Would you try to do this deal......12 unit building???

Question

Okay here is the situation. I know someone personally that wants to sell their 12 unit building. I am really grateful he is offering me a chance to buy it (especially, while it is not even on the market right now). The issue is money. My wife and I just bought a 4 unit 6 months ago. Although it is cash flowing well we do not have enough cash or equity to purchase this 12 unit. My question is what could we do to purchase it? Is seller financing an option???

The numbers are:

Building has been listed in the past for $650K (will most likely appraise for $560K

5 2 bedroom units and 7 1 bedroom units

Gross rents total $9221

Common electrical bill $63/month

Gas bill average $391/month

Water bill average $654/month

Property tax $1700/month

Trash pickup $189/month

Insurance $235/month

25% down on $560K = $140K down   mortgage would be about $2255/month

Monthly expenses would be about would be about $5500/month netting about $3700/month before accounting for  vacancy and taxes or repairs. What do you all think?

Joel Owens · Answer

I get 442,608 sales price at a 10 cap.

At 650,000 sales price you are looking at a 7 cap. These prices do not include immediate deferred CAPEX that comes off of the purchase price.

Only you know the going cap rates for the product in your area to say if it's a deal or not.

Owner financing can be good but NOT at a really inflated price to make it happen. All that you will do in that situation is take  a headache off a sellers hands and when the market improves not have little to any equity years later.

Jarrett Harris · Answer

Heard from the bank a couple days ago. They will not allow the seller to deed the property over to me. I guess he could still deed the property over to me but then they are saying they would call the note due?

They are also still in the process of bidding out the appraisal.

Jarrett Harris · Answer

Well I met with the bank today. They will not (and they say they have never) allow a mortgage assumption. I did specifically ask about the seller deeding the property over to us, and they said they will look into that. They also are starting to bid out the appraisal of the building so that we can see what it is really worth. Ball park estimate is about $1200

Sayo H. · Answer

You should also ask the local brokers on what the going cap rate is in the area..

Sayo H. · Answer

@Jarrett Harris  Joel has made some great points and I agree with him 100%. Make sure you do your research on what the comps have been selling at what cap rate in the market area and determine the average, so that you are not overpaying. And don't forget to include the reserves in expenses. Off-market deals don't mean they are good deals, there are so many properties to choose from both on & off-market.

Jarrett Harris · Answer

@Joel Owens

I was just reading another thread

http://www.biggerpockets.com/forums/88/topics/119771-commercial-property-with-100-financing-but-not-cash-flowing

Do you think the purchase "subject to existing financing" could work for my deal? Just wondering what your opinion would be.

Joel Owens · Answer

It's overpriced then for what it is. The seller can wait for the market to cap rate compress closer to his asking price.

I have seen sellers wait years before for markets to change before getting close to what they want. They key for the seller is if they dig in to get their price or they have another alternative investment that would have given them more yield 2 to 3 years down the road.

The seller to me just doesn't sound motivated enough to even try and work a deal.

We know what the seller is getting for owner finance. Their price and release of a headache. What are YOU the buyer getting? Perceived cash flow and how hard will you have to work for it?? If you buy at a low cap rate then you do not have much equity growth unless it's a very strong annual rent growth market. You will find yourself working for just the cash flow with little upside.

It's really all about your local market and the tenant base at the property that will dictate cap rates. Have you looked at recent closing there to see what caps are closing at for similar properties??

Jarrett Harris · Answer

Thanks for the help so far.

@Joel Owens

Thanks for the cap rate info. I didn't really look at it like that.

There is no deferred maintenance. The roof, tuck pointing, Boiler, hot water tank and City water supply line are all new within the last 5 years. The place is immaculate.

@George P.

The building has been listed in the past for over a year. He has taken it off the market since he has received few serious offers.

George P. · Answer

keep in mind that most multi's are never listed officially. so dont feel like he is offering you a deal. maybe you'd be helping him out.

@Joel Owens do you have a spreadsheet for evaluating these properties? i know we talked about it before, but i just can't find the right multi opportunities..

Would you try to do this deal......12 unit building???

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