How Can I Market This 3-Plex the Elderly Owner Wouldn't Raise Rents On?

Question

I put under contract a 3-plex today that has an out of state owner. The owner hasn't raised rents in six years - in a strong rental market. He also pays the utilities even though some already have separate metering, and has been taken advantage of by tenants consistently as they know he is older and lives out of state.

I would like to market the property at a price that supports the contract price he seeks, but forsee problems as the current rents dont support the price. Some of the tenants will need to be changed as they've taken advantage, brought in other people not on the Month to Month leases and the current owner doesn't like confrontation - which is what got him to this place.

How can I market a property based on projected rents? Most investors want a "turnkey" property to avoid the problems in raising rents, separating utility meters, and changing tenants that this landlord won't undertake either. He's a couple of good heartbeats short of 80, now.

Matt Devincenzo · Answer

How about some numbers to help out. What is your price that it is under contract for? What is it worth in a performing condition? Are there comps, or is it going to be something you have to value based on projected rents? Let's assume for a minute that there are comps, that makes valuing easier, use those taking a significant discount to account for your buyer having to get rid of a bunch of poorly trained tenants. If it's rent based that will be more difficult. it might be worth 100K performing but someone has to get it there so they rightfully are going to need to be compensated for that effort. One thing that may sweeten the deal for a buyer to be willing to pay a little more, is see if he would offer owner financing. If so he could be out of the property, and a buyer might be willing to take the headache because of great terms.

Patrick L. · Answer

I just don't see a deal there given those numbers. If I wasn't paying utilities I wouldn't pay more than $150k for it assuming $2500 in monthly gross rents. If I were paying utilities that offer would be substantially lower.

Burt L. · Answer

Much appreciate the replies on the three-plex topic. The contract price on the property is 188K and the present rents are $2050, and by adding a bedroom to the 1000 ft. basement apartment and raising rents to market, it can rent for $2500-$2600 in total. To do this will mean a gap in income for two of the apartments- the third is already at market rent. There aren't any comps, so it would need to be an income-based approach to valuation. The seller did offer me owner financing on $100k of the $188K, at 4%, but I didn't follow up on it for now, as I plan to resell it and am trying not to be involved on an ongoing basis. He is comfortable with me, but not with an end-buyer who isn't known yet. With a 30 year hold, the property is fully depreciated, and he will have a tax hit. The Section 1250 depreciation recapture at 25% fed and 4.6% state are the worst, and of course, 15% (20% depending on AGI) on his $105K capital gain portion, on a cost basis of $83K. An installment sale would lessen the pain. I don't know if owner financing will increase the value of the property, or by what amount. There certainly aren't comps based on different methods of financing? Getting a cash buyer with profit margin on the current numbers may not be simple. I'm not savvy enough to know how to pass on the seller financing without becoming involved on an ongoing basis. It would be seller financing, and not sub-2. Conversely, there would be a margin, which would become apparent to the end buyer as a simultaneous closing wouldn't work as I know it, with owner financing. Thank you for the inputs provided.

Roy N. · Answer

Burt: I'm sitting here chuckling as we bought a triplex last October from an elderly vendor who had not raised the rents since 1996. On top of that he insisted on a condition in the APS that we would not serve a notice of rent increase for 3-months following close {he originally asked for six} ... We agreed to this in exchange for a reduction in the purchase price to offset the lost revenue. In your case, you will have to get seller to adjust his expectation on price ... or, at least, adjust the price by enough to offset the buyer while s/he sets about serving the initial rent increase. Alternatively, you might find the right buyer ... I would work with the vendor in this situation, but would evaluate the property based on the present cash-flow ... and it would reflect in my initial offer. I would also ask for near 100% vendor financing (an earn out) to give incentive to start getting the property to perform .

Joe Bertolino · Answer

So he wants a top of the market turnkey pricing but he is a poor operator... sounds like he needs a good property manager to fight the battles he is unwilling to fight. Your problem is then the PM will earn the listing.