Value Add: putting my first offer together

[Kyle Dutson]

Hello BP community! Well, I am exited to possibly have a property worth an offer and am once again turning to the expertise and experience of this wonderful community. 

I have a 6-plex with 2x3 beds and 4x2 beds in my area that I am getting ready to put an offer on. The ask is $450,000 and the seller is willing to finance. His asking terms would be 15 yrs at 4% with 20% dn. After walking the property and through the units I estimate it is going to cost me around $60,000 and a lot of my own sweat and time to get the building to where I want it and pulling the revenues I want. right now the current tenants are living cheap at $620 for the 2 beds and $675 for the three. One 2 bed just rented for $725 last week and the available 3 bed is going up for $850. These are market for a property of this size and condition.  After the updates and improvements I have planned I believe this property could potentially pull between $65,000 and $69,000 gross scheduled income.

I am here asking people's thoughts on price and terms for this deal. I have since lost one of my partners and may only have about $40,000 for a down payment. So, this deal may be a lesson on creativity and negotiating skills. If of course, it actually gets that far.

last year the seller report operating expenses of $9,570. I think this is very low. But may be truthful considering he has managed EVERYTHING himself. All be it not very well, but it did keep expenses down. The vacancy rate was 6.8% and is typical for the area. But I expect rents to continue to be depressed in the area due to the closure of a technical school and the large number of new units built in the last 5 yrs. Not sure of the numbers on that but I do know that it has had an obvious affect on the market.

After applying a management fee and a 10% vacancy rate I brought operating expenses up 50% of GSI for rents expected after current leases expire ($56,400). This gave me a value of $331,632. This is calculated using an 8.5% cap rate, which is what the county assessor uses for properties in this area.

I plan to write the listing agent an email explaining my valuation to justify my offer. I am thinking an offer of $350,000 would be appropriate. It is higher than my valuation in hopes that it may spark some negotiation for flexible terms. I am hoping that I can negotiate a deal that will keep my debt service at or below $1,900 per mo. The reason is so I will have room to use cash flows to make the improvements I have planned. Knowing that I will be managing this property myself, I think this would be doable. 

Having stated my goals with the property, I also don't want to overpay but know that I may have to be flexible to get the terms I need. I was hoping he would take the lower down payment and a mortgage amortized over 30 yrs with a bubble at 10.  Or, take a note to cover the amount I would need down to get a traditional bank loan. I believe this would give me the flexibility in cash flows to accomplish what I want and have enough equity through increased value to refinance into a shorter term loan. 

So, let me have it. What are your thoughts? What suggestions do you have? I'll take anything you got and stuff it in my toolbox. Some constructive criticism would also be much appreciated.