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Updated over 7 years ago on . Most recent reply

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62
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Mike Montana
  • Investor
  • Indianapolis, IN
37
Votes |
62
Posts

Advice needed on how to account for differed Cap-Ex in offer

Mike Montana
  • Investor
  • Indianapolis, IN
Posted

So I have been analyzing an opportunity to purchase a property with 33 units. After doing the Preliminary evaluation of expenses and revenue we come to the conclusion of what we believe the property is worth on paper. In our calculations, we have good margins for maintenance expenses as well as building reserves for Cap-Ex, which are based on the seller's numbers and our experience with some smaller multi-family properties we currently own.  In looking at the current rent roll it does appear there's opportunity in bringing rents to current market value. We believe we can accomplish that through some upgrades to the property and have been successful in the past through good management of properties.  there also may be some opportunity to reduce utility expenses. 

The owner claims to have done some recent capital expenditures over the past year but with a quick drive-by of the property, not even going into Official due diligence, it is evident that the 5 building property will need some immediate attention to the exterior. Paint, blacktop, roofs, and landscape to name a few. My question would be, if the numbers support a $1M purchase price and there is conservative $100K worth of deferred capital expenditures, do you write your letter of intent for $900K? Thanks in advance for your input.

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Brian Adams
  • Syndicator of Large Apartment Buildings
  • Glen Mills, PA
1,631
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1,008
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Brian Adams
  • Syndicator of Large Apartment Buildings
  • Glen Mills, PA
Replied

@Mike Montana it depends.

Depending on your market, some assets will trade as is and it is normal and expected that a Buyer will build in dollars in their own capital stack for deferred maintenance. 

Besides significant items, as an example structural, you would reduce your purchase price. 

The other option is after your inspection and deferred items are known, you can go back to the Seller and ask for a repair credit. This approach is fine and I have done it. 

If you do this often though you can get a reputation as a "re-trader". Some brokers don't want to work with re-traders as they are always negotiating, re-negotiating and re-negotiating the contract and over time it can be a frustrating experience.

Brokers and Sellers like deals that go smoothly and easy. 

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