Deal Analysis on complicated property. And appraisal question.

[Joe Ebanks]

Hi all. Im looking at a 12 unit apartment complex for sale near where I live. The owner recently passed away and the heirs had it appraised and are selling it now. It has 11 units occupied and 1 unit vacant for showings (may or may not be true). 

The appraisal used an 8.5% cap for the income capitalization analysis. Is there a database where I can find out how much apartment buildings are selling for in my market? That would be incredibly useful. If not, how do all of you crushers go about doing that? Talking with brokers?  Im curious specifically about the North East Ohio Market. But if there is some sort of national database I would love to know about that too.

My problem is this. It was appraised 'AS IS' at 490k. To me it looks like they just used an estimated NOI, and divided this by the market cap (actually just 6 comps which may or may not be very similar, I think the amount of work needed could vary greatly...) to figure out the appraisal value. The actual NOI was less than the estimated one used in the appraisal. And the 3 year actual NOI was quite a bit less. This may be because the owner was older and wasnt focused on maximizing this. The agent said it was because people moved out and they had to rehab the units. The expenses were much bigger in 2013-2014. Also a higher vacancy rate so it makes sense. To do my numbers I was averaging the 3 years out to get the actual 3 year NOI, much lower than the appraisals.

Also, there is a very old driveway that needs completely redone. The agent said they got an estimate at 40k. I dont think a 40k driveway will increase the NOI that much :). Also the furnaces, and AC, were mostly 20 years old. The electrical is at least that old, and likely the plumbing too. Again I dont think they increase the NOI by as much as they will take away from it...

Were all of these expenditures really taken into account by the 'AS IS' appraisal? The comps said nothing about how much Cap Ex was needed in the near future. Just the property was in 'good' or 'ok' condition. 

I think that I should be subtracting the estimated Cap Ex from the purchase price. The agent did not agree and the sellers do not think so either. They were asking for more than the appraisal already, and I bid a number significantly lower. I took into account all the updates, and very conservative estimates for NOI to protect myself as Im new to this.

It is unlikely we will be able to make a deal here, but Im just wondering if I am thinking about it correctly or not.

I guess lastly, when bidding a property like this... Would it be smarter to offer closer to the appraisal value? Then when I have it professionally inspected, and get contractors through the place to give estimates on the upgrades, and lifespan's of current HVAC/plumbing/electrical, negotiate the price down at that point or walk? Can you get your earnest money back in this situation?

 Thanks!