Re-bid On Multi Dwelling Using 1031

I submitted a bid on a two story 18 unit garden apartment complex including 18 two bedrooms. My bid was $1.25 million. I was told by the broker my bid is too low. The broker also said another buyer bid $1.45 million without inspecting the property. The buyer is scheduled to view the property shortly.

Based on the properties financials I have computed the following rates of return. Please note that I have factored a 2% annual increase in rents over a 10 year period:


Internal Rate of Return
Before Tax
@ $1.250,000 @ $1.450,000
Year 5 21.96% 17.72%
Year 7 21.11% 17.08%
Year 10 20.22% 16.39%
Cash on Cash Return
Before Tax
@ $1.250,000 @ $1.450,000
Year 1 11.75% 6.82%
Year 5 14.14% 8.88%
Year 7 18.28% 12.44%
Year 10 20.14% 14.04%


@$1.25 million the cap rate is 10.32%.
@ $1.45 the cap rate is 8.89%

The property has deferred maintenance in the form of needing a new boiler ($14,000), windows (approx. 80 to 90 windows), upgrade of apartments (kitchen cabinets, resurface wood floors). I have included these costs including a reserve for each apartment @ $450, and $10,000 per year for the deferred maintenance. I plan to upgrade the property over the next four years as tenants move out, also using property cash flow.

I spoke to the tax assessor and asked him to value the property. He calculated $1.2 million. He also mentioned that the purchase price would be the new assessed value base. The town will be shortly going through a new tax assessment. Of course if I pay $1.45 or $1.5 million my future taxes will be impacted negatively if compared to my original offer of $1.25 million. For this type property in this town, the purchase price will be at the market top.

The owner is in her mid 60’s and has some level of motivation to sell.

I am in the 45 day identifying period on my section 1031. If I don’t identify a property within this period, my exit strategy is to accept the funds and pay the tax. My effective tax rate will be approximately 7 to 8 % (state & local). This is because I obtained my sold property (closed in January 2005) at a stepped up basis, and only 50% of the gain is subject to capital gains tax. An 8% tax bill is not bad on a large gain, and I will not have to pay the tax until April 2006. I can collect interest income, or find another property before April 2006. I plan to refinance the property in the near future to pull out my 1031 equity.

I am also looking at other deals. But I like this one.

My questions are as follows:
• Is this a good deal at $1.45 or $1.5 million?
• If so, what creative financing options and offers can I make, to out bid the other person.?
• How can I verify the broker is not creating a phantom buyer @ $1.45 million
• Am I crazy to pay the tax?
• How can I appraise the property before signing a contract?
• Any suggestions on refinancing a 1031 equity pull out in 2-3 months after the purchase? I would like to do the purchase and pull out as step 1 & 2 with the granter of the loan and minimize the prepayment penalties.

I previously owned and sold a 4 unit. I have $740k sitting in my 1031 account at the bank. This is all new to me. Any comments will be greatly appreciated. My basic strategy is buy and hold. I will use this property as a base and purchase more properties in the future. Please help. I am not sure which direction to go.
Thanks.