50% vacant multifamily property. What to offer?

[Kevin OBrien]

Good evening BP!

I found an off-market multifamily property. The owner said that it has been mis-managed by a property management team who was new and were not able to successfully stabilize the occupants and it has been at 50% for longer than the projections and business plan outlined. The owners have had multiple low offers that they do not respond to. The other multifamily comparables are closer to 95% occupied. There is probably no way to get the property based only on the current NOI and market cap rates.

My question is, how would you come up with an offer price? Where would you start with your offer? Would you use projections on increased occupancy and gross revenue? 

[Josh C.]

It'd be a wonderful world if it sold for current NOI and cap rate. Then you just lease it up and make a ton of money, but in reality that is very unlikely. People usually aren't total morons. I once bought a 0% occupancy building and unfortunately it cost more then $0. A car that needs a new battery is worth more than a car with no engine yet they both don't run.

Offer what you think it’s worth. Could you get it leased up to 85%? What’s a healthy cap rate there? Maybe 8% to 9%? Offer based on conservative numbers and decently high cap and you’ll be protected and make some money. Offer like there are only half as many units as there actually are and you’ll end up with what you have. Nothing.