How to come up with offer price on multifamily with 100% vacancy

Question

My husband and I happened upon a 16 unit multifamily property close to a college campus. It’s a 10 unit building with 3 duplexes on the same lot. All of the windows and doors are boarded up, but it had tenants as recently as 2013 possibly 2014. It doesn’t have HVAC, would need a new roof and probably, paint, kitchen, bathroom and flooring updates/remodeling. We haven’t been inside yet nor have we contacted the owner. Therefore, the only improvements we know will be needed for sure are what we can see on the outside.

Should the owner be open to selling, we would like to make an offer on the property (after we get more solid information about the state of the property and do due diligence to determine exactly how much would need to be put into it to make it live able). I know multifamily property is valued based on NOI/cap rate, but seeing how this is bringing in $0 the value would be $0. What other way can I determine what to offer? Would it just be based on the value of the land and the buildings on it?

Erik W. · Answer

Considering the place is likely a full gut to the studs rehab dump, which is making them no money whatsoever the past 6 years and is costing them a large tax bill they obviously do not value the place that much if it has gone this long uninhabited.  Zero $ in each year.  Big wad of cash out of pocket at tax time each year.  Probably having to chase off squatters/vagrants/drug users.

Be careful: watch for liens caused by code violations.  These could get steep.  Unpaid taxes could also be an issue.  Double check there are no tax liens.  Also, I would consider all the plumbing shot being out of use that long.

What to offer? I'd start off asking the Seller what they would pay me to take the burden off their hands. Seriously. This place is a punch in the gut each time they think about it. They might just deed it to you to get if off their plate. If not, then ask them for bottom dollar. This is not your typical nice property that you negotiate back and forth. This is a very weird situation with very weird owners who have written the place off in their minds, but something about it has tied them to it so they haven't tried to sell it. There isn't really a market value to discuss in this instance: it's whatever amount their weirdness allows them to cut the cord tying them to this place. So might as well start off equally weird: FREE! You can offer to pay closing costs so it doesn't take any more money out of their pocket, but that's where I'd start.

Erik W. · Answer

@DeAndrea Douglas, glad I could help.

A word of caution about tax assessed values: I don't know anything about the county assessor for this property, but in my town they are a hodge podge / somewhat random.  This property may only be worth a few thousands bucks "as is", but the assessor thinks it's worth $1,00,000 because that's what it was worth 7 years ago.  Assessments rarely go down due to property deterioration.  They are often based on comparable assets in the neighborhood, which could be in very good condition.  The LAND value portion is sometimes split out, and that may be accurate, if you account for possibly having to raze the structure and start from scratch.

Another big risk with abandoned property is environmental contamination.  If druggies have been cooking meth in it, all bets are off.  Could costs $10s of thousands just to clean it up the toxic waste.  In other words, this property could have negative value, which is why I would seriously consider asking the owners if they would pay someone to take it off their hands.   Whatever you do, proceed with extreme caution and x3 the due diligence you would do on any regular property.  Off-market, abandoned, boarded up property is the "Wild West" of real estate.  No Seller's disclosures, no warranties, and owners too broke to sue and collect if they lie about something that comes back to bite you.  Caveat emptor, and I hope this helps.

Amit Ronghe · Answer

@DeAndrea Douglas in this case since you don’t have any actual numbers so you will have to work on some Proforma numbers. Looks at the neighboring similar properties for market rent. You will have to factor in a lot of initial expense to make it livable it looks like. Get a general contractor to give you an estimate and I would recommend add 50% (or even double it) on top. Get an inspector to inspect it as well. If it’s been vacant for long there may be a little t of unknown issues that may come to bite you. Gather as much info as you can about the area and properties around to see if this property will be worth it. Try and understand from the owner as to why it is in the state it is. Hope this helps.

DeAndrea D. · Answer

@Evan Polaski Thanks! I planned on making some phone calls to get rehab quote ranges and find any numbers I’m missing to get the terminal value this weekend. You’ve helped the many numbers I already have make a little more sense.

DeAndrea D. · Answer

@Erik Whiting LOVE this! You’re absolutely right. It’s costing them about $11k in taxes each year. I need to check to see if the taxes are current, but either way it’s just costing them money.

Lucia Rushton · Answer

@DeAndrea Douglas. Suggestion - be prepared if you have not done a major rehab before ( or possible tear down and build from scratch ) that you are in for a minefield.

Also it can help to get the tax assessed value of the property. DM if I can help.

Evan Polaski · Answer

@DeAndrea Douglas, to add another layer, you need to start with your stabilized proforma and apply a market cap rate to it.  This will get you your exit value.  From there, the Discounted Cash Flow model is the "best", but also more complex.

How I would approach, for simplicity, take your terminal value, subtract costs to renovate and lease-up (don't forget to include leasing commissions if you will have someone else do it), subtract your financing costs (interest, loan fees, etc), subtract a profit margin that you want to make for the headache of doing all of this, and then you will land on your offer price.

Best of luck.

DeAndrea D. · Answer

@Amit Ronghe thanks. This helps a lot. There are 3 similar properties that we’ve gathered rental information about and will work on cap rate info. The owner lives out of state so it’s possible that has something to do with it. We were going to try to gather more info about the area before reaching out but now we will probably give the owner a call to learn more about the property. And willingness to sell.

How to come up with offer price on multifamily with 100% vacancy

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