How to you look at a deal with no sale price?

Question

Hello,

As I gearing up to move into the Apartment Space I look at a lot of deals.  Recently I was given a deal with no sales price.  I was given T12's/ Rent Rolls, Tax bills etc.  Where do I begin to look at this.  Operating income is 498,000 and Expenses are 275,000.  (rounded of course)

Jeff Greenberg · Answer

@Jason Collins It is difficult to find out if you are in the ballpark without the whisper price.

@Dan Bryskin gets you started, but you also need to find out what the market cap rate is for that type of product in that condition.  The broker should be able to get you the Cap for product type, but comparing condition is a little harder.  Once you have the market cap you divide the NOI by the Cap to get the purchase price. You can then drop it by 10-20% to make your first offer.  If you have the whisper price you can see if you are close.  Don't forget to take into consideration deferred maint and immediate cap ex needed.

500k - 275k=225k/.10=2,250,000 10 cap

500k - 275k=225k/.08=2,812,500 8 cap

500k - 275k=225k/.06=3,750,000 6 cap

Andrew Cushman · Answer

@Jason Collins, great job going out and looking at deals as that is one of the most effective ways to learn.  Nothing helps you spot a great deal faster than looking at 100 bad ones first!

@Joel Owens, in my opinion, hit the nail on the head.  Offering properties unpriced or TBD is all the rage these days.  Georgia is one of our focus areas, and more properties than not are offered that way.  Simply contact the broker and ask them one of these questions:

1. "What is the whisper on this?"

2. "Where do you expect this to trade?"

3.  "What is the seller's target price for this property?"

I generally stick to #1 and #2, and am always able to get a number.

Why is this important? My - and your - time as an investor is very valuable, so I would never waste it trying to hit an invisible target.  Knowing asking/target price before you start doing any analysis will help you screen out deals much more quickly, especially as you gain experience and start developing a more intuitive feel for what works and what doesn't based on your investing objectives.  Also, if you like the deal enough to carry out an analysis and determine a price that works for you, knowing the asking/target price helps you frame your conversation with the broker depending on how far off you are.

Finally, one other small thing - asking one of those questions makes you sound more sophisticated and less like a newbie :-)

Good Luck!

Andrew

P.S. One possible exception to the above is if you are dealing directly with a private seller, as that can be a very different dynamic.  But even in that situation I've found if they completely refuse to give you any idea of what they are looking for they are very likely a waste of time.

Joel Owens · Answer

I usually ask the listing broker when I see an OM for retail properties that says (market) or ( to be determined ) etc. what the think it will trade at?

They generally give a range and off of that ( they know their seller) if it is in the range of my client we might throw our hat in the ring with an LOI.

If they want top market or want to do multiple rounds of bidding and all of that crap we move on right away. The seller will try to extract every basis point out of the property and then under due diligence even if you are the winning final bidder the seller will not want to take anything off for valid issues discovered. I am not talking about general re-trading from the buyer but minor adjustments as you work to close with items found.

So sellers looking for newbies, suckers, and buyers to railroad through the whole process you might as well not even start with them.

A successful transaction generally takes a realistic buyer, a seller you can work with, great brokers on both sides, a lender that closes and does not re-trade the rate, and good attorneys. There are other parts but if one is under performing it can really slow down the process.

Michael Le · Answer

If you've been looking at a lot of deals then this shouldn't phase you. Just do your normal underwriting as you have been, putting in the numbers that work for you, and that will result in a sales price. It might not be the sales price they're looking for but you can only offer what makes sense to you.

Also, even if the price is not listed, just ask the listing broker what the whisper price is and you'll see what number they're hoping for.

Jeff Greenberg · Answer

@Jason Collins when you a figuring your cash on cash, don't forget closing costs, immediate capex costs, cap ex reserves, inspection, debt service, and other expenses. That will give you a true cash on cash return.

Dan Bryskin · Answer

@Jason Collins

500k - 275k=225k*10=2,250,000 So, at 10% cap, this property is worth about 2,250,000. I'd say anything under 2 mil is a good deal. Good luck

Account Closed · Answer

You can roughly determine retail price by multiplying gross rent by a particular number of months. You determine this number by taking the sales price and diving by the monthly rent. This is called the income approach to appraisal.

Jeff Greenberg · Answer

@Lane Kawaoka I would disagree that 99% of the deals are junk.  I would say at the asking price, 99% of the deals are not deals.  The problem is, there are many people that have lower requirements then most of us on these forums.  I call it stupid money and it is difficult to compete with that.

How to you look at a deal with no sale price?

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