How much would you pay for this property?

[Anthony King]

If a seller owned a property for 30 years and hasn't raised rents in a decade or more, how much would you pay for it? The property I'm referring to has been meticulously maintained, no mortgage, owner was wealthy and recently passed away in his 80's and now the kids are in charge of selling and want to maximize the sales price on the MLS so it's not a one on one negotiation.

It's a 16 unit with average rents at $400/month and market rate is $800-$895.

Let's assume all cash purchase so mortgage payment isn't a factor and use 50% rule for simplicity:

$400×16×12 = $76,800 gross rents

50% rule NOI = $38,400

At $1,000,000 asking price the cap rate would be 3.8%

If you can easily increase rents to market at $850/unit:

$850×16×12 = $163,200 gross rents

50% rule NOI = $81,600

At $1,000,000 asking price the cap rate would be 8.2%

If comps are selling at a 7% cap rate the sales price of this property could sell anywhere between $548,571 using actual NOI and $1,165,714 using market rate NOI.

Clearly you shouldn't pay $1,165,714 based on unrealized potential, but it's also clear that the sellers would not entertain $548,571. So what would/should you pay?

Do you have any real life examples of how you handled a situation of severely undermarket rents like this? How did you come to your max purchase price?