Is there a standard method for knowing what kind of offer to make on multifamily?

Question

I have been looking at apartment complexes. I managed to get 1 8 unit and 1 6 unit building over the last few months and have done well with them. The cash flow jump was substantial and so of course I'd like to acquire more. To a degree I lucked into the 2 buildings so my biggest question is the title. I'm sure there are lots of variables so its not a one size fits all answer normally. However I am wondering if investors in multifamily go into it with asking for 10-15% off of listing price? Or is there some other method that works better. I cannot pay cash for the building. I would be looking at properties at 1 million or less. Any advice or a point in the right direction would be greatly appreciated.

Robert Rixer · Answer

Ignore list price, offer what you would pay for it. Worst case your offer gets rejected and you've lost nothing. Many sellers asking ridiculously high prices to see who will bite. If your offer is fixed to a list price you're going to overpay. I've seen an offer in the past week alone for 50% of list price so 10-15% below is nothing. A building is worth what the market is willing to pay for it - you are the market.

Chris Mason · Answer

Get the NOI or cap rate. With cap rate and list price, you know the NOI.

$1m advertised at a 7% cap means the NOI is $70k, or so they claim. Obviously validate that claim prior to closing, but let's not put the cart before the horse.

If you know from prior research that assets like that, in that market, trade for a 7.5% cap, then it's as easy as $70k / 7.5% = $933k.

So $933k is your starting place. And the logic is simple, if everything else like this trades at 7.5%, then why shouldn't this one also trade for that? And that's not a sarcastic question, possible answers include but are not limited to...

If management/ownership has been lazy and there's a lot of vacancy or below market units, that you can rent out and/or bring up to current market, then maybe you offer a little bit more for that upside potential.

If it's rent controlled and has significant deferred maintenance, then shoot for less.

Or maybe it's fully occupied, well maintained, professionally and competently managed, totally turn-key, the easiest and most passive that an apartment building could ever possibly be. And maybe the listing broker knows that, that's why they think it should sell at a 7% cap rate, and maybe they are correct.

Joshua Christensen · Answer

Russ, this is a great question.  Answers are all over the place.  Ultimately, you have to be clear on your goals.  Know the market.  A good deal to one guy may not be the best deal for someone else.  I get criticized for deals I do because I have a very long tail approach with a 20 year outlook before I sell.  Most investors I talk to focus too much on discounting the sales price to squeeze as much as they can from a seller.  Remember, Deals only happen when both parties are willing and able to agree.

Short term exit:  Buy and sell inside 5 years.  Your purchase price becomes more important because the length of time for market improvement and your revenue increases has been shortened.  This is the equivalent of flipping houses for apartments.  You "make your money on the acquisition."  These deals are rare and take a longer time to find.  You need to exercise a lot of patience.  This is Capital Gain and Speculation Investing.

Long term exit:  Buy and hold for 10+ years.  Time is your best friend in real estate.  Mistakes made at the acquisition are made up for over time.  Look for a deal structure that makes enough sense for you and makes the seller happy.  If you give up a little on the front to acquire a nice longer-term asset for your portfolio, the price becomes less of an issue.  Your asset value will increase each year with your revenue, so look for assets that you can manage the revenue and expenses in the most efficient way to release your investment potential.  These deals are Yield Investing for long-term cash flow and wealth building.

John Clark · Answer

You need to make any offers contingent on a sworn rent roll and a general contractor’s estimate of repairs and upgrades. Be conservative in estimating new rents, and be very negative in your cost estimates (higher repair costs, longer vacancies, etc.). Then run your numbers.

David Avery · Answer

I have always had a Realtor that can call the listing agent and find out what offer will work.

simple simon!

Russ Mooneyhan · Answer

I greatly appreciate this community and those who have given their input. I'll put this information into practice on my next offer.

Jessie Dillon · Answer

i'm in the 10-15 unit market around that price point also. i offer max what i think the bank will value the property at, based on my OWN noi analysis and the going cap rate for buildings like it in the area. i'll try to get a discount on top of that / seller credit if the inspection report is trash. & this is for properties with a value-add component via under-market rents. it has to be priced according to current rents, not potential rents. but also.. if the price you come to doesn't work with current rates, like it won't meet a 1.2x cashflow ratio or you personal COCR goals, offer what you want to offer & explain why!

Evan Polaski · Answer

@Russ Mooneyhan, to answer your question, and summarize a lot of the responses below: No, there is no specific tactic that people use.  You need to look at the property and calculate what it is worth to you and offer that.  You either get it or not.

I would base this on your numbers, not sellers (seller financials are one of the biggest jokes of this industry), and your return requirements.

Russell Brazil · Answer

If the property is overpriced by 30% and your offer is only 15% under, you would be getting screwed. If the property is appropriately priced or under priced and you offer 15% under, you wont be taken seriously

Is there a standard method for knowing what kind of offer to make on multifamily?

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