Determining Current Value Based on Rent Rolls and Condition?

[Philip Bashaw]

Hello BP!

I am very interested in multifamily investing. Initially, I want to start with a small apartment building with 12-20 units in a good area with high occupancy rates. I live in Atlanta, GA where there are loads of small apartment buildings that are just that, like the building I currently live in. It's an 18 unit building of 2BR/1BA units in a great area with great schools. The owner does the absolute bare minimum and the management company seems to have been instructed to ignore all requests about fixing anything. Rents are $300 below market rate so it stays occupied and once people get over the excitement of having found a bargain, they realize what a dump this place is. 

Being a savvy real estate investor now, I think I've figured out why the owner is letting the building decline. Property taxes and depreciation! I looked at the taxes paid over the last few years and they used to be a lot higher along with the assessed value. With that being said, I want to know a good way to approach the owner with an offer based on the condition of the property, it's depreciated value and below market rents. FYI, the property is not for sale at this time and the same person has owned it for several years.

Is there a formula to determine what a fair offer is for a small, rundown apartment building in an excellent neighborhood? I want to make an offer and even suggest owner financing for 12-24 months while I build up cash by flipping houses. My new strategy is to fix and flip houses, take those profits and invest in small apartment buildings.  

[Justin Fernandez]

Just start by talking to him.  Let him know you're interested. 

Find out what he'd be willing to let it go for.  

Make an offer, add a clause that allows you to renegotiate dependent on performance of building during due diligence. 

You have to make him feel like you're a serous investor, living in his complex may not convey that but only time, relationships and persistence will get you what you want. 

[Bill Gulley]

No property should be evaluated only on the income. His taxes and depreciation are irrelevant to the value, that's his problem or delight. 

Is he motivated to sell or is he just fishing? Most are fishing.

I'd begin talking with the PM, don't forget the social aspect as you may become the new owner, offer support, anything you would like to see, like better conditions, higher rents and more money in your pocket. Build an ally. 

Someone else may have to tell the owner that his property isn't based on future income forever and that the condition effects value. The economic life is running out.

Then crunch the numbers and justify them, if he is motivated and accepts reality, make you offer or make the offer anyway.....but he may be fishing. 

You might also point out that seller financing might be better for him, if he has owned the place for decades he'll have a gain that he can defer taxes on. Investors like income! Seller financing does not add to the value of a property! It's better for him and he can go down on the price instead of up! Agree to finance for a term certain, guarantee interest income that makes up on the price.

Good luck :) 

[Brent Coombs]

@Philip Bashaw, you are in the perfect spot to come up with your OWN formula. I am prepared to believe you when you said you are "a savvy real estate investor now", because your post shows plenty of thoughtfulness.

I look forward to you sharing your commercial MAO formula (for your area) in future. Hopefully others will share theirs here for you too, as you asked.

Initially, I would only suggest carrying out the first line of what @Justin Fernandez recommended: "Just start by talking to him. Let him know you're interested", but maybe don't get into the specifics of a ball-park number until you have worked on ALL the facts you need, behind the scenes. Be patient, ie. don't come across TOO keen/impatient.

All the meantime, get going with your other strategies too. Cheers...

[Rich N.]

yes, try to find out why the owner is like that. If its truly to hold as a loss, then they will never sell. If they are old or out of state and thinks the management company is doing good, perhaps they will sell.  Look up the owner to try and discover their situation.

[Account Closed]

I agree with @Rich N..  I would try to find out as much about the owner and his situation as possible.  It sounds like he's milking this property for all it's worth or maybe there are health problems where the owner needs the money and just can't afford to put it back into the property.  

The property has plenty of upside potential given it's low rents, poor management, and current condition.  I'm not sure why an owner would let a property decline to realize lower property taxes.    If this property's truly in a good area/school district, maximizing the property's income would outpace any real estate tax increase.  

The property is depreciating in value because it's not being kept up.  Depreciation is an accounting paper loss that you will be able to take advantage of when you purchase the property. Depreciation doesn't affect the value as someone noted earlier. 

At the end of the day, you can't afford to buy the building for anymore than the capitalized NOI. Don't let the owner or property manager talk you into buying based on proforma NOI.

Good luck!  I'm interested to see how this turns out.

[Philip Bashaw]

Thanks for the comments guys! 

@Justin Fernandez I do like your idea of talking to the owner as @Brent Coombs  has also suggested. The is pretty insulated by the PM and I actually don't have a good relationship with the management company. I complain too much about the condition of the property and wanting basic repairs done. The maintenance manager is a complete *** and and the management company as a whole seems to not care about the condition of the property or the residents that live here. Building an ally as @Bill Gulley says is not an option. 

I purposely withheld rent to get their attention after many unanswered emails and phone calls about basic stuff and a raging roach infestation! It worked, but not the way I wanted it to. I got a phone call saying  "hey, where's the rent?" Anyway, to make a long story short and after a couple run ins with the maintenance manager and new property manager they stopped accepting my and tried to evict me! (the property manager that was in my corner quit during this whole process) What a nice bunch of people, right? I went to court for the dispossessory hearing and lost. I appealed, paid all the back rent they weren't accepting to the court and got a lawyer. My lawyer negotiated a move out date for me and my kids of 11/15 and full return of my security deposit. I don't think they've ever been challenged like this and it really pissed them off. 

I need to go stealth now. I'm thinking about asking my real estate attorney (closing attorney) to make the inquiry for me and make the offer as well if there is interest.  

[Bill Gulley]

Well, the facts always show up in following posts, LOL. 

That's a good idea, have your attorney represent you as an undisclosed party! Good luck :)

[Philip Bashaw]

Yes @Bill Gulley...the devil is in the details on this deal, if there is going to be a deal at all. I like that "undisclosed party" terminology. I've run all the numbers using the BP calculators and know that the rents will allow me to make hard money loan payments while I renovate 2 units at a time. I would get it all fixed up and occupied then refi with a commercial FHA loan

Thanks @Rich N. and @Account Closed for you input as well! I really don't understand why the owner is letting it decline. I don't think it's health, I think they defer to the property management company too much which I've found them to be very accomplished liars. I have never seen the owner and I've been here 4 years. I have a number in mind and I'm reasonably certain I can secure the financing via private money and some of my own after a couple flips I'm about to start. 

[Tony Velez]

@Philip Bashaw great topic and question. 

[Philip Bashaw]

Thanks @Tony Velez

I'm looking forward to seeing how this all turns out

[Alden Atienza]

Hello, this is a very interesting thread and i can't believe what you said that you've never seen the owner even if you've been there for 4 years haha 

Mine is a bit different. tryin to sell my property via rent-to-own scheme.. do you think this will be a good investment? 

Thanks

[John Arendsen]

Phew! There's some very interesting investment philosophies being tossed about here. Interesting.

[Nicole Dunbar]

Interesting indeed!  I am a newer investor in the same market, and I am also interested in smaller apartment buildings and multi family properties.  I will be watching how things develop for you.  Good luck! 

[Philip Bashaw]

Its funny as I'm writing this I saw 3 maintenance people working on the property earlier today. Damn. Looks like the value is going up now... hahaha!

[Ramsey Kheshen]

@Philip Bashaw

Reading all the colleagues comments, all of them make sense in their own way. I would not approach the owner and ask him if he wants to sell right away. I would have a casual conversation about real estate, and let him know that I am an investor, and to give him the benefit of the doubt that he is an expert in real estate, I will ask his opinion ( how much would an apartment building in a condition like this cost to buy, and wait for an answer, then take it from there. He might give you the impression that he would sell. Please share with us your approach .

Ramsey Kheshen