This is my first multi unit deal. I got if off market through direct mailing. Seller wants to retire and is unloading his properties one at a time. Long story short I let the seller set the price since he was offering seller financing. My first mistake I know no push back but I was extremely happy that I found this "golden situation" on my first time out. Lack of experience, too much reading and no mentor!! Either way we choose a structure that would give a balloon payment 3 years down the line figuring that I could get the asset performing to that level by then to make the numbers make sense. In short paying for future value in the present; bad move! Basically, I have agreed to pay 100,000 per unit in a market that is 80k-87k per unit.
No contract has been signed just an LOI. We have been going back and forth since August with their lawyer being the main sticking point stating basically that the deal doesn't make sense. He is correct of course I have been trying to force a square into a circle. So, why am I writing because I need to find a way to put this back on the right path if possible. Here are the numbers of the deal, experience eyes and direction is what I am looking for in regards to setting an offer amount that makes sense for its current worth.
6 unit owner asking/LOI has agreed to 600,000
6 unit - 3 2bd/1bth, 2 3bds/1bth and 1 4bds/1bth
total rents+laundry = 60,100 current/ pro forma= 70,200 (this can be achieved without any upgrades)
expenses = 23,000 current
NOI=37,100 using the cap rate (.09) method of valuation = 412,222
Got cap rate from a local CRE agent
Building is 100% occupied. I was looking at value add in raising rents which are currently 20% below market and doing some upgrades to floors, kitchens and bathrooms. I was looking to do this over the next three years along with that force appreciation the market should raise a bit we are in one of those revitalization areas. I know "now" to offer on what the current performance is but the questions is-----Can this be saved being sooo far apart?
I know the seller will at the least listen to a coherent counter to his 600,000 but what number would you offer with such a gap that would not offend? I look forward to the clarity that I have come to expect and respect from the Biggerpockets family.
For your entertainment, the first deal structure
600,000
5% down 30k, 2k for 36 mths=72k, balloon payment of 540,000 in year 3
72k=5% 30k towards 10% downpayment with the remaining 42K as financing fee to seller for holding the note for 3yrs
yes I know it looks like a drawing with fat crayons by a 2 year old/unfortunately you don't know what you don't know!!
Hopefully, I have provide enough info so you can help me, help me that is after you have dried your tears from laughter!
