What would you pay?

Question

Just curious to see what some valuations would be on a property in the area. A large local investor owns a ton of inventory which mostly is for sale right now. I think he's over priced on everything but I'm considering running numbers and offering what I think would be correct on each property.

The property:

Duplex, grade B+, 2003 build, each unit is 3/2 @ 1100 sf. Rent is 900/unit. 130 days on market

2015 data from MLS:

Rent = 18k + 200 other = $18,200

Expenses from MLS:

"Outside services" = 1767

Tax = 2641

Insurance isn't listed - I assumed 1500

Maint/Repair = 521

So assuming both units were rented, total rents should be 21,600 - 2650 tax - 1500 ins - 7%capex (1512) - 10% vacancy (2160) = 13,778 NOI

What are some thoughts on valuation? I've come up with my own number but I'd like to see what some of you think.

Thanks,

Andrew

Bill S. · Answer

Account Closed cap rate on a duplex is like taking a speed boat to a sail boat race. They are different animals. 1-4 units are primarily valued on comparable sales. 5 units and up use cap rates as it is rare to truly find comparable sales so cap rate is a way of leveling the field. Bottom line if locals are paying $250K for a duplex that rents for $900 per side then that's the value. Your biggest bargaining chip is comparable sales but it's hard to beat the market using that approach. The point of hard negotiations is to have value at closing. You can offer what you think it's worth and share whatever justification you want, it appears that the seller is not motivated. Better to find a motivated seller than try and beat down someone that is not motivated and is over priced.

Account Closed · Answer

@Bill S., I think what I've learned from looking at the numbers on this deal that there's no way it can be financed with a 20% down payment and have cashflow. Even with a 5% down payment on seller financing wouldn't work unless the purchase price was down around $200k.

It's a really nice duplex. I'm coming to the conclusion that its not a good investment. Rents would need a significant jump and the market won't support it.

Nate Wightman · Answer

Account Closed said it well if duplexes in your area are selling for $250 and renting for $900 per side then value goes up and down from $250 based on location , quality and size.... you can make money in real estate with price appreciation... principal pay down...  tax benefits...  and rental income.    So, if values are screaming up then you may just work with the first 3 to make your money.  Have you looked on zillow, rentometer and craigslist for comparable rents... they may be higher than you think.  We were told on a duplex by the last owner and the appraiser that it would rent for $950 a side .... it rented for $1450 a side after 3 months of clean up... mostly cosmetic.   Can you live in one side?? what is the vacancy in this area...  BP is a great area to get opinions and insight on how other have made money...  At some point you need to look at Your area and make Your decision.   Sometimes a seasoned investor who has a lot of properties just wants out because they are sick of it...  If you were to approach and have a cup of coffee and chat and be real and just say your not comfortable with the cost not cash flowing would they let you buy it for $xxx... you may be surprised at the response..  enjoy your coffee, be straight with them and enjoy the conversation and the lessons.  best of luck.

Gino Barbaro · Answer

Account Closed

Hi Andrew

It seems as if Denver is as overpriced as parts of New York.  You have to become concerned when a large investor has a lot of his properties for sale.  He's moving his position to cash and waiting for the next correction.

Good Luck

Gino

Nate Wightman · Answer

3 just sold in Wheatridge for $309  right next to each other.... but yes it is wonky here

Tess Tari · Answer

@Nate Wightman - if you find a 3/2 duplex in the Denver metro for $350k - let me know!!!  I would expect it to be more like $400 - 450.  It's hard to find a duplex at all here, right now, but less for a great price.

I would go for it, at $400k in Denver at the 1/% rule.  It's not that difficult to get $2000 / side in the Denver area.

Scott Schultz · Answer

based on how i run my numbers, using your income and expenses, you could pay $80-$85K for it, but that may not be reasonable in your market. just my 2Cents

Sarah Ziehr · Answer

It really doesn't matter what I would pay, or what you would pay, what matters is what does the seller want and what are comps? What are other buyers paying for similar properties?

That is what will dictate what the property will sell for.

Also, why would the rents be raised? Can they be raised? What are market rents for your area? Is 10% occupancy normal for your area? Is the area an A, B or C?

I am coming up with an NOI of $12k. If that is true, then a cap rate of 7 would value the property at $84k. A cap rate of 12 would value the property at $144k. Not knowing the area, or the other variables, its impossible to say what this property is worth.

Nate Wightman · Answer

In Denver it would probably be $350k ish.. 1% rule would say $180k, 2%  would say $90k...50% rent is expense then leaves you with 900$ on $150k Principal and interest will be 760$ .... so depends on your area