High Cap Rate But Sellers Asking Too Much!

[Nicholas Junker]

I invest in Bozeman Montana.

I've been in negotiation 4 times now in the past month with off market sellers I've found through direct mail and I cannot make the numbers work even with historically high rental rates!

These are all multifamily properties. One was a small duplex 2000sqft lot very small, one large 6 plex old single family converted, another duplex that is a single family conversion, and now a old single fam converted into a duplex that is in an awesome historic district with great rental history (sorry not supplying numbers I can if need be).

In my analysis I have one key equation that is "Offer price based on "X" cap rate." Bozeman's Cap rate is 7.5% (based on numbers from multiple mortgage and real estate brokers).

This equation is my NOI for the property divided by the cap rate. The number is always about $100k less than what the seller is asking.

Is this cap rate equation relevant for my size properties/market? I know it is used in commercial lending and analysis does it just not work for duplex's to six plex's? Does this just mean the market is so high right now that I just need to wait for a market correction? I can't believe the prices these sellers are asking! 

Please enlighten me.

[Sylvia B.]

Originally posted by @Nicholas Junker:

Thats why I've been really curious about this equation and have used it to back up my low offer price but the sellers say "well I'll just put it on the market and sell it in a week."

I feel the equation accurately shows that, based on the current operating costs and operating income of the property and the current market cap rate, without raising rents, this is what the property is worth. Is this not accurate? Can I explain this better to the sellers?

 If the property really will sell that quickly at the seller's price, then it is not overpriced, no matter what your calculations show.

The true value of an item is determined by the price a willing buyer and seller agree upon. If a seller thinks his property is worth $xx, but no one will pay that for it, it is likely overpriced, but if it sells at that price, then it is not. If it sells very quickly, it is likely underpriced, no matter how outrageously high that is.