Making offers on under-rented units

[Ryan Moore]

I have a few questions on determining an offer amount for a small MF (2-4) property and trying to stay competitive in the market at the same time.

1)  Should I be making an offer based of the local market's cap rate?

2) If yes, then do I use the seller-provided P&I to negotiate a final contract price based off the that P&I to meet the market cap rate?  Or do I make an offer based off my own projections (i.e. % towards repairs, property management, etc.) and current market cap rate?

3) If a property's current rents are undervalued, then I should create my offer based on the current rents, and not the rents that I can raise it up to, correct?  Or am I competing out there with investors who are offering based on the rents they can achieve?

[Hadar Orkibi]

Good questions @Ryan Moore 

First, 2-4 units are Not appraised by income, mostly they are appraised with the comparable sales / per door approach. 

So you need to know the per door price in that area and do your CMA.

You want to get it bellow market, so you can allow for some improvements and manufacture equity.

In regard to the income approach:

1. it depends on if there is enough upside at the local cap rate. 

If the cap rate is 7% it doesn't mean that if you buy it at that its a good deal, because effectively you are paying retail.

But, Leading to question 2. if the units are under rented you can offer the market cap rate based on the sellers ACTUAL numbers. 

The sellers NOI will be lower (because of the lower rents) which will reflect a lower price.

NOI/ CAP RATE = VALUE.

review the sellers P&L and use some of the data in to your calculations, but you need to allow for your assumptions like property management and other things the seller may left out or not allowing for. ie. Yard care, pest control, marketing etc. 

3. To get the best deal you want to buy on actual / current rents, then the upside is yours.  you don't want to pay as if the higher rents were in place because this is your value add.  you may need to spend some money to improve the property so you can get the higher rents.!

In a hot competitive market many people pay to much, sometime if there is enough upside you can pay a bit more then the actual market cap, but you must know that once the property is re positioned you will reach your target criteria. 

COC, Cash flow per door, DCR etc.