Commercial multi-family in TX - query re negotiation tactics

[Tracey B.]

I've identified a property of 10 duplexes that I'm considering purchasing. It is currently experiencing high vacancy levels (50% :shock:) and those units that are rented are at below market rents. My assessment is that the current landlord has lost interest in the investment and failed to maintain it, so it's looking very unloved. I believe with an inexpensive rehab it could do very well.

The initial asking price ($30K per door, $600K) represents a 10% cap rate if the property were fully occupied, and was let at the market rental after rehab. But as the current gross rental income on all units is only about 40% of the level which would give a 10% cap rate (50% occupancy at 80% market rental), I don't think it's worth near $600K. I think the deal stacks up at around $450K, so would probably only want to offer about $400K initially.

I am a property investor by profession, but I'm an Aussie, and this would be my first purchase in the USA. In Australia, if a property is listed at $600K, you wouldn't dream of offering less than, say, $550K. :blush: But the fact that you have properties selling for 50-80% of appraisal makes me wonder whether it's worth a shot. (That simply never happens in Australia; even a "fire sale" price usually gets at least 90% of appraisal.)

Would offering $400K be considered cheeky for a standard sale? By standard I mean that it's not (AFAIK) in pre-foreclosure or foreclosure, but I suspect it has been on the market a while, and the vendor obviously has lost interest in it and wants to sell, so I presume the vendor is quite motivated.

Is it customary if the vendor wants more to counter-offer? (ie come back and say "$400K is no good but I'd consider $480K", for example)

I'm just seeking advice about your negotiating customs; I don't want to get off-side with a major realtor in my chosen area with my first offer!