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Author Topic: #'s wrong after doing due diligence  (Read 7221 times)

Offline johnnyg

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#'s wrong after doing due diligence
« on: December 29, 2006, 08:08:06 am »
Im am close to putting an offer in on a 4 unit apartment building. (my first offer on an investment property) My question is ....... What if i find after signing the purchase agreement the an expence that the seller quoted on his ballance sheet was way low.With this higher payment I can not make this property cash flow and I want to get out of the contract? Do I need to put in a special clause for something like this or am i covered in the language already in the offer to purchase. thanks for your help. Also the asking price is 195,000 With gross rents only at 21,900. and NOI at 10558. If I times the NOI of 10558 by 10 I get value of theis property at 105,580. Is this the right formula to figure value/asking price. Than you very much for your help ???
johnnyg

Offline propertymanager

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Re:#'s wrong after doing due diligence
« Reply #1 on: December 29, 2006, 09:30:28 am »
Johnny,

Here's the real story:

Gross rents are $21,900 per year or $1,825 per month
Real world expenses are about  $10,950 or $912 per month
Real world NOI is about $10,950 or $912 per month
The mortgage payment on $195,000 is about $1,464
Monthly LOSS would be about $552 (or a little more at your listed NOI of $10,558.

The MOST I would personally pay for this property is $91,250.

I don't put in a contingency for cash flow.  The income and expense numbers given by the seller are almost always fiction!  Check the actual leases and count heads for the income and estimate the expenses yourself.

Good Luck,

Mike
www.1MinuteToRentalPropertyRichs.com 
This No-Hype, No-Nonsense Book is a step by step course in making money and building wealth with rental properties!  Everything from buying properties at a discount to dealing with terrible tenants.  Now In Paperback!

Offline Iron Range

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Re:#'s wrong after doing due diligence
« Reply #2 on: December 29, 2006, 10:47:43 am »
I put in the bid that the offer is continguient on the rent and expenses being accurate on the MLS.  May or may not be legally enforcable.  On my 3rd duplex I found out the rent was $50 less on one unit then stated on the MLS.  I cancelled the contract we signed to purchase the property.  The seller then came back to me and dropped the price an additional $3,000 to make up for the lie.

orininal price $141,000
oringal offer accepted $124,000
Ending offer accepted $121,000

The MLS said the rent was $775, but I found out it was $725.  I raised the rent after I bought it to $775, and got the property $3,000 less then I orginally planned.

So its ok people lie, use it against them
« Last Edit: December 29, 2006, 10:56:33 am by Iron Range »
Great Tenants are an Investors Greatest Asset

Offline Rich_in_CT

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Re:#'s wrong after doing due diligence
« Reply #3 on: December 29, 2006, 10:55:20 am »
USE EVERYTHING AS A BARGAINING CHIP!!!!! 8)

Offline hanatal

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Re:#'s wrong after doing due diligence
« Reply #4 on: December 29, 2006, 04:04:43 pm »
RUN!!!
This is not a good deal at all.
I have a 9 unit that came w/ a 2 bdrm house. I bought it for 300,000. My payment is 1700.00. I bring in roughly 4,400.00 per month. This works for me but I wouldn't go any less.

Mike has a good formula that I have swore I will use in the future.  Can you give your formula again Mike?

Thanks,
Wendy

Offline propertymanager

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Re:#'s wrong after doing due diligence
« Reply #5 on: December 29, 2006, 05:08:48 pm »
Hi Wendy,

1) I divide the gross monthly rents by .02 to get the maximum purchase price.

2) Then I subtract the mortgage payment (P & I) from the gross monthly rent to get
    the real world cash flow.  I must have $100 per unit per month.

3) Finally, I won't pay more than 70% of market value for the property, BASED ON MY  
    OPINION OF THE VALUE (no comps for me, thanks).

I'll only buy if all three of these parameters are met.

Mike
« Last Edit: December 29, 2006, 05:10:44 pm by propertymanager »
www.1MinuteToRentalPropertyRichs.com 
This No-Hype, No-Nonsense Book is a step by step course in making money and building wealth with rental properties!  Everything from buying properties at a discount to dealing with terrible tenants.  Now In Paperback!

Offline SteveGent

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Re:#'s wrong after doing due diligence
« Reply #6 on: December 29, 2006, 06:06:37 pm »
PropertyManager,

How do you get the expenses ?

Quote
Real world expenses are about  $10,950 or $912 per month

Offline propertymanager

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Re:#'s wrong after doing due diligence
« Reply #7 on: December 29, 2006, 06:24:12 pm »
Throughout the entire United States, operating expenses run 45% to 50% of gross rents.

Mike
www.1MinuteToRentalPropertyRichs.com 
This No-Hype, No-Nonsense Book is a step by step course in making money and building wealth with rental properties!  Everything from buying properties at a discount to dealing with terrible tenants.  Now In Paperback!

Offline johnnyg

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Re:#'s wrong after doing due diligence
« Reply #8 on: December 29, 2006, 06:53:55 pm »
mike,

is it even fesable that a sell er or a realestate agent would even show the seller my offer of 91,000 on a apt listed for 195,000 . is this a waste of time or should i give this very lowball offer anyway and see waht happens . thanks mike
johnnyg

Offline klproperties

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Re:#'s wrong after doing due diligence
« Reply #9 on: December 29, 2006, 07:05:31 pm »
re agents are reqiured to show all offers, they have to.

Offline SteveGent

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Re:#'s wrong after doing due diligence
« Reply #10 on: December 29, 2006, 08:01:43 pm »


Quote
Throughout the entire United States, operating expenses run 45% to 50% of gross rents.

Mike


Mike,

Does that exclude the mortgage ?

Thanks

Offline propertymanager

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Re:#'s wrong after doing due diligence
« Reply #11 on: December 29, 2006, 08:24:06 pm »
Steve,  

Yes, that excludes the mortgage (P & I).

Johnny,

Personally, I think it is a waste of time.  I would find properties that are likely to work instead of finding properties that are WAY overpriced.  The key is finding DESPERATE sellers.
This is a property being offered at retail.  There's no deal here.

Mike
www.1MinuteToRentalPropertyRichs.com 
This No-Hype, No-Nonsense Book is a step by step course in making money and building wealth with rental properties!  Everything from buying properties at a discount to dealing with terrible tenants.  Now In Paperback!

 




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