Potential deal, but potentially delusional seller.

[Matt Hernandez]

Hey guys, I am looking at a multifamily deal in the Columbus OH market. 

At first glance, this deal has potential.  Here is some important information

• 32 Units
• Class C property in a B neighborhood
• A block from nice shopping, restaurants, etc.
• Original owner held since building in the '60's, recently passed
• Owner's daughter is out of state, with no experience in real estate (she is a lawyer though, so not clueless)
• Expenses appear very high (reported 75%)
• Many tenants who havent had rents raised in 5-10 years
• Rents sit around $0.73/SF, there appears to be room to take them to $1

Here are where things get interesting:

• Reported Financials
  • GPI $222,000
  • Expenses $152, 327
  • NOI 44, 646

Based on the expenses, I am comfortable saying that I could remove some, (for example, they are paying 2 management companies, one of which is family owned, I believe to reduce taxes). I could fairly easily take the NOI to $72,000 without doing any upgrades. This provides a good deal of value add, but its not cheap. There are 8 buildings which needs new windows, roofs needs to be done within 5 years, and kitchens need upgrading. Even when accounting for this, it's still looking good.

The problem is the asking price. The seller is basing their ask on a pro-forma NOI of $120,00 - 3 times what they reported. I think this is unrealistic. While I am willing to pay a small premium for the potential and location of this property, they are asking full retail value for what it could be when turned around.

They are asking a 6.25% cap, which is reasonable.  But their value is $1.95M.  Mine is closer to $1.2M  (and thats with a generous assumption on expenses).  The realtor said he doesn't think theyll consider anything below $1.6-1.8M  (the realtor acknowledged that the price was high, but basically said that inventory is low so they can ask it - which i disagree with)

What do you all think? I am going to submit an LOI, but I don't think I'm going to be able to hit $1.6 M. Should I just walk away from an unrealistic seller?