How to find utility cost before making an offer?

Question

We're considering making an unsolicited offer to purchase an apartment building.  We know what the rents are, what the vacancy is, what the competitive rents are, have estimated per-unit and site rehab costs, after-purchase taxes, etc.  However, this particular complex includes heat and water in the rent, which means utilities are a significant portion of the operating costs.  If we are successful in acquiring the apartments we'll switch to RUBS because the market supports it and competitors use RUBS, but to make our offer we need to know utilities.  Is there any way to determine utility costs beforehand; e.g., calling the gas company, etc?  Gas is serviced by DTE or Consumers Energy (southeast Michigan utilities).

Joseph Gozlan · Answer

@Ken P. call a few local property management companies in the area and tell them that you are about to make an offer and they will usually be able to tell you what to expect for utility costs.

David D Painter · Answer

Call the utility company. In my area I can get average monthly cost for the past 12 months easily on line.

Joseph Gozlan · Answer

@Ken P. experience beats statistics everyday. A good experienced PM will be able to be close enough on the numbers for you to put an offer.

All the utility company can tell you is what happened in the past.

They won't be able to tell you how it looks like on extra hot/cold years, they won't be able to tell you the neighborhood is changing and they won't tell you that prices will be cheaper with a competitor if you sign a long term lease.

One more they won't tell you that a good experienced PM will: "don't buy this property because of X/Y/Z" or "this property is worth $$$", or "there is a gang that moved into this property last month and the police are nervous about the complex impact on the neighborhood". A goood local PM will know these things.

The 19 y.o. kid that picks up the phone when you call the utilities company won't. All she can give you is dry statistics.

Personally, I never put an LOI without talking with my PM first.

Anthony Dooley · Answer

It's great to get as much information up front as you can, but why not make an offer?  Part of your due diligence is gathering the trailing 12 profit and loss, rent rolls, property disclosures, etc. If you find that the operating costs are excessive, then you would not purchase the property, or it would give you reason to re-negotiate your offer.  Putting it under contract gives you access to this information as well as the sellers tax history on the property so that you can get actual numbers to base your purchase price on.

Ken P. · Answer

Thanks for all the good input.  It sounds like calling the utility companies is the best way to try to get the info on utility usage, so I'll call Monday and then report back on the responses.

@Joseph Gozlan, just curious on how a property management company could help estimate costs for this is a 100+ unit apartment complex with heat included.  Wouldn't the utility cost vary greatly from complex to complex depending on the heat source, vintage, building condition, etc?  That is, I'd expect very different heat costs between a 100 year old mid-rise building in Detroit with a central boiler vs a 1970s garden-style complex in suburbia with hot-water baseboard heating.  Even for two complexes with similar style heating systems, I would imagine costs would vary greatly depending on the age/technology of the heating plant. I will ask several PM company owners I know in the case where the utilities don't provide the data, if you still think this approach has value.

@Aaron Howell as I mentioned in the original query, this property is not on the market, so there is no seller's information package available to review.  We will be approaching the current owners with an unsolicited offer, because we think under the right terms we can achieve good returns for our investors and ourselves by improving operations.

Doug Johnson · Answer

Great idea.  The PM can also verify your rental assumptions.

Aaron Howell · Answer

The Seller's agent may have info on expenses (Schedule E, utility bills, etc) that they may provide in a marketing package

Michael Noto · Answer

@Ken P. Here in CT we can get past utility info from calling the local electric and gas company. Comes in handy for due diligence purposes like in your case or when a perspective tenant asks "how much do the utilities usually run".

How to find utility cost before making an offer?

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