Purchasing a SFR portfolio. Large post with many questions!

[Alex Martin]

Hey guys, I was recently put in touch with an individual who is nearing retirement and looking to sell his SFR portfolio. I have been going over the numbers which seem to be looking pretty good based on what has been given to me so far which includes asking price, unit count, addresses, rent roll, property tax, net income, and cap rate. What documents should I request to back up the data that has already been given to me and what other pieces of information should I request to help give me the full picture of all the properties and exactly what I will be taking on?

Another issue I’m having is valuing the portfolio. I know with multi-fam and commercial properties the value is usually derived by the income the investment is producing. If this were a commercial property with the cap rate he is offering this would be a home run deal; but if I average the price of the properties based on the count and his asking, his asking per property is at least 25-50% more than these properties would be worth individually in my market. Should the properties be valued closer to market value or am I essentially paying a “convenience” premium because the portfolio has already been built? For background, the portfolio contains more than 50 houses.

I always hear these fantastic stories on BP of people hacking these deals together and getting their foot in the door with no money down. I was thinking about trying to structure a couple of different purchase options to present to him and see if I get a bite. Obviously I would love if he did some type of seller financing, but I’m wondering how likely that is considering he’s 72. What’s the structure look like of some seller financing that you may have done or seen work recently?

I do not really feel comfortable putting all the information out there but if someone is willing to lend a hand, I would be eternally grateful; I do not have a problem sharing all the nitty gritty details of the deal via private message.

Thanks guys! 

[Mike Dymski]

The portfolio should be priced LESS than the sum total of the individual property values because you are providing HIM with the convenience and cost saving of being able to sell them in one transaction. The number of buyers for a 50+ SFR portfolio is limited and the exit strategy is one of the primary issues for these owners.

The price and the cap rate (unleveraged ROI in the case of SFR) can't both be above market....something does not add up. If I had to guess, you are missing some portion of vacancy, management fees, maintenance, cap ex, and other expenses.

Seller financing may be an option if he does not have a use for the sales proceeds, is interested in some mailbox money, or is facing a large tax bill on the sale due to capital gains or depreciation recapture.  Finding out his needs is a great decision.