HELP - 10 Unit REO Apartment Complex

[Tom C.]

Drafted an offer on a REO apartment complex in Texas (Houston Area). Only problem is the bank has only owned the property for about 2 months and has a PM running it. Currently it has 3 vacancies, with one lease signed but not yet started (last month it had only 1 vacancy) and all units charge ~ 450/unit. The apartment was built in the 50s and likely needs some work, but I am looking to buy and hold but how do I know if the price is "right." I think it is, but I have first deal jitters. It needs almost zero capital improvements to continue to operate at this level. I will have a good deal on the sidelines just in case. It seems to have a high turnover in the first 2 months being "managed," but that might actually make some sense under the circumstances.

I have put the numbers to paper and worry that I am adding layer after layer of conservatism and may be "thinking my way out of a good deal."

The complex is approximately 7,000 rentable square feet and I can grab it for $21/sqft or just under $15K/unit. Again, this is in rentable condition at the rates above as I have walked through all the vacancies... they will rent at the current $450/unit. What I don't know is how transient the lower end of the market is and where my estimates fall... There is no track record. I fear I am overly conservative... or maybe not?

So I thought I would throw my assumptions out there. I think I may be overloading this with fear... My assumptions are monthly and I have normalized them by unit.

Price: $15K/u
Rent:.................$450 - (Market above $500, though)
Vacancy Cost:.....($90) - This assumes 2 months vacant on average.
Repairs.............. ($30) - Estimate
Property Tax:......($60) - (assessed at 2x sale price, I plan to challenge) *
Insurance:..........($36) - No data
Utilities:.............($63) - Water / Garbage have no data on this...
Misc:.................($11) - Admin
Fixed PM:...........($60) - Quoted, known
Variable PM:.......($30) - First month's rent, assumed amount
Asset Op:............70

Other - All cash deal, but I plan to refinance the property to pull out 75% appraised value. (Don’t know what this would appraise or whether they can appraise on pro forma estimates) If financed, the PMT would be $69/unit.

Upside 1: - I should be able to challenge the assessed value adding 20-30/mo to operating income. (Currently assessed at $30k/unit)

Upside 2: - My property manager said I should be able to qualify these units for section 8 and that would lower vacancies and increase the rates to $550/u, minimum BUT more likely $600/u. That is a lot of upside in the deal.

Am I grossly overpaying, or just adding layers of uncertainty on a good deal, with solid upside.