Am I️ going crazy or what?

Question

Joseph Gozlan · Answer

@Taylor Witt you are not going crazy you are just off-cycle.

This approach is solid and true in a buyer's market but not very realistic in a seller's market.

I'm not saying you should use the broker's proforma numbers (some of them are flat out delusional) but here is what I do:

For expenses: I use MY numbers. It doesn't matter what the seller is paying for payroll/phones/transportation/pest control/etc... I know how much WE would pay for those. Only thing I take from the seller is the actual utility bills.

For income: I use the income WE think we can get the property to, regardless of what the current owner is getting. So essentially, our own proforma.

For capex: we put eyes on the property, assess condition and add budget to interiors in order to get it to where we will get the rents we forecasted in our proforma above.

To calculate the offer we are missing one more number and that is our profit: what do we want to get paid for the time and effort it will take us yo get the property from the current condition to the proforma we projected.

So, here is the formula: LOI offer = [proforma value] - [capex] - [profit for our efforts]

Example:

Property X can be valued at $2MM post rehab and stabilization REALISTICALLY (based on your own calculations).

From current condition to there it will require 18 months and $500K in rehab costs.

Let's say I'm willing to do this hard work for $200K

LOI offer will be $2MM - $500K - $200K = $1.3MM

The wiggle room is in how much do you value your time. You can requir more or less based on your personal considerations and/or your investors requirements.

Most first time buyers these days do NOT value their time and will offer more than $1.5MM just to "get the deal". That's the unfortunate part about buying at the top of the cycle.

Stick to your numbers and value your time and efforts and you will be at a better position than most when the market turns.

Jeff Kehl · Answer

@Taylor Witt you're probably being perfectly rational. There's just a lot of demand right now for larger multi-family properties because there is  good story there, a lot of people are syndicating it and you can get incredible financing on it.

You have a few options, 1) be patient 2) Give in and join them and pay up or 3) Find other asset classes to invest in.

I am not patient and am too scared to pay the prices they are trading for these days so I have gone to number 3 for my personal active investments. I'm buying office, retail and special situations.

But, let me also say, I have invested passively  in several multi-family syndications recently and even at these nose-bleed levels they still look much better than anything else I could invest in.

Joseph Gozlan · Answer

@Taylor Witt my experience is that every property is different. I've seen a 2007 build property that runs on 35% expenses ration and a 70's product that runs closer to 50%

In an ABP property you would run closer to 65% expenses.

Simplest way to look at it is that industry averages are just that, averages.

A 3 stories high 100 units property that sits on a 2 acre land will have a significantly less landscaping (contracting services) costs than a 2 stories  garden style 100 units property that sits on 15 acres of land with lots and lots of landscape.

They will average each other out but will be very different when you drill down to the details.

My advice, is use the big thumb rules for initial quick glance but when you are ready to put in an offer, dive deep to the actual property numbers and do not use the industry averages if you don't really have to.

Brent Coombs · Answer

@Taylor Witt, why should Sellers give away their properties at bargain prices?

(ie. At your "strike price"/ROI, they'll likely say: "might as well keep it myself"!)

While Banks continue lending money hand-over-fist, you'll continue having this problem!

Or, you need to find your own, off-market deals!

Unless you or the economy changes, you'll likely look at another 500 deals before success comes your way. Why? Largely because: your timing sucks!

Finding deals in a "hot" market (without working harder at it)? Good luck with that!

Jeff Brower · Answer

Stay the course. Some of the best deals are the ones you don't do. You have done 500 good deals! ;)

Taylor Witt · Answer

@Brent Coombs I agree with you, why would they sell if they are raking in the money.  That's why I was wondering where I could be going wrong, so that I can make the appropriate changes.

@Thomas S. Just to clarify, I haven't made 500 offers - I've analyzed 500...nevertheless not very good!

@Joseph Gozlan Thank you for laying it out clearly for me, that's a very interesting way to look at it.  Would you mind sharing the numbers/percentages that you use when calculating your ProForma value?  What is your expense ratio typically look like?  From my experience, I can run a complex for around 40% expense to income ratio, and I just want to make sure I'm in the same ballpark as some more experienced investors.

Thomas S. · Answer

Difficult to believe that out of 500 offers you have not been able to close a deal.

Gregory Flores, Jr. · Answer

I think its a solid approach @Taylor Witt. As someone who likes to be conservative with projections in all other things I do, I totally understand the conservatism here. If those are the requirements you have for ensuring that a deal will cash flow, and possibly cash flow better than your conservative projections, then stay true to them.

It may be a result of an aggressive cap rate being used when coming up with your bid. Still, nothing wrong with being conservative. That, and being competitive, are different stories though. It may just be a matter of finding the right motivated seller.

Am I️ going crazy or what?

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