Advice on 46-unit possible offer

[John Batson]

Hello,

Hopefully I can get some advice. We are selling a smaller multi-family and doing a 1031-exchange.  Our agent brought a possibility to us yesterday.  I might be missing relevant details, if I am please ask so I can ask our agent.

46 unit Class C property. It was purchased by a contractor in October 2014 for $615,000 and he is flipping it. He has completely redone 18 of the units and the remaining units are dated but in average condition and rented. As tenants move out they will need things like flooring, paint, etc. The 18 he renovated were previously unrentable and vacant. There are 32 1-bedroom and 14 2 bedroom in 6 different buildings.  Here is what he has fixed:

All new exterior/parking lighting

All new security system with remote DVR access and cameras

New Laundry Room/Storage Room

Handrails and decking repaired where needed
All steps on all buildings have been replaced and will be painted

11 trees removed

Extensive landscaping

110 new windows (entire complex)

18 units remodeled with porcelain tile in kitchens and baths and luxury vinyl faux-hardwood floor in living rooms and new carpet. Kitchen cabinets replaced where needed. Remodeled units had all sockets and switched rewired and replaced and light fixtures and hardware replaced/upgraded

75% approximately of toilets, showerheads, faucets replaced with new Delta fixtures.

-Patched potholes in driveway and parking areas

The roofs have varying degrees of life left, with one getting near the end of it's life. Heat pumps have been replaced as needed in the past. There are currently 2 vacancies. The owner/flipper and his wife are managing right now. We own 64 units in the area and would hire our own full time manager. We also have received proposals from PMs in the area that are 10%.

The financials:

Purchase price: $1,250,000, with 25% down, interest rate 5.5% amortized over 20 years

Gross scheduled income: current actual income (just for last month since he has been flipping) $221,000 - with potential rent $247,500

Vacancy and concession assumption: 15% ($37,150)

Other income - (laundry) - $3000 (he is installing a new laundry room)

Total income: $213,000

Expenses:

Taxes: $12,251

Insurance: $6000

Repairs and maintenance: $30,750

Utilities: $22,456

Landscaping: $3000

Management: $19,851

Legal and Admin: $1700

Contract Services $4580

Total expenses: $100,552

NOI: $112,985

Downpayment of $312,500, annual debt service $77,387 with 5.5% 20 year amortization for Cash after debt service of 11.39%. If we ended up with a 15 year amortization, annual debt service would be $91,921, cash after debt service of $21,063 and cash on cash return of 6.74%.

The actual income from 2013 and earlier 2014 is about $165,000 income - prior to the flip. If it's relevant, it appraised for $950,000 in 2013.

I am a little apprehensive because of the "flip" part of it, although the bank says they know this contractor are comfortable with his work. The "pros" part of it for me are that we already own 64 units nearby the property and it's only a few hours away. The "con" part is that it's all new and there are really no actual income. I don't want to overpay or get stuck with a lemon. Any advice or input is welcome. Thank you!