Help! First Offer - Posted by Vernell

Posted by Vernell on June 21, 2001 at 16:48:50:

Thanks Randall!

It’s actually worse than you indicated. Annual Gross Rents would be $43,200 ($3600 x 12). Assuming 40% for expenses, I’ll have a NOI of $17,280. Which makes the cap rate 3.3%.

What is a good cap rate? The owner saw his appraisal and thought it was a good price. I thought it was too high and didn’t know if there was a formula to help me arrive at that conclusion. Would it be better to walk away or to reduce the selling price. I’m sure he won’t get many bites since he asking for so much down and taking all the equity out of the property.

Help! First Offer - Posted by Vernell

Posted by Vernell on June 21, 2001 at 14:01:46:

I found a motivated seller but not sure how to make offer so I can afford property. Owner has 3 duplexes must sell all of them. He’s asking $520K in total (said the city appraised it at $523K).

He built them in 1979 and they’re paid off. He will carry a contract at 6% but wants $175K down (wants to buy property in another state).

The duplexes are all rented. He says he hasn’t raised rents in years and informed tenants new owner will probably raise rents. Total rents are $3,300 a month. Based on rent rates in area rent can probably go up an additional $300 a month.

The property is well maintained since the owner lives in house in front of duplexes. I’m not sure how to structure this so I can pull out some cash and have a positive cash flow. Any ideas?

Re: Help! First Offer - Posted by SueC

Posted by SueC on June 22, 2001 at 13:12:25:

You would come out of pocket for $175k?? with that kind of money, go find a better deal - or deals.

And the city doesn’t appraise properties, that’s just for tax purposes and shouldn’t be relied on for the FMV of the property. What are comps? and WHY hasn’t he raised rents in years?? Are you SURE they can bring higher rents?

Just playing devil’s advocate here, since he wants too much from YOU why wasn’t he also getting it from his tenants??

Re: Help! First Offer - Posted by Randall Porter

Posted by Randall Porter on June 21, 2001 at 15:55:22:

This does not sound like a motivated seller to me. Assuming the rents can be raised to the level you indicated, the annual gross rents on this deal is $61,200.00( 6 UNITS X $850 month x 12 months) Assunming expenses are 40% of the gross rents, you have an NOI of $36720. Divide that by the asking price, and the cap rate on this is 7.1%. This is not a good deal at the price the seller is asking.

Re: Help! First Offer - Posted by Vernell

Posted by Vernell on June 22, 2001 at 13:37:04:

Everyone has been really great! I realize this is not a good deal since the cap rate is so low.

I had no plans of coming out of pocket with $175K. Since he owned the property free and clear. I was hoping to use his credit and then transfer mortgage to me.

The seller’s daughter works for a title company and told him the city appraisals are fairly accurate. You and I know that’s not the case but he’s convinced his daughter is correct. He said he has been trying to sell on-and-off for a year. His price explains it.

Comps - actual sales price for comparable properties sold in the area. I have a real estate friend who runs this for me.

He built the properties in the '80’s and likes keeping it rented so he charges a lot lower than the competition. I have looked at the market and feel I could get higher rents (not enough to justify selling price). However, I’m certain I would lose many of the current tenants.

The buildings are beautiful and well maintained but the deal isn’t. I’ll simply pass on this one.