Offering on a 50% vacant property

Multi-Family and Apartment Investing
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Offering on a 50% vacant property

Khizar Hanif
Houston, TX · Member since 2017 · 40 posts · 19 votes

Any advice as to offering on a 50% vacant multi? Owners purchased back in 2014 and did some repairs to everything but the units themselves. 2016 was stabilized and started to fall off thereafter. Went from $140k NOI (2016) to about $40k NOI (2018). Trailing the same NOI this year (due to property being half vacant). Reason-property management was stealing from them.

40 Units

May be a good opportunity to go in, rehab, and lease up. Market is pretty strong. I definitely want to submit an offer, but not sure where to begin. If I value the property as is today at a 6.5 cap (market rate), using $40k NOI I'm at $615k (15k/unit). It's definitely worth more than that, but I need to come up with a fair offer. I don't think its fair to base solely off of pro-forma numbers, but somewhere in between..after all, it will take me time, effort, and money to get to pro-forma, so I need to factor all of that into my offer.

Sellers are not motivated to sell. They are just considering offers. I did hear they have an offer at $2M (50k/unit), I would just like to know how the buyer came up with that number?

I haven't walked the property yet. I know I should do so with a contractor to determine rehab budget but I would like to express interest at this time, and tour sometime in the next couple of days...since there are offers already. 

What factors should I consider to arrive at a starting offer and what are some creative ways of going about this kind of deal?

 

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Michael Ealy
Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes
6y

I don't believe that the seller is not motivated at all. A half empty building will motivate any owner.

Having said that, here's the answer to your question:

Compare it with what a new build will cost as the high end but deduct the cost of renovation to get you there. Then use the valuation based on current NOI and then take the average of the two. Then estimate your operational budget to turn the building around and then multiply that by two and deduct that from the average.

Here are some numbers just to illustrate it.

Let's say new builds in your market costs $100,000 per unit

As you said, your valuation based on current actual NOI is $615,000 or $15K per unit.

How much renovation/updating will it take to get make this building look like new build? Let's say it's $20K per unit. You deduct that from $100K so you have $80K/unit and average that with $15K/unit. You get $47.5K/unit or $1.9 Million valuation (average of "new build" and value based on actual NOI).

Now, let's say to bring the NOI back to $140K from $40K, it will take you 12 months to operate and assume that you spend $5,000/month (I am guestimating the negative cashflow during the 12 months you're turning the building around..you need to actually calculate it). That's $60K multiply by 2 (because it takes twice as long and twice as much as expected to reposition a building), so that's $120K.

Then deduct that from $1.9 Million value - and your maximum offer should be $1.78 Million. That's closer now to the $2M offer the seller claims to have gotten and a lot more reasonable than the $615K based on actual NOI.

Makes sense?

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  • Charles Carillo
    Rental Property Investor · North Palm Beach, FL · Member since 2018 · 2k+ posts · 1k+ votes
    6y

    @Khizar Hanif

    Traditionally, the value is determined by the NOI. Since there is a lot of fat on the bone due to the mismanagement, the NOI is not the only value determinant...especially in this market. I would figure out the NOI, conservatively, after the property is stabilized. Estimate the rehab budget and time-frame for being stabilized. You can then figure out what you should get for purchasing and completing the value-add and arrive at an offer price. Lastly is financing. How are you going to be able to finance the property? Seller financing?

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  • Michael Ealy
    Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes
    6y

    I don't believe that the seller is not motivated at all. A half empty building will motivate any owner.

    Having said that, here's the answer to your question:

    Compare it with what a new build will cost as the high end but deduct the cost of renovation to get you there. Then use the valuation based on current NOI and then take the average of the two. Then estimate your operational budget to turn the building around and then multiply that by two and deduct that from the average.

    Here are some numbers just to illustrate it.

    Let's say new builds in your market costs $100,000 per unit

    As you said, your valuation based on current actual NOI is $615,000 or $15K per unit.

    How much renovation/updating will it take to get make this building look like new build? Let's say it's $20K per unit. You deduct that from $100K so you have $80K/unit and average that with $15K/unit. You get $47.5K/unit or $1.9 Million valuation (average of "new build" and value based on actual NOI).

    Now, let's say to bring the NOI back to $140K from $40K, it will take you 12 months to operate and assume that you spend $5,000/month (I am guestimating the negative cashflow during the 12 months you're turning the building around..you need to actually calculate it). That's $60K multiply by 2 (because it takes twice as long and twice as much as expected to reposition a building), so that's $120K.

    Then deduct that from $1.9 Million value - and your maximum offer should be $1.78 Million. That's closer now to the $2M offer the seller claims to have gotten and a lot more reasonable than the $615K based on actual NOI.

    Makes sense?

    4Reply
  • Greg Dickerson
    Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes
    6y

    I like to take market value based on comps and work backwards from there. Example If market value is $2.154 million based on NOI of $140k at 6.5 CAP that's $53.8k Per unit so the question is what will it take to get the other units fully occupied at market rents? Are the occupied units already at market rent? What will it take to get them there?

    Let’s assume you need $10k per unit to get vacant units to market value of $53.8k per unit. You want a margin of 20% so that’s $12k plus the $10k renovation costs = $22k per unit x 20 units = $440k to get to stabilization. $2.154 million - $440k Gives you a strike price of $1.7 million. I rounded some numbers for example purposes.

    This is how I value vacant and semi vacant properties. Of course there is a lot more to the equation tho sdn is just a high level quick calculation without know the specifics of the market, property and operational costs etc.

    3Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    6y

    A property at 50%  occupancy would not be valued based on cap rate. (Unless 50% vacancy is common for the market). A cap rate based evaluation is based on the property performing to market norms.  Figuring out what it would likely be worth if the occupancy was at a normal market amount, then discounted backwards from there for non performing would be the best way to come up with an actual valuation model. 

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  • Khizar Hanif
    OP
    Houston, TX · Member since 2017 · 40 posts · 19 votes
    6y

    Thanks all for the great advice. @Michael Ealy and @Greg Dickerson great valuation methods, I like the idea of working backwards with a cushion. Going to discuss the status of this deal today with broker and will submit an offer. I'll do some practice with these methods so that I can be prepared for the next opportunity that comes around.

    1Reply
  • Tj Hines
    Specialist · Tampa, FL · Member since 2012 · 933 posts · 492 votes
    6y

    @Khizar Hanif, if you take the current NOI and base your assumption only on that this deal will not work. Taking a really good look at the competition nearby and what they're charging for rents in the current condition their property is in - will give you a good idea of what a conservative NOI would be if the property was, let's say 95% occupied. There is quite a bit of speculation there. To justify what you may be thinking, what I would do is get with a property manager that specializes in that specific class of asset for that area and have them work through some scenarios for you, so you have a really good assumption of how the property will perform.

    Are you taking this property down cash? How will you finance this transaction? Conventional is probably off the table here. Can you may be get creative with the seller of this asset? Good luck

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