What is an underperforming property worth?

[Kevin Farrell]

I am looking at an 8 unit apartment. Four 1br, 1ba and Four 2br, 1ba. I just got financial information and since Jan 2016 the income is up and down several times. They lose tenants, then get some units filled, then they lose tenants, etc. Right now they have two vacants. Rents are in line with the area - maybe a bit higher than average. Property is in good physical condition but there have been some expensive repairs and all the utilities seem high to me. I suspect that the tenants are not screened and that the management company is spending too much on repairs. I will learn more during due diligence. The property is listed for $189,900. The max income from rents is $3900 at 100% occupancy. Assuming 55% of gross income is going out to expenses (owner pays all utilities), then this has a CAP rate of 11.1%. With two vacancies the income from rents is $2800 today.

Here is the question: What is it worth? Using the $2800 and the CAP of 11.1, I calculate a value of $136,000. Is this an appropriate place to start my offer. The current owner has proven on paper that he can not control costs and can not keep tenants, so why would I offer more than this?

Thanks for any comments and suggestions.