Valuation on a 52 Unit Apartment Complex (Please Help!)

[Johnny Hastings]

Sorry for how long this is going to be. I'd like to get as much pertinent data in as possible. 

I'm looking at a deal, and I need to determine a valuation for the formal offer. 

The deal is a 52 unit apartment complex, spread out over 5 buildings. 

Condition of Buildings:

The buildings are mostly from the 1980s, and some have not been well maintained. I'll do a break down by unit count here:

8 units are in reasonably good condition. Only minor / cosmetic stuff required; I'd estimate around 2K per unit to get them to a standard I'd be happy with. Also, there's common areas in the building that would need to have the once over; carpet, paint, and so on. Probably $5K worth of work, total. That's $15K roughly to turn them around as I'd like to.

There's 8 more units that are in a similar state, but slightly more distressed. For the sake of simplicity, let's say $20K for the turn around. 

The remaining 36 units are in bad shape. I haven't been in any individual units in the buildings yet. I can say that from the outside there's a nightmare going on. There's several decks that appear to be falling off the building. There's a section on one (perhaps 20' x 30') where the siding has blown off, and needs to be put back up. The common areas need a complete overhaul: flooring, paint, and so on. All the apartment doors need replacement. The common areas feel scary, as they've painted the doors all black, done the floors in black tile, and there isn't good lighting. You get the idea here, but I cannot even estimate the cost of getting all this turned around as I'd like to.

One thing about them all is that the roofs are in good shape; they're newer, so won't need replacing. 

Of the 52 units, the rent rolls show 14 as vacant, and most of those not ready to be rented due to the condition of them. All the unrentable ones are in the 36 unit bunch of problem buildings. 

Valuation Commentary

So, how to value all this? Last time I made a large purchase it was done by simply calling it $35K per unit; the building was in great shape (built in 2002), but had tenant/management issues.

I could come up with something similar here, perhaps break it down by which building it's in. I'd also have to reduce that for any unit that isn't rentable. So for instance, say $27,500 per unit for the buildings in decent shape, $20K for each unit in a bad building, subtracting something to account for the ones that aren't rentable. My per unit numbers there are probably low, but it's just an example.

I could also do it based on Cap Rate. Given the condition of all the properties I'd use their incomes from their 2016 Schedule E forms, and put it at a 12% to 15% cap rate.

I really am investing here for cash flow, so I could also take a cash flow approach; again based upon their 2016 Schedule E forms. 

What are your thoughts on these approaches?

One other caveat to the valuation. I've worked this out so that it'll be seller financed. That gives them some additional sway in setting the price. They are very motivated to be rid of all these buildings however, so I'm not without leverage. 

I'd very much appreciate some advice here!