Nearing the finish line and very nervous

[Glenn France]

Morning all. I'd love to get your collective wisdom on this deal I'm in. Here are the basic facts as I know them.

I moved to this part of the country (NW Arkansas) 1.5 years ago following a career on Wall Street as a derivatives trader. I'm good number crunching and modeling. My thinking began with looking and chasing single family homes, but I never really got off the ground. Then I switched gears and started looking at multi family apartment buildings. I've seen and crunched the numbers on several but haven't come this close. Close, meaning in contract and doing thorough due diligence.

Building facts: 32 unit complex, four 8 unit buildings. Clubhouse and pool. Currently there is an onsite guy who gets free rent and $800 per month to take care of everything from leases, rent collections, evictions, maintenance, etc. My plan is to switch to profession Management company for 8% of revenue. It comes to about the same cost. And the guy struck me as 'low'. And he's not doing anything special as far as maintenance goes...handymanish. And he's attracting tenants 'like him'. Building is in residential area (15 minute drive away). Lots of houses, visible. Decent area.

Financials:

Cost: $1,205,000

5% 3 year note amortized over 20. 20% down.

Rent Roll (with small laundry plus onsite guy's apartment rented. $16,500/month or $198,720 gross annual

100% occupied but I'm running 6% vacancy (2% comps for area).

Expenses:

Property Taxes: $12,500

Insurance: $14,000

General Maintenance and repairs: $20,000

Pool Care: $1800

Admin: $3000

PM Fee 8%: $14,900

Trash Pick up: $4,800

Water: $16,800

Clubhouse Electric: $1,200

Total: $89,200

(expense ratio 50.88%)

NOI: $97,600

Mortgage Costs: $76,300

Annual Cashflow: $21,259

Key Ratios: Cap Rate 8.0%, Cash on Cash Return: 8.24%, Total Return 19.4%

Revenue is only 1.37% of Cost (violation of 2% rule!)

I had the place inspected and it came up messy. The building is roughly 30 years old, and most units are still running on their original HVACs and hotwater heaters. Past manufacturer's stated life. Windows were pretty awful and drafty. Residents complain of high electricity bills. Current owner has had the property since 2011, and I suspect has done little or nothing in the way of value added/capital improvements. I cautiously estimate $150,000 needed for value added improvements to appease inspection report. And that's probably low.

Basically it's lower income housing for this area but it seems to be a spot with high demand as there is full occupancy. It may have once been a nice building with the clubhouse and pool. But I hear few actually use that now.

I took the info from the inspection and began to try to negotiate a better price. I asked for $150,000 discount, and got zip. They claim to have another buyer waiting at full price. I asked for $50,000 discount as best and last, and they didn't budge. I told my broker to terminate contract and we did, however seller has not signed and returned. Started fighting about $10K earnest money on deposit. Technically, I'm out of contract but since seller hasn't signed and is stalling, it's still alive I suspect and we can move if desired.

Yesterday broker calls and says they may have budged. They are offering this: full contract price, but with a check made to me at closing for $25,000 to be used as I wish no claw backs (capital expenses and upgrades on top of my modeled budget). (Honestly, I actually suspect but can't prove that the actual seller hasn't budged but the two brokers are reducing their take by $25K in order to close the deal and get paid.)

So, in conclusion, I'm not sure what to do. I have no experience in real estate investing, but this strikes me as at least a fair deal. Not great, but not bad either. My fear is the condition and the amount potentially needed to keep it going. Also, I don't want to buy current owners problems of course. Seems he is passing along all his deferred maintenance to me. I could carry it for a few years as is and look to sell and pass it along to next, but I fear I'll be stuck holding the bag. Dangerous game of musical chairs.

I'm happy to walk and move on, using this as a template to judge future deals. But I'd also love to not let a good one get away.

Let's hear what you guys think.

Thanks,

Glenn

[Jean Bolger]

I think you should let the "other buyer" have it.

I'm not the most experienced person on the block, but I am one apartment complex ahead of you. I wouldn't touch this, frankly. First, IMO it's way overpriced. The deferred maintenance is going to be big, expensive headache- I'm not against buying a property with lots of deferred maintenance, but you need to be getting an appropriate discount, and with this one I don't think you are.
Also, it doesn't sound to me like your broker is really playing on your side here if he's advocating for you going into this as your first deal.