Posted by Redline on December 27, 2001 at 20:51:50:
So of COURSE it’s overpriced!
For what it’s worth, I am also looking for an apt building and I’ve seen them sit for months and then go for close to asking price - and the prices they go for would make me NO money.
RL (NJ)
Shopping for an apartment complex… - Posted by Mike (NJ)
Posted by Mike (NJ) on December 26, 2001 at 08:59:30:
I will be meeting with the seller of a 9 unit terrace style apartment complex within the next week. I only have a limited amount of information at this time, so bare with me. The property has been on the market for approximately 6 months. The Lot size is 79X190. Rents average $700/month. The asking price is $495k. The seller wants $100k down and is willing to hold a second for another $100k. I currently own 3 properties where i could re-fi and perhaps pull 30k - 40k out. I have no cash availible (except for 3 platinum credit cards where i could advance approx 15-25k as a last resort). I am in process of forming an LLC for the purpose of real estate investing. I have 4 partners with good credit that are currently renting apartments. My questions are the following:
If 2 or 3 of my partners are willing to initially reside in the apartments, can we go in as owner occupied and thus reduce the down payment requirements?
What type of statistical/financial/tax data should I ask the seller to provide?
What kinds of questions from the seller should I be prepared to answer?
What formulas should I be using to determine if the offer price of $495k is legit?
Basically, I want to present myself in a manner that shows the seller that I am serious about making this deal happen if he is willing to be flexible on the terms. If he is not willing to make a few concessions for me at this time, maybe he will reconsider in the future if the property stays on the market. I’m not sure if i have a realistic shot of landing this property but I will use it as a learning experience either way. Any advise on this issue would be greatly appreciated.
Re: Shopping for an apartment complex… - Posted by Ronald * Starr(in No CA)
Posted by Ronald * Starr(in No CA) on December 26, 2001 at 17:19:34:
Mike–(NJ)------------
The property asking price is probably well above market value. Otherwise, why would it be sitting for 6 months? Unless apartments take a very long time to sell in your area. How much too much? Hard to know. But, with single family properties, people are often willing to offer 92-95% of the asking price. Even maybe 90%. If the same holds true for apartments, then the property is probably at least 10% overpriced.
Do your analysis of income and expenses and let that be your guide as to what you would be willing to pay for the property. What the owner is asking is nothing to go by. Owners often ask high prices, trying to get you thinking in terms of those numbers.
Good InvestingRon Starr***
Re: Shopping for an apartment complex… - Posted by RT
Posted by RT on December 26, 2001 at 13:04:55:
I don’t know where you are at and don’t know your market. Just by using the rough figures in my market in Northern California, the top dollars I would pay is no more than $430,000. Of course, this number is just a reference. You have to consider another sets of numbers which is estimate of expenses. Why don’t you have a contractors give you a quote on all the fix ups? That will help you to negotiate the price.
Don’t forget to come back to tell us how it goes.
Re: Shopping for an apartment complex… - Posted by phil fernandez
Posted by phil fernandez on December 26, 2001 at 10:39:04:
You won’t be able to get an owner occupied loan even if some of your partners live in the complex because you have over 4 units. If you search long enough you are apt to find a lender who will do a 10% down payment loan. I’ve worked with small banks in the past and often have only had to put 10% of my own money in and they will allow a 10% owner carry back 2nd if the cash flow to debt ratio falls into line.
You could also generate part of your down through the proration of rents and assignment of the current tenants deposits at closing. In your above case that would be $700 x 9 units = $6,300 and perhaps another $6,300 in deposits for a total of $12,600.
The key to getting an accurate picture of the income and expenses is to not rely on what the seller tells you, but to verify every number yourself. Also the seller seldom puts in a number for Reserves For Replacement. The cash for replacing appliances, furnaces, roofs, carpet, painting etc should come out of the cashflow, not out of your pocket. Reserves For Replacement needs to be factored in as an expense.
As far as what questions the seller might ask you could range from your experience in owning and running an apartment complex to your ability to get financing.
I don’t like to just base my buying decision on formula’s like Cap rates and cash on cash numbers etc.I base my decision on the income minus expenses that will give me the positive cashflow that I am satisfied with. However I do look at the Cap rate and other formulas as another way of checking to see if I have a deal.
Re: Shopping for an apartment complex… - Posted by Jim Rayner
Posted by Jim Rayner on December 26, 2001 at 09:22:14:
Mike,
Search the commercial newsgroup for due diligence and cap rate. also post this question there, you will get more responses.