I walked away from a 74 unit deal

[Jason Malabute]

My broker sent me a 74-unit deal. I normally wouldn't look at the deal because I am laser-focused on my 50ish unit deal criteria. However, the broker was pushing me to look at this deal. The thing that made me look at the deal closely was that the deal has been on the market since December (originally for $5.4m) and fell out of LOI 2 weeks ago despite being in a good neighborhood. I thought the seller would be more open to a more realistic price.

I confirmed with the property manager we can hit our projected $124 rent bumps. I budgeted $7k for updating the classic units. The owner already put $350k for capex. So I budgeted another $300k for possible additional capex updates. I also increased interest rates by 100 basis points because the Feds already said they would increase interest rates by 50 basis points in June and July 2022. I also increased cap rates by a full point on the front end because in the last recession cap rates in the market by 1.5% and there is so much uncertainty in the market currently.

After underwriting the deal, $3.8m seemed to be a more realistic offer. I was so surprised to hear the broker say they are still wanting $5.4m. So I walked away. Sellers are like the passengers on the Titanic, watching the ship slowly sink as everyone tries to jump on the last rescue boat. In my mind, I know the key is to remain patient because sellers will circle back in a couple of months as the market continues to soften.