Would you buy poorly managed 8 unit for this ROI after changes?

[Nathan Coldsmith]

Hello all,

Over the past several weeks i have been analyzing an off market FSBO 8 unit apartment building and would love to know your thoughts on this deal.

Current owner purchased in 2002 for $210,000

Was listed in 2007 for $429,900 (listing expired, not sold)

-The owner is currently asking $349,000-

The property consists of:

6 one bedroom apartments

2 two bedroom apartments

Coin operated laundry

Storage shed

Tenants are on a month to month lease and average rent is $665/month (my calculations are based at $675/mo due to coin opp income, storage shed income when rented out, and converting a tenant paying weekly to a $675/mo lease)

All 8 units are heated by electric baseboard heat and separately metered. I believe that the natural gas for the hot water heaters and gas ranges are separately metered also.

Here is the interesting part: The owner chooses to pay all utilities costing him upwards of $17k annually.

There is ROI opportunity by simply keeping the rents the same and mandating that the tenants now pay their electric utility bill (est. $100/mo each unit x 8 units= $800/mo savings in expense $9,600 annually). With that change, we would now be $90/mo positive cash flow per door!!! However, With substantial management changes as noted above, to force appreciation and ROI, we could expect vacancy turnover and potential loss in eviction initially.

From our little bit of experience we found we can hold market rent + electric at our other properties we own.

Based on the small amount of expirence I have, I am inclined to make an offer to the seller as such:

Contingent on:

1)All deferred maintenance completed or a $10,000 sellers credit directly for repairs and maintenance

2)All units move in ready condition per buyer standards

If sold at current (100%) occupancy we offer $285,000

If sold at 50% tenant vancancy we offer $300,000

If sold at 100% tenant vacancy we offer $315,000

OR 100% sellers financing with a purchase price of $330,000

You can see it is counter intuitive to pay more for a non performing asset, however we save eviction costs/ time while being in a strong position to advertise and fill the deal with properly screened tenants locked into our lease, paying at our desired terms.

**ideally we would like to negotiate a seller financing deal, conserving capital. However, if the seller wants paid in full it would reflect a lesser purchase price amount. What potential do you feel for refinancing and pulling some of our capital back out of the deal after 6 months.? What are your thought on this deal?