First Multi-Family deal or no deal

[Brian Cain]

Hey BP family. I have a deal in which a contract is close to being signed, all-cash deal. The return looks great but for some reason, red flag are coming up. Heres the run down. This apartment building I'm interested in is in a rural part of Nevada, the population of about 5000. Ill put the breakdown of the deal below. Keep in mind this will be my first deal. In my contract i put  "Agreement is contingent upon the Property appraising at no less than the specified purchase price". Seller wants this removed. Mind you the last time is was appraised was back in 2006 which that is what the offer price is being based on. He wants me to put in the contract that I agree to buy as-is. Not sure if that's a normal request. Also just found out one of the units needs complete electrical rewiring. To me, he seems like he wants to close fairly fast without proper due diligence period. Feels rushed. Like I said I'm new. This may be the norm but I wanted to run it past you guys first. Thanks for the help.

14 unit 

Sales price $565,000 (Cash Offer)

Total monthly rent $6720

Annual Gross $80,640

Expenses $27,000

@ 5% vacancy NOI will be $49,608

[Bea Leichliter]

It is very common,  at least in CO for all cash offers to complete due diligence in 2 weeks.  One of the major benefits for a seller with an all cash offer is less contingencies.  Because there is no loan, it is typical, at least here, to waive the appraisal.   Personally, I would not call this a red flag.

The red flags that I see, is the location.   Being a small town, I would definitely be concerned about the town dyeing.  What is the major economic driver in the town now?

I am going to assume that you are offering cash then plan to do a cash out loan.   If I am correct,  have you done research on a commercial loan and have a good idea of the interest rate/amortization schedule and know how it will play with your numbers?

I would also ensure to walk thru every unit.  It's not unusual to be shown a couple of the best units to be blow away later by the rest of the units.  

It seems odd to me that only 1 unit needs re-wiring.  why is that?  I would expect if one needs it then most or the entire building needs it.

Get on regional and see what permits have been pulled for the property.   When was the roof redone, water heaters, furnaces replaced.  You should also be able to see any electrical work that has been done.

Finally, request at least 2 years of rent histories and copies of the leases. Sometimes a seller will get rents up to raise the CAP rate to sell. That's not a problem, but sometimes it's not sustainable for that area/building without massive turnovers. As you know turnovers are very expensive. It sounds like you have researched that areas rents, but neighborhood to neighborhood sustainability changes.

If you are very clear about the work needed and the local economy,  I would say the number are fantastic! I hope it works out.  If all is good, I'm jelly.  😉