Help me close this deal or NOT...

[Sohrab Ansari]

I have a 10 unit under contract. It is in a decent area with decent school district. It is in a two acre lot. 

Property details 

• 3 two bedrooms
• 3 studios (very small) 
• 4 1 bedrooms 
• 10 feet deeded lake access. it is not being used now. 
• Most units are really clean and recently updated 7/10 units. 
• Recent roof 
• rents are about ~$150-200 under market value. 
• you can add a unit by building one
• 100% occupied, most tenants have been there more than 2 years. 

Under contract for $512,000

Last year gross income was 80K. 

Expenses based on actual 

1. Insurance $9050 (They paying too much for this. I am sure I can decrease to half but like to see what others are thinking) 
2. repairs $5500
3. Supplies $1600
4. Taxes $12,561 (based on my assessment, this expense will increase to $16K after sell)
5. Utilities $13309 (Will have tenants pay this. The current owner paying all expenses) 
6. Others (snow removal, labor, etc) $11,939 (most of half of this expenses is non recurring) 

NOI  = $27K (without management fee and vacancy) 

Cap rate of 7% valuation = $385K 

At stabilization (after rent increases, passing on the utilities, controlling expense, etc) the NOI will be = $52K

Value at stabilization = ~$750K

Negatives are 

1. It be hard to reseller in the future due to weird buildings out lays and small units ( but I am not planning to sell it. My plan is to refinance and get my down payment back in 18-24 months.) 

The agent presented that the NOI is 47K but after due diligence the NOI is 27K. How can I negotiate the price down? I offered $430K the owner thought this was an insult. What would you counter offer after finding the NOI is not what they presented and it also needs the electric box to be replace (~4k) and insulating the attic (~8K).

Please look at the pictures. Would you pursue it or look for better deals. What would your counter offer be or would you buy at price that is under contract? thanks

[Sohrab Ansari]

Originally posted by @Nicholas Weckstein:

In my opinion it seems like the seller/agent valued and did the “underwriting” wrong.

You said at a 7% cap would be roughly 385k?
What are cap rates in the area ?

Seems to me like that 500k price you have it under contract for is way to high.

I underwrite properties like this

Gross rental income
-all expenses (utilities, lawn care, insurance etc)
-10% vacancy
-10% cap ex
-10% management fee
———————————-
= NOI

Seems that the seller didn’t value properly.

At the sale price your talking about roughly a 5% cap rate. That’s not to great nor worth the hassle. Unless the place will go up in value.

So again you have to say what type of return would be the least I would accept. Find that number and that’s the most you should pay.

The market cap is 7-8%.  Idk how people will response to the increase in rent and utilities. I am sure I will have some move outs. The property is rented 150-200 a unit very conservatively lower than market. I am sure there is room to increase rent. some tenants have been there for 8 years and pay the same rent. The owner is 74 years old