Strategy when making an offer on WAY overpriced building

[Charles H.]

Hello all,

so I found a 10 units building, that is apparently with 50% vacancy. Not much info except that it is listed with the potential GRI of $70500. it's listed for $450,000 (lol). Not renovated in a while. Roof seems not that old. Laundry hookup. 1bed/1bath. Florida. Not a big city but some job around.

Based on this info, I applied $70,500x0.5=$35250 of actual rent (if rent is being paid...!). Apply a .5 ratio for expense (rough analysis to get NOI)=NOI $17625.

Seems to be a C-ish place in florida. Would apply a 10% cap. so 176250$ which is 40% of the asking price.

My questions are :

- Am I doing a right analysis ?

- Due to the hot market in multifamily, everything is listed too high. How to approach and make an offer without looking like a douche (basically telling in a nice way "your building is not worth that much") ?

Thanks all for the help.

Charles

[Brian Burke]

@Charles H. how long has the property been on the market?  Has it been in escrow and fallen out?  If it’s been on a long time or has fallen out of escrow before the seller might already realize that it’s overpriced. In fact, their broker might be telling them that already and could even advocate for your offer.  Just make the offer. 

On the other hand, if it just came on the market it’s highly unlikely a low ball offer will get much traction.  And if the broker believes in the price you probably won’t get any help in convincing the seller to engage. 

That said, forgive me for pointing out a few flies in the ointment. You say that because of the hot market everything is listed too high. If that were true, nothing would be trading—the listings would sit. I suspect that things are trading which means that other buyers are just willing to pay more than you, which is different than being listed too high. No less frustrating, to be sure. 

But why is it that other buyers are so willing?  Is it that they are crazy?  Just parking cash?  Just don’t know what they are doing?  Those are the reasons we oftentimes hear, and hear frequently from folks unwilling to look in the mirror and set expectations for their real estate investments that are closer to market. 

By your description you have almost $600 rents for $45K/door which doesn't seem egregiously high for C class property in FL. The property is 50% vacant but that doesn't mean that you get half of the units for free (which is the result when you cut the GPR or NOI in half).

Next, you are applying a 50% expense ratio.  This may or may not be accurate (probably not) so what you need to do here is get the property’s actual historical expenses.  Make adjustments because of the vacancy (when full you’ll use more water, etc).  If the actual expenses are less than 50% you are cutting yourself short on the price. 

And then there’s cap rate. You want a 10% cap rate. That’s nice, but it’s not market. C class property in suburban FL trades from a 5.75% to 7.5% cap depending on market.  In a tertiary market maybe you can inflate a percent or so above the applicable cap rate for the nearest MSA.  But 10% on actual just isn’t going to happen unless the property is D class and has all sorts of problems or the seller just doesn’t know what he’s sitting on. 

My guess is that this property might not be as overpriced as you think.  If you don’t buy it, at least watch it and when it sells look up the price and let us all know how close it trades to the ask—this gives us all the chance to talk about how the buyer must be crazy.