Offering on a 50% vacant property

[Khizar Hanif]

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?

 

[Michael Ealy]

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?