All Forum Posts by: Brad S.

My first concern would be, are you sure it's a "deal?" I know it's a portfolio of 60 units, but that doesn't mean it's a "deal." You said he is open to "reasonable" offers, but what does that mean to him ...and you. A reasonable offer to him may be a non-deal for you. Evaluating a potential deal like this takes quite a bit of time and energy, and may lead to a dead end. 

So, what would you want out of this deal? Below market price? Above market return/cashflow? Would you want to profit from the sell some of the units and keep the rest, or? I would get clearer on your intentions, and then evaluate his motivations, and see if you can make them align. Otherwise, you may be going down a route leading to nowhere. 

So far, nothing you wrote hints to him being motivated to sell below market. They are class A properties, 100% rented close to market rents. That sounds more like a dream for him as an investor with no evident reason for him to accept a discounted price or terms. I know he's older, but why wouldn't he want to pass them on to his son or family?

Anyway, to evaluate the portfolio, I would first get all the addresses and financials for at least the past 2 years. We get the financials on multi-fam properties (5+ units) and just the rental amounts and terms for the <4 unit properties, to start. Then put it all on spreadsheet/s. Evaluate the 1-4 unit properties for value (find comps), list current scheduled rents, estimated vacancy/collections, expenses, etc and you can have another column for a proforma, if rents could be raised, etc.

For the 5+ unit properties, you need to determine the market cap rates for the area and compare them to the actual performing cap rate of the Subject properties. This is why you get the financials, to see what the actual #'s are. Then you can evaluate if there is room to improve, what discount you would need, etc. 

But, for me, there would really be no reason to spend the time walking the properties first. I would just assume average condition for the units to evaluate them, until you could verify that. But, without being clear on motivations and if there is a potential deal here, walking the properties may just be exercise. 

 Can you share a recent deal or 2 you've done, and the general #'s, and location, with us?

Thank you

Appraisers (I am one) are going to classify the house for condition and quality. Then, they will attempt to find relatively similar recent sales to compare to your house. So, your goal should be to have the appraiser give the higher classification for the least amount of cost - to you. 

As you say there are few comps available, they will expand their search criteria back in time (possibly using sales from many years prior) and estimating a market trend adjustment (adjusting up for an appreciating market and vice-versa for a depreciating market, etc), they will go to other nearby neighborhoods (even if they are many many miles away) and find recent sales, adjusting for location (Superior/Inferior neighborhood - if warranted). 

So, using @Account Closed 's idea, look for any sales in the area, even miles away. Try to find a neighborhood that is relatively similar, in a similar "market area." You can ask any local realtors to get their opinion also. One thing I do is ask the vendors. Example: when I am getting flooring for a project, I ask the flooring supplier what are the more popular floorings being used now, etc. 

On the appraisal front, let me give you the general definitions for the quality and condition classifications. You are most likely going to be in the Q3/Q4 and C3/C4 range

Q2 - Custom designed, could also be high-quality tract, high-quality details/ornamentation/interior refinements, high-quality workmanship/materials/finishes
Q3 - generally high quality, individual or designer plans, above standard tracts or individual site, significant exterior. Ornamentation/well-finished interiors. workmanship/materials/finishes are above standard
Q4 - standard plans, average ornamentation/refinements, materials/workmanship/finish are stock with some upgrades

C2 - no deferred maintenance, no repairs required, most or all new building components, recently renovated/similar to new built
C3 - well-maintained, Limited deferred maintenance, partial updating/rehab
C4 -normal deferred maintenance, adequate maintenance, minimal repairs required

Basically, if you fully rebuild the house or extensively remodel it, and change all utilities (all new plumbing lines, new electrical, new roof, etc.) you would be C2. Most remodels would be a high C3 or low C2. And most remodels will also be high Q3 and rarely Q2.

Ok, that is probably way more info than you wanted or needed.  :P

So, basically, my suggestions are to put granite or quartz (or some other "solid surface" countertops). I'd get the ones on the less expensive end - the appraiser most likely won't know the difference and will still see it as being "modernized." "Good enough" quality cabinets. Again, the appraiser most likely won't know the difference between solid wood cabinets, mdf or ? I personally would use a mid-line quality cabinet though, with soft-close drawers and plywood boxes and probably a shaker style door. You should be able to find them pretty inexpensive - but I'm spoiled, since I am close to a port. Stainless steel appliances - mid level. For basic properties, I like a micro-hood over the range - takes care of 2 appliances (microwave and hood).

See if you can find a good "big box" store for some other materials, like flooring and tile. We have Floor & Decor stores here (CA) which are great, but you may something similar. Home Depot, Lowes, etc, are ok, but there may be some that are better. 

Generally, I'd say go more mid-end on quality, no need to go high-end unless you are doing a high-end house and going for that clientele, but low end can sometimes be readily noticed.

Don't know if that helps, but good luck!

And some words of wisdom - not mine, but still good.

"The deal of the century comes along every week!"

A few more thoughts.

I do like the 4144 Hyde Ave because it is the closest in quality and condition, to how yours WILL BE. So, if it was me, I may see a $140k or so, but again, someone who knows the neighborhood might have a different opinion. One issue is, that I am not seeing any other renovated duplex sales, so that leaves more up to the Appraiser's opinion, since there are less facts (i.e. data/sales, etc) which reflect how the market is valuing a renovated duplex. And it's difficult to argue with opinion. So, if you can find some more renovated duplexes in the general area, even just over a mile away (but similar neighborhood and market area), that may help give you a better idea of value. 

On the rehab side, I do kinda agree with @Nicholas L.. The return % seems good, but the nominal amount seems low for the potential risk involved. Also, I didn't see if you said if you were experienced in rehabs, etc, or not. My other concern would be the full rehab only costing $42k. I don't know if that includes any contingencies or not. But, you are dealing with a 130yr+ old house, I imagine there could very easily be things an inspector or your contractor missed or can't see (inside walls, etc) and if you find those issues, that could easily throw off your rehab budget a TON! In my market, I have only dealt with 2 (maybe 3) ~100yr old properties, and at least 1 had a bunch of surprises within the walls, especially the bathrooms, where we had to reframe some walls, etc. We couldn't see those till the walls were opened. But, we had plenty of room in the deal, so it wasn't a big issue. In the photos of your Subject, a few of the acoustic ceilings look suspect, wavy, lines, etc. In my areas, that may be asbestos and may need remediation (not cheap, if done properly) and if it isn't, it still may need some work - scraping and finishing the ceiling, etc. that adds to the rehab costs. Or it may not need any of that, but those are the unknowns. So, as these risks go up, I personally, expect more of a potential reward from a deal.

Using your #'s, purchase and rehab = $108k, which is about 77% of $140k (assuming a favorable appraisal). That's not terrible these days, but not good on the lower priced properties/areas, like this. Again, not much room for error here. 

My approach would've been to come up with an offer # that worked well for you, maybe closer to $50k or so, and find comps to support that ( I thought I saw 1 or 2), and present them with the offer and let them know that is the highest and best. It has been on the market almost 3 months, my guess is people aren't banging down the door to get it, but, again, I dunno! 

One thing I tell new investors is, How much is it worth TO YOU, to OWN someone else's problem/s. I personally have owned properties that anchored me down more than propped me up.

First, as a certified appraiser and licensed broker, my opinions should not be relied upon for anything and are not offered here for anything other than general discussion and are not expressed here in a professional capacity at all. I know less than nothing about that market or the Subject property, etc, etc, etc. I also don't have data from the area and can only see zillow data.

Now, with that said Here's my take:

Your comps:

4144 Hyde Ave - too far - over 1 mile from Subject

7124 Clark Ave - large wrap-around porch, superior appeal, larger gla 2424sf (over 20% larger), has an additional bedroom, but it may be a moderate traffic street which may be an inferior location

3411 W 91st S - also over a mile away

Zillow comps

3134 W 88th St - sold 4/6/23 @ $125k, within a mile, much larger at 3012sf, in avg-good condition, avg quality

3127 W 70th St - active listing, $129,900, listed for 78 days, a stone's throw away, in avg-good condition, semi-upgraded possibly

General guidelines are to stay within a mile from the subject for comps. There is no rule saying you HAVE to do that, but you need to explain why you deviated from it. Typically that would be because you couldn't find a reasonable comparable within the mile. I would probably use 4144 Hyde Ave, because 1 unit was renovated, and that may help to bracket your future renovated condition and quality, but that doesn't guarantee a higher appraised value. I could see a path toward the $140k, but my guess would be more in between 130-140k. And again, I know NOTHING about the area or market there and I don't get the proper data for that area. I don't know if there are differences in lot sizes and neighborhoods, etc. It also is a flip of the coin with which appraiser you get. I have had some bad appraisals on my own deals, so, you never know.

Good luck

I think it may depend on the local municipality. You should check with the planning dept. But, I have heard that some will require you to maximize the density first, before allowing you to add an ADU. In other words, you may only be able to build out the multi-units up to the zoning density limit, and then they would consider an adu. Although, I thought the CA adu ordinances only applied to sfr zoned lots. So, I don't know about that, also, if its zoned commercial (>5 units), those laws may not apply also.

As Joe said, your plan sounds like a good direction. Those returns sound very good, higher than anything in areas I have seen. 19% moderate leveraged cash on cash return or an 8.5% return with non-leverage all-cash.

I would double check those #'s (verify rents, does this include reserves/vacancies, etc). is this duplex also in FL? Is this a new build? Those returns sound more like midwest or D property returns.

If those are real #'s and it's in a reasonably good area and is a good property, you could get $150k+/yr cashflow, if you exchange all 4 of your properties to those. That cashflow alone should be plenty to pay for a loan on a house in CA.

And please share info on the duplex, if those #'s are real, I'd love to tfr a couple of my rentals to those returns.

What @Chris Seveney said, but also, they get skillful at doing the renovations below retail cost. They may source the materials themselves, interview multiple contractors and pick the most reasonable one, etc. For example, on my flips, I would often need to point my contractors to some suppliers why I get materials for less then they do. Many times, they end up using those suppliers for their other jobs, also. 

Those ROI returns and estimated renovation costs are based on averages, so, that reminds me of a quote I remember by Robert Kiyosaki. When he was asked by an investor, "How do I get above average returns?" his answer was, "Don't be Average!"

And also, buy at enough of a discount to make money, a well-known saying in REI is, "You make your money when you buy!"