buyer would get an 18.39% NOI.

If I sold it at a 15% NOI (which I think is still really good), I could sell it for roughly $55k

(all calculations using current occupancy rents)

Thanks a bunch for your help! :)

Hi, Brian

Let me start by saying that I am not an Investor. I do not want, nor am I intending to be a professional, but I do enjoy the analysis part of the business.

I would recommend asking the question here. I think that Comps should matter, because if you were asking a higher price than other similar properties then any potential Investor would have a negotiating point that he could use. But I believe that savvy Investor's will have a dollar figure in their head, on what they want to make annually, and this ALWAYS needs to change by small increases in Rent and getting efficient with Expenses. If your Investment will produce their desired annual "Return on Investment" they will be more receptive to your property.

TIP: Use the "Keyword Alerts" here and enter in Desired Return on Investment and watch what others are using.

I was taught to believe that 10% is the minimum, but maybe there are cases when someone can buy a property that produces 9% ROI and that property has low rents in comparison to others in the same neighborhood, thereby justifying a rent increase to bring up the ROI, or a drop in Expenses.

TIP: Do searches on the Internet about CAP Rate, as well as ROI, because the Banks require a certain CAP Rate in order to lend on an Income Property. I just read something yesterday about it.

NOTE: In my example above, I did not calculate using full occupancy. If you calculate using that you are "Over Valuing" your Investment. Smart Investors will know Real Estate Agents/Brokers and they will double check the current Owner's claim to a a Super Low Vacancy rate. If you look at my calculations, you will see that I calculated a 4 month/120 day vacancy loss of $1,380.00.

NOTE: Since you are doing this with an Out-of-State landlord, it may be tough, but asking him what his "Vacancy Rate" was for the last 3 years would give you a great blueprint of his Mgmt style and perhaps an indication of the area itself.

The figures you used don't have any Accounting and Legal, Office Supplies, or the biggie "Property Management" in them. If the new buyer says you do not need to include Prop Mgmt, because he will manage it himself, just let him take it out, it will only help your deal. I omitted it, but it should be in there.

Your figures below. Everything assumes a Cash Buyer. I could use your figures, but they are going to be short, quite a bit, because you ARE going to need Legal, Office Supplies, Snow Removal, and you do want to get paid for your time, so I did include Prop Mgmt at 10% of NOI.

NOTE: Without a good accountant, you will be paying too much in taxes, or would you rather spend hours trying to save a hundred dollars. Also, what if if you need a lawyer for something? At least you have something built in.

(You need to know the Vacancy Rate and include it. Ask owner to send you a copy of his Sched C)

Property Management: 10%, 20% I don't know what they charge Easy to find out. Do they want 10% of the Gross NOI or Net OI, I don't know. I am figuring the Net Operating Income

Vacancy Rate: $28.77 mo $345.20 (I used 30 days, which seems reasonable)
Insurance: $58,.33 mo $700/year
Taxes: $152.16 mo. $1,826/year
Water/Sewer: $250 mo $3,000/Yr
Accounting and Legal: $33.33 mo. $400/Year
Office Supplies: $12.50 mo. $150.00/Year
Snow Removal: $29.16 mo $350/Yr

Total monthly expenses $ 564.25 per month.

Income of $1,150.00 - Expenses of $564,25 monthly
Income after expenses of $564.25 x 12 months = $ 6,771.00

NOTE: Above doesn't include any of the below expenses.

Property Managment: Omitted
Newspaper Ad: For Rent ? Left this out too. Prop Mgmt usually does this
Realtor Fees to sell: ? (What is the avg DOM for area) Left out
Emergency Account: Living dangerously without this. 1% to 2% of NOI
Calculations don't assume Janitorial svcs,

Scenario 1: You sell at $55,000 and he accepts
$6,771 / $55,000 = 12.31% ROI, if bought for all cash. Rounded.

Scenario 2: You sell for $45,000 Mkt Value and he accepts
$6771 / $45,000 = 15% ROI

Good luck with this deal. There is AMPLE room to make this work and provide a good return for a prospective buyer. Let us know how the sale goes.

If I had confidence in my speaking voice, I could be in a position to do what you are now.


Ron

I would complete any repair work, find a tenant for the last unit, hire a property manager, and get insurance to guarantee the rent. Then sell it as a turnkey rental to a busy professional that needs to earn money on their investments but doesn't have time to manage it.

You want an investor that does not have time to find, buy, and rehab a property and so will value the turnkey property and the work you have done. Offered a 15% return when they are earning vs. who knows what on a bank CD they will see the value in the offer.

Comps do matter. Lenders will use the comparison approach in an appraisal if your buyer needs a loan on 1-4 unit residential. If all the 4-plexes in the area are selling at $15K, why am I buying yours at $50K?

Appraisal 101:

Cost Approach: The least useful here

Income Approach: NOI --> Cap Rate which represents cash flow as a percentage of an all-cash purchase but does not include proceeds from a future sale (IRR or less used ROI). What is a typical cap rate in the subject area?

Comparison Approach: Are you getting solds from Trulia? A true comparison is from properties that have sold, not asking prices--typically in the last year and within one mile of the subject.

On residential properties, I look at both the income and comp approaches. If they converge, there's my number. If they are very different, I ask what's wrong with the market or the property and have to justify it.

If you're doing a bunch of this certainly put together a worksheet that you can present operating numbers to potential buyers. You might find some templates in the FilePlace http://beta.biggerpockets.com/files/category/spreadsheets

Sounds like you've got a killer deal. Congrats.

Wm

After you find a buyer offer them seller financing with half down and the balance at 4% for 5 years. "Let the renters pay for the other half". Calculate the yield the investor gets after the loan is paid off it will be off he chart good. This is the 50/50 model.

Originally posted by @Bob E. :
I would complete any repair work, find a tenant for the last unit, hire a property manager, and get insurance to guarantee the rent. Then sell it as a turnkey rental to a busy professional that needs to earn money on their investments but doesn't have time to manage it.
You want an investor that does not have time to find, buy, and rehab a property and so will value the turnkey property and the work you have done. Offered a 15% return when they are earning vs. who knows what on a bank CD they will see the value in the offer.

I think from what I see of Brian's deal, it has promise. There seems to be sufficient room to provide a buyer with a good enough R.O.I. and that should be all that matters. If the property is OLD and the furnace, and other major things are wrong, then the deal is not going to be so good. Brian needs to be careful, since he is cannot see it himself. I don't think the ROI on this low, even if he factors in Prop Mgmt. I think if Brian tries to sell at a premium to an Investor, he will have to re-negotiate or lose the deal. That's just my 2 cents.

Bob, just one question for you, please. Why do you think he needs an Investor that is too busy.If their is only about $1,000 dollars in work. I guess it depends on the Investor, hey?

My biggest concern for an Investment for this area would be the economic outlook.and job market. Seems, I remember reading that this area is depressed, and good paying Jobs are scarce. I did look for Jobs on Craigslist to see and I thought the mkt was so so. I also looked at the rentals available and I think, I remember seeing a LOT of rentals and competition, which could indicate higher Vacancy Rates.

Originally posted by @William Hochstedler :
Comps do matter. Lenders will use the comparison approach in an appraisal if your buyer needs a loan on 1-4 unit residential. If all the 4-plexes in the area are selling at $15K, why am I buying yours at $50K?

Appraisal 101:

Cost Approach: The least useful here

Income Approach: NOI --> Cap Rate which represents cash flow as a percentage of an all-cash purchase but does not include proceeds from a future sale (IRR or less used ROI). What is a typical cap rate in the subject area?

Comparison Approach: Are you getting solds from Trulia? A true comparison is from properties that have sold, not asking prices--typically in the last year and within one mile of the subject.

On residential properties, I look at both the income and comp approaches. If they converge, there's my number. If they are very different, I ask what's wrong with the market or the property and have to justify it.

If you're doing a bunch of this certainly put together a worksheet that you can present operating numbers to potential buyers. You might find some templates in the FilePlace http://beta.biggerpockets.com/files/category/spreadsheets

Sounds like you've got a killer deal. Congrats.

Wm

A fully functioning kitchen with sink, stove/oven and refrigerator is not an efficiency.  Just call 2BD units.....with small kitchens.  So it's a 4 unit, with 2 1BDRs and 2 BDRS?  Needing only $1K in repairs to make it fully rented at $1500/mo?

I'm not a fan of using the income model in order to set an asking price.  You could end up underpricing it for investors that need way less return. You could have a CA buyer ready to pay $50K today, while your local buyers may want to pay what you paid for it.

Putting the income model aside, what are the real comps?  And how bad is the neighborhood. There are some inner city areas in OH where you'll be hard pressed to find a buyer at almost any price.

Good point, William

I think it seemed as if I said that Comps did not matter, but if you read further, I did say that I was aware that they could be a problem, and especially when selling to an Investor. With Banks, I have read this to be true.

Just take a look at the News Article at http://homeguides.sfgate.com/using-capitalization-rate-determine-value-real-estate-1579.html and you will see how it is done. I hope that I am not breaking the Terms and Conditions of my account by pasting the forementioned URL. Just trying to help others. I searched Biggerpockets for terms and conditions, but could not locate them, so I copied the article and pasted it here.

End point: Yes, banks will not lend you an inflated loan on an Overpriced Property. Hell, we already have been through that Crisis already. LOL.

Originally posted by @Ronald Holloway:
Originally posted by @Bob E. :
I would complete any repair work, find a tenant for the last unit, hire a property manager, and get insurance to guarantee the rent. Then sell it as a turnkey rental to a busy professional that needs to earn money on their investments but doesn't have time to manage it.
You want an investor that does not have time to find, buy, and rehab a property and so will value the turnkey property and the work you have done. Offered a 15% return when they are earning vs. who knows what on a bank CD they will see the value in the offer.

To Comment on Bob's answer directly above, I think from what I see of Brian's deal, it has promise. There seems to be sufficient room to provide a buyer with a good enough R.O.I. and that should be all that matters. Although, If the property is OLD and the furnace, or other major things are wrong, then the deal is not going to be so good. Brian needs to be careful, since he is cannot see it himself. I don't think the ROI on this low, even if he factors in Prop Mgmt. I think if Brian tries to sell at a premium to an Investor, he will have to re-negotiate or lose the deal. That's just my 2 cents.

Bob, just one question for you, please. Why do you think he needs an Investor that is too busy.If their is only about $1,000 dollars in work. I guess it depends on the Investor, hey?

My biggest concern for an Investment for this area would be the economic outlook.and job market. Seems, I remember reading that this area is depressed, and good paying Jobs are scarce. I did look for Jobs on Craigslist to see and I thought the mkt was so so. I also looked at the rentals available and I think, I remember seeing a LOT of rentals and competition, which could indicate higher Vacancy Rates.

Seems, I used the "quote" here and to me it appears like Bob Hestler is talking. My apologies.

Where is the best place to find wholesale deals upto $70,000.
JANINE KOSTER
661-878-6533

Brian,

Numbers sound great. Quick background - I bought a duplex in East Cleveland in 2012 with an expectation of 12 to 15% annual return. I'm also based in Connecticut so being out of state so "Trust" is one of the hardest hurdles to overcome with out of state investors. @Bob E. gave great advice by suggesting you put the $1k, fully rent the property and put quality Prop Mgmt in place. I know many investors (myself included) that would want turn key properties that produced these types of returns for our portolios.

Any chance you could get a steady stream of these? You could have quite the wholesale or turn key business. Best of luck!

-PRJ

@Ronald H.  I would look for a passive cash-flow investor that is busy with other things in their life because they will value the turnkey aspect of the property.  Other investors my look for similar properties and just do the work themselves.

@Brian Bagnall  not sure if this came through in what others posted. Vacancy is figured/calculated based on a percentage of the time out of a year that a unit(s) are expected to not collect rent. For example assume you turn over in all the units and one unit you rent right away, one unit it takes a month and the other two 6 weeks each. You can do this on a daily basis but for simplicity sake look at it this way. There are 4 units so a potential of 48 rent months in a year. You had 4 rent months where units were not occupied. Your vacancy rate is 4/48 or 8.3% (fairly low). Let look at what happens when you have an eviction that you let drag out and the tenant stays 3 months free and that was the unit that you previously had no vacancies. Your now have 7 rent months lost so 7/48 is 14.5% vacant. See how a bad tenant ruins your life? 

It's my opinion that when taking over a distressed property using the previous owner's vacancy rate is nothing more than a negotiating ploy (higher vacancy rate lower ROI and lower purchase price). You must do your due diligence as to what the local vacancy rate is. Here we have a very tight market so it's in the low single digits (4-5%) which is very good. It won't last. In the past vacancy rates have been mid double digits (14-16%). It's really all about the local economy and available rental stock. Usually if someone shows you a vacancy rate that is significantly lower that what you know to be true locally it means rents are low or the property is extremely will managed (hint extremely well managed properties are not usually offered for sale at a discount).

If there is a local landlord association, apartment owners association, or government housing office they keep statistics on vacancy rates. Get in touch with them see what the real number is and use it in your analysis. If you can not find anything and the area unemployment is near the national average I would use 12%, if it's above the national average I would use 18% and if below I might do 8%.

Hope that helps for a small part of you situation.

thanks for all of the great help everyone! :)

Join the Largest Real Estate Investing Community

Basic membership is free, forever.