10 unit apartment offer made to overcome analysis paralysis

[Lester Schmitt]

I have been analyzing a 10 unit apartment building. I found it through a traditional broker not a comercial broker. Seller is providing scanty records such as no Rent Roll or detailed expenses. 

I have submitted an offer and would like to get your opinions on this purchase rehab. My intention is to buy, hold,rehab, refinance and purchase another property. I needed to make an offer just to overcome inertia. If my offer is not accepted, I want to learn from the process. Or be ready to negotiate further.

The property is located in an area where the town has their own municipal electric and the rates are low. So the apartments are all electric and tenants pay their own utiities except water/sewer, which the landlord pays (although the rates for water are also low). Tenants also pay their own trash bills individually.

In lieu of rent roll,  he sent his schedule E for the past year. Seller listed that 8 units rent for $500/month and two rent for$450/month. So rents could be $58,800 at full rent. His Schedule E states $37,600 for income.

Proforma expenses include a 10% management fee and 8% reserves for repair.

Gross income = $37,600

Expenses- $24,300

NOI= $13,300

I am willing to buy at a 10 Cap so I should have offered $133,000.

Owner has property listed at $299,000

My private money guy will finance 70% of the purchase price.

I would want to get this with as little of my own money as possible, so I am asking the seller to finance 25% as a second mtg.

Here is where I lost my nerve. I offered $175,000 with the 75%/25% financing so I am offering to overpay for current NOI and would have negative cash flow of $5000 the first year by the proforma.

The potential in this property comes from correcting the current mismanagement.

The 10 units are 2BR 1Bath apartments that would rent for $700-750 per month if rehabbed. I would get real CAPEX numbers as part of due diligence, but of the units I have visited, my estimate of $5,000 per unit would get the rents to the proper level.

At Rents of $700 per unit and vacancy of 10%, the NOI becomes $45,000

So, would I have been better to stick with the offer that the property analysis led me to $133,300.

Was I ill advised to offer $175,000 which is closer to what the seller is asking.

Is there another way that you would have structured this offer, or another strategy you would have used?

Thanks for your comments.

[Keegan MacNichol]

Unless I'm not following, there's no way you could get a property with an NOI of 45k for that cheap. Here's How I'm seeing this, let me know if I'm missing something:

Purchase Price: $299,000

CAPEX Req: $50,000

Down Payment: $90,000 (30%) 

Closing Costs: $18,000 (est.)

Cash to close: $158,000

Gross Rent at 490/unit= $58,800

         Less 10% Vacancy: -$5,880

Effective Rent =               $52,920

     Less 50% Expenses:  -$26,420

NOI=                                  $26,460

Purchase CapRate: 26,460/299,000 = 8.8% 

That's a good cap rate! With in place rents you'll see a COC return of about 6.3%. If you can raise rents to 700 over two years, you'll see an average COC return of 15%. With the information I have, seems like a great deal at purchase price.