Case Study: Deal that just went under contract

[Scott French]

Hey BP people,

I have been lurking for awhile and decided to sign up and start contributing. I heard today that a property my partners and I were looking at, and passed on, sold for more than we were willing to consider. Here are the case materials:

The building in question contains 4 units, each with one bedroom.

Gross was $2350. All utilities separately metered, with LL paying water, sewer, trash. Water/sewer rates here are roughly $3.50 and $2.50/CCF. Trash $50/mo.

No offstreet parking, no laundry.

Although the exterior was well maintained, the apartments were dirty, with smoker tenants, half-kitchens, and were dreadfully outdated (more like barren). It was a C- class asset. Needed new carpets/flooring throughout, some actual working appliances, paint, etc. I figured a $5000 initial capex budget to address some of the issues with some of the others occurring as tenants moved out, probably totaling in the $12,000 range by the time we were done. These things would be necessary to fit the renter profile that we are targeting.

The 2% rule is wishful thinking in my market, which is a college town, and a 1.5% gross is more fitting. The 50% rule is more reliable, but with the 1900 vintage buildings here, there can be landmines that will create major issues for a buyer down the road, so I tend to gravitate towards a 60% rule. With the $12,000 of capex identified, and knowing my market fairly well, I decided that an offer of $x was reasonable.

Let me know if I forgot anything and I will add it.

Respond with your estimations of list price, your offer price, and final sales price and in a few days I will give the answers.