Posted by Ed Garcia on June 24, 2001 at 12:58:44:
Mark,
I think that you’re on the right track with your thinking. I’ve read what Bill W has told you and must admit that he gave you some sound advice. However I wanted to discuss it in a different sense.
When I said that I think you’re on the right track, I was referring to the fact that you’re offering $150,000 as a lease option. After all, the seller owes $148,000, so we know at this point and time, that they don’t have a lot of room for further negotiation. They’re motivated, and just want out.
My concern is the differed maintenance. The cleaning and paint is no problemo, my concern, is the CARPET in 2 units, and the ROOF. That can cost you, and could be the deal killer, depending on what’s going on with rentals in the area.
Let me take my shot at some of your questions.
- How would you structure the “offer”? (I avoid using the word “deal”, I’ll let you be the judge if there is a deal here or not).
I think, that your L/O of $150,000 is fine. Now remember, my answer is contingent on the information that your providing. I have to assume that you know what you’re talking about and have done your homework. You say that after the fix-ups, and the smoke clears, that you can get $28,800 Gross Rents.
You also tell us that a 6unit just sold for $272,000, which is $45,333 per unit. That times 4 units, would give your property a ballpark value of $181,332. This is not a correct formula, just a ballpark to put values in prospective, as to how much units in the area are worth per door.
Mark, there is so much information you didn’t share with us; such as what are the current monthly payments? What it will cost to do the fix-ups?
What is the unit brake down, how many 1 bed, how many 2 etc? I’m assuming for now that they’re all 2 bedroom. I smell a deal can be made here because the seller is motivated and you can turn this into a leveraged deal, meaning your going into it with no money out of your pocket and doing it on a lease/option with no real credit risk. It’s a matter of getting the numbers to work.
Again a rule of thumb on 4 units, and how it could look 12 months from now.
Gross Rents $28,800
Hit it for 30% expenses and 5% vacancy = $10,080, giving you a NOI of $18,720
When Bill was talking about financing, I’m afraid he was referring to multiple units, which from a lenders stand point, 4 units are not there. The financing on 4 units can be achieved from most residential lenders, which do from 1 to 4.
New loan at 80% which is $144,800 at 8.5% which gives you a payment of $1114 X 12 months = $13,368. You’re going to have the seller carry the difference as a second for 5 years with no interest, which is $5,200 and gives you a payment of $86.67. X 12 months gives you $1,040. $1,040. + $13,368 = $14,408 giving you a positive cash flow of $4,312. or $359.00 per month. I hit your deal pretty hard Mark, normally a lender will only plug in 25% for vacancy and expenses on a 4-plex because there is usually NO management on 4 units. Owners usually manage them their selves. Because of that, I will split the difference, and there could be another $1440 for you to play with, which could sweeten the deal even more, giving you $5752 or $479 positive cash flow per month.
Mark, Bill in his post refereed to “Cap rates” and that he had a preference to 12 to 15. I can’t argue with Bill because when I do a deal, that’s exactly where I’m coming from. But this is only 4 units, and I don’t think I would look at this deal from a standpoint of Cap, but rather from a stand point of GRM ( Gross Rent Multiplier). Not knowing what multiplier they’re using for the area, I’ll have to discuss Cap for now. But even at that, with no money down and at a 10 cap, this could be a deal. The reason I was reaching so hard is because it’s your first deal, and it would be nice to see if we could put it together with no money and a little positive cash flow.
- Do people generally offer to make payments to the seller equal to the seller’s payments?
In order to get to the deal we’ve just discussed you’ll need full cooperation from the seller. From this point on I would agree with Bill where he starts No. 1 and says, “If I was willing to do this, (and from the numbers, I would pass at the moment)”,
Bill is right Mark, I was just playing with numbers trying to reach for you, to see if I could make chicken salad out of chicken you know what.
Mark, I did all of this just to give you some more food for thought and possibilities that could be achieved.
Ed Garcia