Posted by Ed Garcia on April 26, 2007 at 11:16:18:
Maine,
From this post on, if you should want to correspond with me further on this deal it will have to be by phone. Although I like to work a deal on the board so that others can learn, it?s time consuming and we can work much fasted by phone.
Going over the 18 questions.
(1) Describe the Units and the surrounding area? Unite are about 375 sq ft efficiencies. They were updated in 2003 and have been being operated as an extended stay and student housing . Units are in a college town about 1.5 miles down street. The units sit right off of Interstate 20
RESPONSE
Maine, college rentals have there issues. Students are known to have beer busts, parties etc and can cause disruption as well as damage to the units making the units management intensive, They also rent for 9 months rather then a year which again makes them management intensive.
(2) How old are the units? 30-35 years
RESPONSE
No comment.
(3) What’s the unit mix ( how many 1 br. 2 br etc) all 1 bed /1 bath plus a larger 6900 sq ft multi-purpose building that ½ is leased at $4,000 a month for 5 years with an option
RESPONSE
Maine, your unit mix may be the reason you have such a high vacancy. When buying multiple units, my preference is 2 bedroom or a unit mix of at least 50/50 1 bed room or less such as efficiencies and two bed room to 3 bed room. The reason 2 bedroom are favorable is turn over and management intensiveness. 1 bedroom units or less, have more turnovers which is costly. Not only from the temporary lack of income as the units are down, but also because of the fix-up or clean up cost even though it may be minimal.
- What’s the vacancy factor in the area? Between 5 and 10%
RESPONSE
Had your units had a better unit mix I would attribute it to management, however with your units mix, I?m convinced that your vacancy factor will be on going. Normally I welcome vacancy as up-side, but not in the case of your deal.
(5) What is the gross income of the units? 29,820 a month, tenant just signed lease for 4000 a month
RESPONSE
I could be wrong but this figure appears to be PROJECTED rather then ACTUAL, I would be concerned to see the Actual.
- What is the vacancy of the units? 20%
RESPONSE
Previously discussed in questions 3 and 4.
(7) What is the NOI? 17,000
RESPONSE
Again, is the Actual or Projected?
- What are market rents in the area? 1 bed / 1 bath $450 a month
RESPONSE
This leads me to believe that your rents are maxed and there is no up-side in the rents. Maine, when you buy commercial property you?re buying an income stream, this question is asked to let you see how your units compare and compete in the area.
- Are there any other Units in the area for sale? Listing for 49 units about 5 miles away
RESPONSE
This question is asked to get you to do your home work and again look at your competition to compare your purchase to others in the area. 5 miles may or may not be a good comp and be questionable as to area. We know that the property is multiple units but we don?t know the unit mix or rents which could make a major difference. The important thing is for you to re-evaluate you acquisition to make sure you haven?t gotten over motivated as a buyer.
(10) If so at what Price? 1,800,000
RESPONSE
I addressed this in question #9. 5 miles away could be in an entirely different community or part of town. The unit mix and rents could make this comparable, apples to oranges. I was hoping you could give me better comps such as closer and more comparable to subject property such as a like property 10 unit building all efficiencies etc.
- What are the going Cap rates in the area on multiple units? 8%
RESPONSE
Again, this question is for you to get a feel as to how a lender might view the value of the property for loan placement, and for you to get a feel on how good of a deal you?re getting.
- Have any other Units in the area recently sold? Yes 20 units
RESPONSE
It would be interesting to see how close this sale is to your subject property not only geographically but likeness unit mix etc.
(13) If so at what price? 720,000
RESPONSE
This answer has no meaning to me do to I don?t have enough information to judge it as a comparable.
(14) How much does the seller owe on the units? 800,000
RESPONSE
I?m glad you know the answer to this question. This means to me that you?re on the right track as far a evaluating you options on doing this acquisition.
(15) If there is a loan, is it assumable? No, it is a USDA Loan and must be paid off so tenant can occupy the multi-purpose building.
RESPONSE
I?m sorry Maine, this answer doesn?t make any sense to me.
(16) Will the seller carry a second? Yes for 150,000
RESPONSE
Here is where you?re going to pick up your $50,000. If the seller will carry 150k they?ll carry 200k. Especially when you can see that even if they carry 200k they?ll pull out 500k in cash and have income from the 200k 2nd mortgage that they?ll be carrying for you.
- Is there any differed maintenance? Very Little
RESPONSE
No comment
(18) If so, estimated cost of maintenance? $40,000
RESPONSE
I would make sure of this number and negotiate it against the purchase price.
Maine, it?s difficult to tell you how to work this deal because I still need more information about you, the seller, and the property. As I said when giving you the 18 questions, they are just to get you to think and analyze your deal.
This would not be a deal I would do to hold, due to I feel that it?s too management intensive. After saying that in all fairness, I realize that you more than likely won?t agree with me and may feel that it?s a deal for you.
I would rework the deal by finding the history of the vacancies. If this building has a history of such high vacancy, it should be reflected in the price with a price adjustment.
I would want to see actual figures rather then projected and I suggest that you go to Ray Alcorn?s Commercial Real Estate: Analyzing & Due Diligence (http://www.creonline.com/articles/art-148.html). I believe he also asks for 3 years personal tax returns as well as the tax returns the building might have if it?s in an LLC, partnership, or other Corp. I have a feeling that you?re already working with a bank because you seem to feel that you?re short $50,000 so you may already have some sort of deal on the table.
Please understand Maine, with the minimum information you?ve provided, I?m in the position of second guessing. As I said earlier in my post if you should care to talk you can call me,
Ed Garcia