Hi @Sarah Lorenz,
Have you ever looked at a real estate broker's description of a single family home. If it's super small, they call it "cozy". If it covered in overgrown vegetation and original paint and rotted trim, then it's "cute". If it needs a little TLC, then it's a money pit and if it's "investor's delight" then it's a tear-down. Loopnet is like that but on steriods.
The proforma number are pure poop. They mean nothing! Never, ever buy at a price based on what an asset could be. You make your offer on what it is, where it is and in it current state and condition. Ignore entirely what the cap rate would be at 100% occupancy. It never will be 100%. Look to the market where the asset is in order to find the occupancy rate then round down to the lower percentile. (example: the local market vacancy rate for comparable assets is 13%, then your occupancy figure is 80% at full performance.)
Next, even when your occupancy is relatively high, you should figure the turn over rate, concessions and economic vacancies. That is to say, how do you get the occupancy up and how much does it cost to keep it there. If you can rent the units quickly, but the tenants don't stay for long, the cost of tenant acquisition can add a lot your expenses, which can have the same impact to your bottom line that extra vacancies would.
What happens when you rent your apartments out? Do you have to offer inducements, like the "first month free" or "all utilties paid"? Do you have to lower the rents you charge across the board to push occupancy north? Who do you attract when you do these things? Are those tenants going to keep paying the rent once the concessions run out? How many of these folks are you going to have to evict? If these costs were compared to the cost of lower occupancy, would you be better off to let a few units remain vacant longer?
When I look at a Loopnet listing with high vacancy I ask myself why are these units not rented. Often it is NOT due to a lack of tenants, but rather having units that are not in rentable condition. If the vacant unit are not safe, clean and livable, then they are not rentable. A unit I cannot rent is a liability, not an asset. I never pay asset prices for liabilities just because I could make it an asset someday if I put up still more investment. That's like buying a broken down VW bug just because it used to be new and that's just stupid.
Now, that being said, I look at Loopnet from time to time. I agree that Loopnet is where "commercial deal go to die" when they are not good enough to attract buyers in better market segments. Loopnet is the Walmart of the commercial marketplace, but deals can be found at Walmart because there product is priced accordingly. Loopnet has deals for someone who can sort through the fluff and deception to assess the real value in a particular deal, set a maximum allowable offer price and terms and then negotiate to that threshold.
There is great deal more to consider than the occupancy and cap rate, but I ain't writing a book here. This is just the tip of the iceberg. The point is this: a 17.27 cap is pretty good. Now get that number based on a 42% and a $100k in repairs. Your LOI should should offer something closer to $1.35M for the portfolio and then only if everything else is working great. If they won't talk to you at that price point, then sigh a huge sigh of relief, move on to the next property and let a stupid person buying that lousy listing. Never offer to pay for what a property "could" be worth.
Cheers!!
