Sweet Deal On 6-Plex, Need Help With Offer
Hi all,
I need help structuring an offer on a 6-plex . I owned and lived in the house next door to it for 8 years, so I know the 6-plex well.
Facts:
~Since we moved a couple of years ago it was sold to an investor, emptied out, totally rehabbed, and is now back on the market at 50% occupied, leases, about $950 a unit.
~The rental market is soft there right now.
~At $650k It's way overpriced, even at 100% occupied.
~The owners are highly motivated to sell. They'll look at all offers and will provide some owner financing as well.
~I have adequate cash for a down payment at a reasonable price.
My questions:
--What should I offer? Tax appraisal is $265k, asking price is $650k (hahaha),
and current cash flow is $2800/mo. In order get a DCR of 1.25 at 50% occupied I would not be able to offer more than $160k. Positive cash flow is my first pre-requisite and can't be compromised.
--How can I get the other three units rented fast without benefiting the current owners or some other buyer if I don't buy it? Would a property mgmt company be helpful in this situation, at least to tell me what the correct market rent should be so they'll rent?
Any and all comments welcome!
I would find out what they paid for it and start the bidding at that amount. Since they are only 50% occupied they are doing something wrong or the market there isnt that good. A property management firm will usually take 10% of gross so make sure to factor that loss in. If you want to get creative ask them what the current loan is and get them to do a seller wrap around until it is fully filled and then go get your loan. Give them a small down payment or make a couple of payments in advance and I am sure they would work with you on getting it filled. Dont forget to keep enough in reserves when you refinance to take out the first mortgage and to get a new appraisal so that you can get a better loan, since the increased cash flow will make the property worth more when you get the loan.
Good Luck,
Kyle
Thanks Kyle. I'm not clear on how wraparounds work, could you explain briefly or point me to a link?
Also, another thought occurred to me:
What about asking for short-term owner financing and a balloon? That would also give me a chance to safely get the property filled. I have a pretty good idea of what they're doing wrong - it's a soft market and they're asking way too much rent !
Our observation is the inflated sales price. A 300% markup? Maybe you can be the reality check. Did you have a realtor perform a FREE market analysis to get a ballpark price?
Good luck.
Eric & Rosa
[addsig]
New News: The current owners paid $350k, then did their renovation. Should I factor in their reno costs into my offer, given that the property is still half-empty?
Thanks all!
Being aware of their renovation costs and purchase price will help you understand what they might sell for, but as for what to offer, I would base my maximum offer on what the property could support. You might always choose to offer less if you felt they would take it.
If fully rented it brings in $68,400/year, expenses are at, say, 45%, then you have an NOI of $37,620. The CAP rate that people often talk about as being desirable is 10%, giving you a maximum offer of $370,000. If the current owner paid $350,000 + rehab costs, he most likely paid more than that. Personally, I wouldn't increase my offer based on that.
Of course, I am making estimates here. I don't know what the expenses are, or what the likely vacancy factor is (what is the underlying reason for the current 50% vacancy?) or what your overall goals are. If you have a good downpayment you may be able to accept a lower CAP rate, or perhaps you can get good seller financing to allow a slightly higher offer.
Thanks Marcher. I'm thinking along the $350k range myself.
As per the high vacancy rate: I'm sure it's because they're asking way too much rent in a soft rental market. I lived in and renovated the house next door to this unit for 8 years, and was president of the civic association during that time. It's a slight down cycle in an otherwise great area and I have confidence it will rebound in another year or two, which is why I'm so interested in this opportunity though I no longer live there.
I'm researching market rent level and time it would take to find tenants, after which I'll make my final offer decision.
Hope I can make this work! Thanks.
Once you get your comps together and put together a realistic proforma, you should be able to answer your question of how much to offer. Find out what cap rates other "like properties" are selling at in the area. If your analysis of the property coming off a reposition from the rehab, you may convince a lender to underwrite based on a market average vacancy instead of 50%.
Just curious, it the property at 50% occupancy is producing $2800 per month CASH FLOW on $2850 monthly rental income, I assume that the property is owned free and clear. Just how low are the property taxes as well as the costs for insurance, repairs, preventive maintenance, cleaning, supplies, legal fees, management fees, snow removal, trash removal, leasing costs, utilities and advertising?
You mentioned a 1.25 DCR and you also stated that this is a six-plex property. If you are getting institutional financing, the property does not qualify for residential financing. So the lender will most likely put you into a commercial loan program with a 15 year amortization and may only accept up to 10% seller participation in the financing. What does this do to your DCR (Calculate DCR at 100% occupancy with a 10% vacancy factor)?
A couple of thoughts:
First, what is DCR? I feel like an idiot asking but I never let pride keep me from learning something new.
Second: ask to see the sellers schedule E's for the last couple of yearsand figure your operating inclome and costs.
Third: Ask them how much they owe? they may not tell you so go to the courthouse and pull up their property and figure it out with an amortizing calculator, this should get you close and give you a point at which they may be able to sell for.
Fourth: Have you thought about a master lease with an option to buy? This would fix the price at which the property could be bought for. Give them the income without the headaches, and you a chance to increase your rental income and cash flow by renting out the other units first, and maybe adding laundry, parking lot vacuum machine, internet, or anything else that will increase income. Generally for every dollar you earn that increases the value of the property by 10.
If you use this route then you can walk away if you can't pull it off and you can strengthen the cash position of the property prior to purchase.
five: use some combination of subject to purchasing if possible to decrease the amount of money you have to borrow.
Stockpro...DCR (aka DSCR) is Debt Service Coverage Ratio. NOI/Yearly Debt Service = DSCR. It reflects your ability to service the debt from the income of the property. If it's below 1, it's absolutly impossible to pay your debt from the property (negative cash flow) and every lender will require AT LEAST 1.2, and will like to see 1.5. Anything above 1.5 is gravy.
How long has it been 50% occupied??? You may want to submit an offer for the LOWER of their price and an appraisal. 6 units is a commercial piece of property. The income that it has generated the past year or two will be THE BIGGEST determinant of the FMV based on an appraisal. NOI X 10 is a rough estimate of what it will appraise for. Schedule an appraisal, Get the offer signed for their price, and then get the accepted offer's price down.
What are the Fair Market rents/unit in that area? What expense factor will you be counting on (NOI calculation)? We need more info before we can give you some numbers. Obviously, the lower the better.
How are you going to finance it??? 6 plexes can be tricky (they're small commercial deals. Most lenders like to do $500K and up for commercial deals). You may be better off giving them their price but all the terms you want (25% seller carry for example at 0% interest).
I'd include in the offer that you'll have the right to show and rent the vacant units while under contract. You might have to fight over the nitty gritty, but you're better off investing some time while it's under contract (once you're moving ahead seriously) and buying it full. Who cares if you benefit the seller? Tell him Merry Christmas. You might even say that you get 50% of the rents of all units that you rent at close. Split the profits, so you get a kickback at closing. How much will it cost you to have 3 vacancies for 2 months because you didn't want him to benefit from you renting his place??? do the math.
As for the market rents....Drive around 4 or 5 blocks around every direction on the property and call every "for rent" sign that is a similar property (3+ units, similar sq. footage, condition, and beds/baths). You'll get a really good idea of what the rents are. Pretend like you're looking to rent an apartment just like that in your area. You'll have your market figured out in 2 hours. Again, we can't tell you that. It varies a ton.
How long has he had it? How much equity? Can you buy it subject to????
A couple thoughts on how to buy it:
sub. to
Defered settlement (say 18 months) so you can refi
100% carry (aka wraparound)
have the seller be your partner for 18 months, season it, and then cash him out.
....it's too late for me to be more creative than that.
Finding the property is half the battle. Figuring out how to buy it is the other. Don't get caught up in the deal and ignore the financing.
Hibby/DaveT/Elissnurse/Stockpro:
Thanks for all the good tips. I misstated when I said the cashflow was $2800 a month right now; it's the gross scheduled income that is $2800. I also have all the tax, insurance, and other expense information, and had already calculated that at current GSI I the break-even price would be $160k. Since they're asking $650k that seems a little far-fetched as a going-in offer.
[B]I would be very interested in learning more about "deferred settlement" and any other methods that would allow me go gain control of the property in order to get it filled before closing. B] I don't think "subject to" works in Texas, does anyone know for sure?
Thanks!
The $650K asking price seems way out there. You might want to ask them how they arrived at it to get them to start realising they are not really in the ball park. Elissnurse mentioned finding out about comp CAP rates. If they are at around 8%, you would still not expect a price of more than $460K.
Since it is a small commercial loan it might not be easy to finance, but if you keep calling around their are some lenders who will do them.
Good luck
Thanks to all who helped me think through this. My realtor viewed the property for me and told me it was not such a good quality re-do job, so we are not going to proceed at this time. If it's still on the market in a few months then I'll get an appraisal and make an offer based on that.
Good thread, great group! Thanks!