Make an Offer on a Multi-Family Deal Without NOI?

Question

I'm looking at an off-market eight unit condo building, but the seller isn't providing NOI, so I don't know the current CAP rate. They've offered a rent roll, but that's just showing the current roll (which shows 3/8 units vacant). The seller won't release the P&L until we're under contract.

When I plug in an estimated 7% for vacancy/concessions, the deal rocks, but I'm concerned that the current NOI (with high vacancy history) doesn't justify the price of the deal.

In this type of situation is it reasonable to make an offer and then get the official numbers later, or is it a red flag that indicates the deal should be avoided?

Stephen David Smith Jr. · Answer

Good Evening,

Everyone's advice is spot on however one mention of an item I would look at if everything else is looking great on the offer is the inspection period to get the time to take this look.

1) Ask if he has the P&L on hand along with other documents if you go under contract.

2) If he has done his homework and collected everything to move expeditiously then I would have the deposit made within a 3 day timer after LOI negotiations (he may request it to accompany which is fine since you can request back). So during the 3 days you will have time to review however you will also have time to review under the inspection and due diligence. And for a commercial property that requires you to review financials not released prior to contract, I would request anywhere from 20-30 days for inspection on the starting offer and directly point out it is due to needing further time to review financials and estoppels with each tenant. (In some scenarios this could be considered a short Due Diligence period I am not privy to the property so please adjust the commercial due diligence time requested accordingly for you needs)

Evan Polaski · Answer

@Neil G. a similar question was recently asked,

https://www.biggerpockets.com/forums/432/topics/803088-negative-cashflow-apartment-building-what-to-offer?highlight_post=4716071&page=1#p4716071

@Michael Ealy has made a lot of money buying deals like this.

Build your proforma operating budget and apply a market cap rate to get what the stabilized sale price would be.  From there, back out cost to rehab and any capex and profit for you.  This will give you a ballpark of where it should trade, even without seeing any financials.

Cory Carlson · Answer

For your numbers just make an assumption on the expense load. Guess 35-45% of EGI depending on its age and condition? If its in the ballpark of a decent deal, write up an offer and fish out the rest of the financials. The beauty of off market sellers self representing ahhh!

Eric Johnson · Answer

sellers numbers don't really matter tbh, because they're probably off base and or under/inaccurately reported anyway to sell the building. Do your own underwriting and offer what price / cap makes sense to your deal structure. If they don't like it, then on to the next, just about getting offers out.

John Woodrich · Answer

To weed out non-buyers many commercial deals start with a Letter of Intent with general terms.  After that is agreed upon you will have a due diligence period where they will typically provide more information, you can review leases, etc.

Wally Klosner · Answer

@Neil G. I'm pretty new to this but NOI is pretty important. I live in MN so heating cost is huge. Recently looked at a strip motel/efficiency. Heating bill was something like $2-3k/mo. Killed the deal. It has potential for someone with value add capital. Just not right for me.

Michael Ealy · Answer

Thanks for the mention Evan.

If the issue is the building does not make money so how do you calculate the NOI, then do read the forum thread link that Evan provided.

If the issue is the seller is not willing to provide any info, then you have to make some assumptions. Here is a rule of thumb:

NOI = Gross rents x 50% (this is the 50% rule and it applies for properties in B/C areas; lower for A and new builds and higher for D/F properties)

You can submit an LOI if based on this assumed NOI the deal makes sense. Once you have and the seller likes the terms of your LOI, you can proceed to a Purchase & Sale Agreement and that's when you require the seller to submit to you the T12, and other documents you need to do your due diligence.

James G. · Answer

NOI is going to be the single most important number for you when purchasing an apartment. A lot of people may stay away from the deal because of this which gives you an advantage. I would put rule of thumb numbers in for your expenses and make your offer based on that. Just make sure that you have a contingency in your contract in case you find out that none of the tenants are actually paying.

Evan Polaski · Answer

@Neil G. Best of luck. I think the hardest part will be nailing down actual expenses. Don’t forget a realistic management fee, even if you plan on self managing.

Bryan Mitchell · Answer

@Neil G. do as @Evan Polaski suggests and let us know. Thanks!

Make an Offer on a Multi-Family Deal Without NOI?

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