Need help - Apartment auction

[Vikram C.]

Guys, I am happy to announce that Jon Klaus and I have partnered to bid on an apartment complex in Texas that is going to be auctioned. (one more relationship created by BP.)

Since this is our first apartment complex auction, we would appreciate any help and guidance you guys can give. Here are the details:

Total Units = 34
30 units are 1BR and 4 units are 2BR
The units are in two separate buildings
Rent = $650 to $700 per month

Current vacancy is 30%. We are not sure why it is so high. Could be that the current owner is indifferent. Sales office has no brochure where brochures should be, etc. Or maybe there's something wrong with the area or property.

Electricity is sub-metered. Each unit has its own air conditioning and water heater.

We have to buy the unit as-is. There is no opportunity for inspection prior to buying. The complex looks well-maintained when looked at from outside. In fact, it looks nicer than most apartment complexes in the neighborhood.

Neighborhood is mostly duplexes and other apartment complexes. Duplexes, which are around 1200 sq ft, are selling for $90K.

Questions:

1. We know about the 50% rule, etc. But how would the lack of ability to inspect affect the way we value this property?

2. Does any of you have experience bidding at auctions? What's a good way to prepare for it?

3. If we end up buying the property, we will be paying all cash in order to close it within the deadline. But after that, we would like to get some money out through conventional financing. Based on prevailing lending standards, what LTV can we expect to get in a refi soon after we close the deal? Will the bank appraise the property based on its income or based on our recently concluded purchase price?

4. The property has a pool. Does that affect the 50% rule? Does the fact that most units are 1BR affect the 50% rule due to potentially higher vacancy?

Any other advice / guidance?

Regards, Vikram

[Brian Levredge]

I would be concerned about the unit mix to a degree, but that depends on what is relative to the area. Obviously, one bedrooms are going to have a higher turnover/transient rate than will larger units. Is this a foreclosure auction, or different type? If it's foreclosure, I would assume the maintenance reserve (I use 15% of gross) would need to be larger initially, which will skew expenses north.

Depending on who is closer, I would try to pretend to be a solicitor and go door to door on everyone's unit if you can to get an idea. If the living area looks ok at first glance then the other rooms probably are as well. I've tended to notice from experience that when you see bad living rooms that the bedrooms and baths are even worse.