Due Diligence question

[Jason Leak]

Hello BP Family,

I am looking to get advise on a CRE due diligence issue that pertains to negotiations. Here are the specs:

6 unit brick multifamily Apt building-priced at 569,000- negotiated down from asking 600,000

6-2bd/1bth apts currently does 4700 per mth-rent currently about 20% under market 

at the start of due diligence was 100% occupied-That is what I based my offer on building performing at 100%

tenant just gave his 30 day notice -so before closing the building will have 1 vacancy performing at 84%

The inspection also turned up 15k of safety violations 

I believe both are points of renegotiation-I'm just not sure how much is my question

-I was going to ask for 15k of a closing concession to cover the safety issues

-but how much is considered acceptable/reasonable to decrease the price for the vacancy? If I am correct on this point.

I am looking forward to the communities responses and thanks in advance for your assistance and advice. 

[Charles Seaman]

@Jason Leak I think that a concession of $15,000 to correct the safety issues is reasonable, unless the seller chooses to correct the issues prior to closing.  You shouldn't be entitled to any concession for a vacancy.  If you valued the deal at 100% occupancy, then you have a very unrealistic expectation of how this business works.  You always need to budget for vacancies because they're a normal part of this business and should be expected from time to time.

[Erik W.]

Agreed with Charles.  Vacancy should always be factored in.

Not very excited about this deal based on the facts you've given us so far.  Even if you boost rents 20%, that's $5,640 / month, give or take.  It almost but not quite hits the 1% rule.  Are you paying cash or making a huge down payment?  If not, I would expect negative cash flow.

What's got you excited about this place?  How are you paying for it?  Counting on appreciation only?  Details!

[Jason Leak]

Thanks for the clarity Charles. This is my first CRE deal so that is point is well taken! Thanks for the quick response

[Sarah Brown]

Vacancies are a standard part of this business and shouldn't be discounted off of a price.  Was part of the sellers negotiations down because of already known safety violations?  I'd be surprised if they weren't noticed before an inspection.  Either way, it doesn't hurt to ask to try to get the best deal, but I wouldn't be surprised to if you don't get the whole $15k.

[Percy N.]

@Jason Leak, there is no "right" answer in negotiation, since it depends on the position of the buyer and seller. However, at the end of the day, the seller is getting 97.5% of the contracted price, so I would not expect them to push back hard unless the $15k is an outrageous number for the required safety fixes.

How old is the building? Have you checked with the local authorities on any outstanding code violations?

Did you review a proper T-12 and what does the occupancy show on that?