12 unit apartment complex

hi everyone,

I am looking into a 12 units plex and I amcurrentlytrying to negotiate the price. Once we have a binding contract, I will lots ofcontingencies to protect my self but my question is the price to start my offer. Here is goes:

A year ago he had it for sale with a broker for 1.2mil (i thought it cas too high)

He called me 2 weeks ago and told me he wants to sell if I want to buy (no longer listed).

Here are my numbers:

Rent: $650/month (7800/year total gross income)
Taxes: $3,750/year
Insur: $7,556/Year
Misc: $15,620/year (management, street lights, general minor repairs, legal, etc.

After calculating my operating expenses (including 10% vacancies) I estimate my NOI to be 57,314/year or $4,776/month for mortgage expense.

According to tax records, land is valued $194,400 and building at $616,300 for a total assesment of 810,700. He bought it is 2005 for $844K.

Suggestons on starting offer price? I was going to start at $750K.

How motivated is the seller?

He had it for 1.2M last year. When he called me I told him that I thought he had it for 1.1m and that I thought he was too high … he responded that he had a lower numer that that and to make him an offer.

Walk away from this deal. Unless Bankruptcy sounds fun to you. This property is not worth anywhere near 1.2 M. I would put a bid in at around $300,000 to start and maybe creep up to $350,000. If he wants to go higher then you walk away or go bankrupt. If you have to pay utilities then you couldn’t pay much more $300,000.

If you are thinking about starting at $750,000, then you don’t understand the expenses involved in rentals. You should start smaller, much smaller. 1-2 unit properties will teach you VERY quickly the real expenses involved in rentals.

Let me know if you want to know why I am saying these things to you. Read what I wrote carefully or you will lose everything Cuadra.

I was thinking something around $375ish and I forgot you would have to pay utilities. If the idea of the tenants thinking they have “free” heat sounds appealing then you’re crazy. With me paying all utilities I’d be down around $275k and creep up to $325k if I was drinking too much.

What you haven’t provided was the property’s captilization rate—here the income capitalization approach to calculating commercial property value:

BPO = NOI/Cap. Rate

If the property has a cap rate of 10% with a NOI of 57K, then the BPO (best possible offer) would be 570K.

Like others have suggested, I don’t think you have a handle on the true operating expenses of this building and suggest that you aren’t in a position to tender ANY offer until you have your head around this first…


Scott Miller

A friend of mine bought a duplex in Florida a few years ago for $200K. That was when the market was still rising and his attitude was cheap money plus tax deductions plus good appreciation makes for a good deal.

Well. now the building is worth 300K on paper because that is what he and several other duplex owners are trying to sell their units for in that area.

But the only one that sold in the past year sold for $225K.

So now he has an overpriced property in a saturated market that is likely to decline even more - maybe below what he paid for it - over the past few years if he can’t dump it soon.

And he wants his price so that is unlikely to happen too quickly.

Moral: Make sure the numbers work based on a strict cash flow basis. If not, walk away. Do not count appreciation. Do not count tax deductions.

Just count income and expenses - including your new mortgage - and a decent reserve for vacancies and repairs.

Then if the left over cash, you may have a deal.

I would not offer over 560,000 unless the rents were below market by at least 75% or if the land was worth more as commercial property with the buildings tore down.

Even at $750,000 there are many things you could always do to make this deal work if the market will allow it. Things like raising rents 75% from day one, or making them Condos with owner financing, or you could turn it into an elderly assisted living apartment building ($1900 per unit per month).

As long as you are not stuck in the REI OLD SCHOOL mindset, you can realize a profit from even the worst deals as long as you keep your options open.

Richard Stephens