First Building - Looking for Advice

[David Calme]

After looking for a building local to my area with a decent potential cash flow, I have found a 19 unit building in a rather remote northern suburb of Detroit (Northern Macomb County for those of you that know the area).  Upon working with a buyer broker who is a friend of your family, we have a verbal agreement to draw up PSA based on a set price point.

There are some questions that I have regarding the process, thus far, and what to demand in the PSA regarding the due diligence period.

In this market, is it standard for a seller to refuse to release the true profit and loss documents until after a PSA is signed?  Of course, the due diligence would have plenty of provisions for obtaining and analyzing the P&L (Tax forms, utility bills, service contracts, etc), but I of course would have liked to have seen these numbers before spending the time, effort, and money needed to determine what the seller is holding back.  I have a rent roll but, the expenses are based a combination of pro forma numbers, adjusted to my version of what they should be, and research that I could do ahead of time (County property tax records, insurance quotes from my agent who insures my SFRs, asking service providers for an opinion, etc).  Should I demand seeing the P&L before entering into due diligence?  

I don't want to end up getting a reputation for retrading after the face, but I'm sure that I will find at least a few surprises, when I go through the documents and the physical inspections.

• Numbers
• • Purchase price $875,000
  • Units 19 2 Bedroom
  • C Building, C Neighborhood, Low crime, Rural within driving distance to metropolitan jobs
  • Gross Rents (Rent Roll) - $10,600/month
  • Less 5% Vacancy  - $120,480/year
  • Management @10% = $12,720
  • Legal, Marketing, Administrative (My Estimate) - $1500
  • Landscaping and Snow Plowing (Pro Forma) - $2,631
  • Other Maintenance and Repairs (Estimate based on 10% total M&R) -  $11,481
  • Utilities (Common areas only Pro forma) - $1,069
  • Total Operating Expenses - $52,013
  • Expense Ratio 41% of gross scheduled
  • NOI - $68,827
  • Operating Cap at Purchase Price - 7.87%
  • CapEx Reserves (Not included in NOI) - $300/unit per year

Does anything seem out of place, based on these numbers?  The expense ratio may seem low, but it is a newer building and currently 100% occupied (rents are being held low to keep occupancy up, relative to surrounding propeties).

Any input would be greatly appreciated.

[Michael Ohara]

Utilities seem low.  Who pays water, sewer, gas?  Can you negotiate lower management fee since it's all under one roof? Maybe 7-8%.