Silver Spring, Maryland Mixed-Use Property - Input Needed

[Brad Dwin]

Hello BPers - 

I am working with a seller of a mixed-use property in Silver Spring (20902 near Holy Cross Hospital) and I'd like to either wholesale it or keep it as a rental if I can make the numbers work. If I take option B, I will need a cash partner.

Owner - The owner lives most of the year in Florida, husband passed away and would like to sell without a realtor. She isn't super motivated, but I've met with her a few times and I know she will sell it for the right price and of course claims she doesn't want to be greedy. Property is owned free and clear.

Property -  The property is roughly 7,000 SF, although only the residential 2700 sf is publicly recorded. The owner did give me all of her income/expense numbers (including the total taxes and the cost for the special exemption for the office space), which I will  share shortly. This property is two office spaces and one apartment - all with separate entrances. One office space is rented by a dentist for $3600 per month (1.5 years left on lease and when I met him he indicated he is staying), the residential space is renting for $2700 per month (current tenant has been there for more than 20 years already) and there is a third office on the ground floor that is currently vacant (the owner has never really marketed it, but it seems to me to be another $2500-$3000 in gross rent). The vacant office probably needs $10K-$15K work to be ready.

Current Numbers -  Monthly income is currently $6300 between the two occupied spaces and expenses are $1,842 (owner currently pays all utilities, insurance, lead certs, pest control, special exception for office space, taxes, etc.). These were the total numbers for 2015. No management company is involved. No major repairs needed (HVAC is only a year old) except that the vacant space is not rent ready. With the third space rented (ideal for a doctor/medical professional due to proximity to Holy Cross Hospital), this property has a potential for $8,800 - $9,000+ in monthly revenue.

Situation - Because there are no recent comps nearby for a property in this unique category I have been unsuccessful in determining a solid ARV to allow me to work backwards. I know that the owner has already turned down an offer of $650K sight unseen (which was were my initial thoughts were number-wise) and thinks the property is worth $700K - $900K. That's a pretty large window and also goes to the motivation factor. Plus she is going to have her attorney review any offer. She will consider a seller financing arrangement as well and I am not very well-versed on those deals. I know there was an appraisal in 2002 for $1.2M, but property values in that neighborhood have dropped considerably since then. I know, since i used to live a 1/2 mile away. Even the owner doesn't believe it's anywhere near that value in the current condition. I ran one scenario using an ARV of $875K and came up with a number around $715k. But again, figuring out the actual ARV is very challenging and my realtor partners have not been able to find adequate comps - only for the residential piece. The e-appraisal website put the property's value at $736K, but I doubt that's accurate.

My hope is that there is someone in this group - hopefully in Maryland - that has done a similar deal and can offer some suggestions. Or has an idea about determining the ARV. Or any creative way to get this deal done.

[Account Closed]

Originally posted by @Account Closed:

Here is an example without knowing the additional expenses for the 3rd unit being rented, the age of the property or cap rate: before the 3rd unit is rented: Annual income $75,600 - expenses of $22,104 = Net Income of $53,496. If the age and area cap rate for this type of asset is 8% then the calculations are $53,496 / 0.08 = $668,700. This is the current value of the property.

When the other unit is rented then the numbers are $111,600 gross income minus expenses $22,104 = $89,496. Then take this number and divide it by 8% = $1,118,700. This then becomes the value of the property after the next unit is rented, if the expenses stay the same.

Steve, that is an incorrect way to calculate value.  By ignoring the PGI potential gross income of the property and only capitalizing actual rents you are grossly under valuing the property.

The correct way would be to take the potential rents of all three units. Subtract a vacancy and collection amount and then operating expenses to get NOI. Then you would take the market cap rate against that NOI and get close to your $1.1M value. But you do not have the property operating at market so you would subtract FROM the capitalized value the costs to get the third unit leases and the lost rents and a risk factor. That may only be $10,000 in a strong market or $100,000+ in a weak market. So the difference in value is not $450,000 as in your incorrect calculation just because one unit is not leased.