First deal opportunity analysis help / valuation problem

[Jonathan Hagan]

Hey everyone,

I have been reading BP for a while now and I am finally in a position to potentially make a first deal. An agent informed me of a potential multifamily deal in the area here, and it looks like it could be a good deal to me. I just need a little help with the analysis to see if it will really work. This will be the first deal I have tried, so I want to make sure my analysis is correct. Here is what I know so far.

The deal is for a 3-plex located in a good area outside a military base. The seller is asking $95k for the property. The units are a 2/2 which goes for $550, a 2/2 which goes for $500, and a 1/1 which goes for $495 (all according to sellers agent). Checking it out, these are very comparable rates to what is around the area. They are saying that one of the 2/2s is rented out right now and tenants just left the other ones. Of those, the two 2/2 units have been updated, but the 1/1 didnt get updated at the same time since it was occupied at the time. I havent been in the house yet, but will be checking it out either tomorrow or the next day.

The problem I am running into is that I am not sure of what the house should actually be valued at. It is the only 3-plex that I know of in the area so it is hard to find comps. On top of that, the tax information lists it as a duplex that is valued at $59k. However, if I value it using the cap rate method assuming a cap rate of 10% it comes out to be valued at about $92k ( $9,190 NOI / .1 Cap rate = ~$92k)

The property seems like it will cash-flow about $400/mo (without PM) under these conditions according to my spreadsheet analysis. I estimated the maintenance, advertising, and other expenses using the 50% rule along with the tax information and estimated insurance for the area.

My concern is that I have read a lot saying that I should make money on the buy, and that I should make sure I have multiple exit strategies. I am intending this as a buy and hold, but want to be able to get out and sell the house without a loss if I need to as another exit strategy. However, I am not sure how to value the house since it lacks comps in the area and the tax information seems way different than the asking price or cap rate valuation.

All that being said, does this seem like it is something worth pursuing? Sorry for the long post, I just want to make sure I dont mess something up.

[Edward Burns]

With the tax records indicating it is a duplex, I would check to be sure it is a legal tri-plex. My gut feeling is you will find it is only zone as a duplex and no permits were ever received to allow the conversion to a tri-plex. Assuming it is illeagal, I would either walk from the deal, or renogiate the price.