Who buys apartment complex at retail price and why?

Question

I've talk to a lot of investors who always say you want to buy real estate properties at a discount and I agree completely. However, I am wondering who buys apartment buildings at retail price. I look at websites like loopnet that have thousands of apartments for sale, but there are no discount on those apartments. So if there are people buying these apartment buildings at retail price, what are the benefits if there are any?

Bjorn Ahlblad · Answer

@Jackson Roberts Prices are often described various ways in stores and real estate: retail, wholesale, discounted, rock-bottom, whatever-that's just blah blah. When buying I do my homework on price; and what is far more important than price is value; how is the rent roll, how much cash flow, will it need a roof, siding, etc. How does it perform today and how will that continue throughout the intended ownership period. Welcome to BP Jackson!

Henri Meli · Answer

@Jackson Roberts The criteria  used to determine if an asset is cheap or expensive is subjective. Especially, when you invest in value-add. People generally look at CAP Rates. Is it what you looked at to make the determination?

Let's take an extreme example: Price = NOI/CAP Rate. Does this mean that an empty 100 units apartment should sell for $0 , because there is NO income?

HELL NO.

I look at asset prices in terms of potential. And potential depends on many factors. So, in my case, you start from the exit (pro-forma) and walk your way back to determine what a good entry price (purchase price) would be. This approach is not fail-proof, obviously and the manager needs to have enough experience to know what they are doing and how they are going to execute the business plan.

In the example above, If I'm confident I can spend $10k per unit (rehab), then rent each unit at $1,000 in a reasonable time , then I wouldn't have a problem paying $1,000,000  for the asset. Because I know that if I execute my plan successfully, then I will exit at a very high price.

The purchase price is important, but it is NOT always the only factor.

Good Luck.

Erik Jenkins · Answer

When the numbers make sense.

Russell Brazil · Answer

People who think they are buying at a discount are just lying to themselves. Condition of the property, and condition of the market all go to the price that you pay for a property.   Ive got a property under contract right now at an amazing 18% under list price. Are we buying it at a discount? No, we are buying it for what it is worth at this moment. Can we improve things about the property, the marketing of the property, the conditions of the market to sell it for more relatively easily...absolutely. That doesnt mean we are buying at a discount or below market though.  People make the mistake of thinking what a property could be valued at under different circumstances, and think if they are buying under that price that they are under market, and thats simply people telling themselves a lie to make themselves feel good that they got a good deal.

Chris Tracy · Answer

Probably investors from other countries that are simply looking to preserve their capital and not doing a syndication.

Who buys apartment complex at retail price and why?

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