How to make initial contact/offer to off market MF owner?

Question

I have been looking around town for some "not on the market" apartment complexes and have found a few. These are owners that didn't even know they would like to sell. I have convinced them to maybe think about it and call me back. How do I figure the amount I should offer? What do I really need to see from their rent rolls and P & L (or something else)? For example, I found a 24 unit apt complex that charges $700 for 12 units and $550 for the other 12. The complex is a C, at best a B-, but has room for improvements and rent increases, but I did not tell them that. Any help is greatly appreciated.

Reno (1st time MF buyer)

Reno Puente · Answer

Thanks for the reply M & M ( Max & Matt). I recently purchased the BP calculators along with the Syndicated Deal Analyzer and have been running numbers. You guys just reassured me that I have been doing it correctly, except I have only been getting the past 12 months. Also, 4 of the owners have their numbers "written down in handwriting" their rents and expenses ( I know, red flag) but some of them still look good.

I did start out making an offer, but now I am asking them to give me a number that they have. Still negotiating on a couple others. Now I just need to find the capital to put down with my hard money lenders.

For the most part, when I drive around town, I see some apartment complexes advertising FOR RENT and call them. I simply ask if they are the owner or property manager. Then just ask if they have ever thought about selling. Some say no, but some say yes. I even had one owner offer me some other apartments that they owned, but her sales price was too high for me. I asked you if I could keep in touch over the next few months in case anything changes.

thanks again for the replies,

Dilly - Dilly

Reno

Maxwell Manatt · Answer

Hello Reno,

First of all, great job in getting some off market opportunities!

I would love to hear exactly how you found these owners.

I agree with Matt, much better to get sellers price expectations before you offer. Who knows, it could be even lower than what you are willing to pay!

At minimum you need the trailing 2-3 years of operating statements and a current rent roll to come up with an initial offering price. From there you can pick through the numbers and do your own calculations. For instance if the owner is reporting $200,000 of annual and income only $50,000 of annual expenses that is suspicious. Often times with smaller complexes the owners do not keep good records or maybe do much of the work themselves. A general rule of thumb for yearly expenses is 50% of the yearly income. But you need to make a line by line budget in the first week or two of your due diligence period at the latest. A rule of thumb is not good enough to close with.

Once you have a good figure for the NOI you can apply the market cap rate or cap rate you want to buy on. This will bring you to a back of the napkin price. For instance:

Property A

Yearly income: $200,000

Yearly expenses:$95,000

Net Operating income: $105,000

$105,000 (NOI)/.08 (cap rate, I just picked 8 out of the sky, this should be market or your return goal dependent)= $1,312,500

That would be your value. From there maybe you could try offering $100,000 or $200,000 lower than that to leave some room for negotiation. But really depends on the specific situation, your relationship with the seller, Sellers motivation ect...

Also keep in mind this does not factor in what the potential capital expenditure or rehab cost will be. It is prudent to assume at least $5-10,000 per door in rehab costs and factor that into your offer, especially if the property under consideration is older or known to be in poor condition.

Another big variable is how the purchase will be financed. Someone self funding with their own cash will purchase differently than someone purchasing with Hard money charging 6% up front and 13% annually.

Michael Blanks syndicated deal analyzer and accompanying videos are a great resource to value apartment complexes and it is what I personally use for my initial evaluations.

Cheers

Matt Popilek · Answer

Bigger Pockets provides a pretty nice proforma application you can use to figure your offer based on your return requirements. You can do simple math to get the ball rolling - (rent) x (# of units) x 12 = (Annual Gross  Rent) Divide by 2 = your VERY rough NOI then you divide that number by the cap rate you would like to see...say 10% or .10 that would give you the purchase price.  I think I would be trying to get the Seller to tell me their price before offering a price...usually they start higher than they are willing to go..that gives you the advantage in negotiating the deal. Also it prevents you from upsetting the Seller when your numbers are significantly lower than their numbers you can soften the blow by outlining why your offer is so low.  If this is a C property I might be trying for closer to a 12% cap rate, but that will highly depend on the market you are in, and the expectations of Sellers in that market.

How to make initial contact/offer to off market MF owner?

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