Determining Purchase Price

[Brian Plajer]

Hello,

I'm looking at an apartment building that recently hit the market. The calculated purchase price based on actual numbers is significantly less than the calculated purchase price based on the proforma (best case scenario)  which requires capex improvements to increase the rents over a few years. Looking at similar properties, recently sold,  the Proforma price seems to be more in line with what it will sell for. My question is: aren't you giving up all the value/growth  by paying a  price based on the proforma which may or may not come to fruition? Seems like the purchase price should be somewhere between the actual and the proforma, acknowledging that improvements MIGHT increase the value to some unknown degree but certainly not a guarantee. I appreciate all of your expertise, suggestions and comments.

[Taylor L.]

So, basically, the property is worth $X right now based on its current incomes and condition. 

It could be worth $Y down the road if you spend $Z to fix it up and raise the income. The seller is trying to get $Y for it right now. 

What is it worth right now to a disciplined investor? $X!!!

It's been an interesting phenomenon that seems to have increased in the last few years. Don't fall for it! It's not worth $Y until it is actually worth $Y. Stay disciplined.