Assessing Market Value with high vacancy rate

[Greg Scully]

This is from the MLS

2 ranch style 5 plex buildings on separate lots. Excellent potential. Newer metal roofs in past 10 years, 9 year old boilers and water heaters. 7 units remain vacant, 3 units rented on month to month leases.

The asking price is 450k, comparable rents are around $900.  City appraisal is 360k.  This place needs some rehab to make it marketable.  At 70% vacant this isn't worth much more than the land value.  

Generally speaking, how do you approach making an offer when the marketing package essentially says it has little income and it needs significant work?  

[Joel Owens]

First see if the land has a higher and better use. More density for the same asset class or a different asset class all together.

If not then look at the building for what it is.

3 units month to month might as well count zero income. Likely when you rehab and raise rents they will be gone anyways.

Make sure the 5 plex buildings are in a good area. If you rehab in a rough area the tenants can just trash again as you tend to draw in the trashy tenants who rent the dumps nearby and now want to pay close to the same rent for the nice units. They run down your newly rehabbed units and stop paying rent after a few months.

Need to know cap rates for the area. Fully stabilized say market is a 7 cap.

Rents 900 X 10 units = 9,000 a month X 12 months = 108,000

108,000 / 2 ( 50% costs for vacancy, management, expenses,etc.) = 54,000 net operating income

A 7 cap value would be about 770,000

If you paid 450,000 and each unit needed a full gut job of say 10,000 a door that is 100,000.

Now 550,000 in.

770,000 times about 10% percent  for 6% commissions resale costs and buyer closing costs the seller pays is 77,000.

770,000 - 77,000 = 693,000

693,000 - 550,000 = 143,000 pre-tax profit unless you 1031 exchange

That is a crap load of work to make only 143,000 upside.

This is all hypothetical but how you might look at it. It's not just the yield but how long and hard you have to work to create the yield.