What should I offer for this 4plex?

Question

Current income is:

$1675 per month/$20,100 per year.

Tenants pay between $325 and $500 per month. Two losest payers have been there 5 and 13 years. Once stabilized they should pull $700 each.

Last year's expenses were:

$1411 for insurance

$1296 for taxes

$1238 for maintenance

I have been given no other numbers.

My initial expectation to boost value is $25k rehab, (delayed maintenance, updates, and cosmetic.)

I do not know the cap rate. It is a B- or C neighborhood and building.

Ask price is $159,900.

Been listed for 2 years.

I will be attempting 100% no recourse financing or 96.5% through a HUD program, or FHA, USDA, etc.

I would appreciate advice regarding my offer and strategy. My goal is buy and hold for cash flow.

Thank you.

Jaysen Medhurst · Answer

@Michael Brown, since this is a residential property, Cap Rates have no bearing on it's value.

Given current rents, standard underwriting, and traditional financing this might cash flow ~$100/month. If you can actually get rents up to $700/unit, this could do great.

As @Derek Harris mentioned, the ARV is important here. That will dictate an appropriate offer.

Do you know what the current owner paid or if there are any major issues? There's a reason it's been on the market for 2 years. It's either way overpriced (not a good sign for your ARV) or there is something very serious going on with the property.

You need to get very clear about your financing.

• FHA- and USDA-backed mortgages are only available on primary residences. You didn't mention whether or not you plan to live in the property.
• Non-recourse doesn't really exist for residential properties. That's a non-starter. You will have to be a guarantor on the mortgage. 
• I have no idea what 100% financing options you're referring to. Low-down payment is possible if you plan to owner occupy. Otherwise you should expect to put down 20-25%.

Derek Harris · Answer

@Michael Brown, what is the ARV or, in other words, what do similar fourplexes that do not require substantial rehab sell for? One strategy I've used in the past to negotiate a lower price is to get a home inspection. Although this may cost $300-600, I was able to negotiate almost 10k off the asking price. Keep in mind, home inspectors typically go overboard and most of their recommendations will not be made unless it is safety related. This tactic typically needs to be done in conjunction with getting contractor bids. Most non-owner occupied sellers I've come across have no idea the actual condition of their property.

Also, I recommend reading the book Never Split the Difference or watching some of the BiggerPockets podcasts with Chris Voss.

Michael Brown · Answer

@Derek Harris, Thank you for your response. I estimated stabilized rent, after necessary rehab., at $700 per door after seeing nearby, nearly identical 3bd 1bth 4plex properties with the same rent. Also, half a block away one can rent a 1 bedroom for $500-550 per month.

Fortunately, the market is pretty stable. Yes, it was hit by the shutdown but not nearly as hard as larger cities. Currently it is mostly open with minor changes for safety. There is a university and two hospital systems within 3 miles of the property. Lots of retail and industrial jobs normally though not at full capacity yet.

The rent roll indicates 2 long term (multiple year) renters. One renter has been there over one year. One unit was open for at least a few months but signed a year lease last February.

I assume pm to be about 10% of rents.

Seller has dropped initial ask price by $15,100; from $175k in Spring 2018 to $159,900 last month.

Derek Harris · Answer

@Michael Brown, how did you come up with the stabilized income? Is it based off comps? How stable is that market? Is it reliant on one employer? With rents that low, I suspect it is probably in a high CAP rate area which usually translates to a higher number of non-payers and evictions. I would also factor in property management costs.

In regards to the offer price, since the property has been on the market for two years, it appears the seller is not highly motivated to sell. Have they adjusted the sales price during the past two years?