Owner Willing To Do Lease Purchase Or Owner Financing On 31 Unit Apartment Complex
Here is the information I have right now.
18 townhouses 2/2 rent $450
13 one story units 2/2 rent $425
Currently managed by the owners and all but 4 of the units 2 of each rented out. Within the past 3 years there has been extensive renovations. Buildings are brick and vinyl. There are 5 section 8 tennants currently living in the one story units.
Monthly rent at $13,950 100% occupied.
Estimated Expenses:
Vacancy 16k @10%
Taxes 10k
Insurance 6k
Property Mgt. 17k
Maintenance 10k
Landscaping 3k
Pest Control 3k
This would leave my NOI around 97,200.
The asking price is around 800,000.
I would probably not be in the financial position to qualify for a comerical loan for a property this size, but the owner said the he would be willing to do a lease purchase or some type of owner financing. My question is what type of proposal would be the best way to get this property. 12-month lease purchase with 5% down or 5 % down and do owner financing at 8% over 15 years?
-Would this be considered a good deal?
-What other questions do I need to ask to figure out if this is a good deal?
Any feedback would be appreciated.
Thanks,
Thomas
DO NOT under any circumstances do a 1 year lease purchase! If you don't qualify now, you'll nees to show at least 12 months or profitable history before you'll be able to get a bank loan.
ON paper it looks pretty good, but I'd be concerned if the seller is willing to just hand you the keys with nothing significant down.
Don;t hesitate to do a 3-5 year least option; I'd even use his NOI numbers to set the purchase price, in your case the multiple is 8.23 - but if you find a 15% vacancy and find the maintenance is actually 20k per year; your NOI will only be 79,200 - and if your multiple stays the same, the purchase price would only be $651k. You can even offer to use a floating average - so if year one NOI is 79k; year 2 is 84k and year 3 is 85k you would pay the average multiplied by the multiplier.
He probably won't want to go for this, but i think you;ll find this to be a very fair way to truely value the building.
How to determine true management and
maintenance expenses with owner currently managing the property?
If I can get the NOI numbers for the past 5 years, how can I determine the true expenses on the property?
Would 10% down and a certain % per month towards the purchase price be reasonable?
What is the FMV of the property? Would you be willing to talk to the owners to see if they would give a discount for a cash purchase?
[ Edited by NancyChadwick on Date 07/21/2004 ]
Hold your downpayment to a minimum. Have the nice owner take back the mortgage as he has indicated. You might try to bargain for a reduction in interest rate. You might also ask for an option to purchase at a lesser price anytime during the 15 year of the note which the mortgage secures.
Looks like a goody to ride up an inflationary period of history. What kind of tenants, any racial incidents. What is the mood of the development. Tenants upbeat about jobs, rents etc. etc. Sometimes it is these little things that make a looser into a winner.
Why is he selling? For Real. Check his income and expenses over the last few years. Check the repairs. Do the tenants like the owner? Will they lie for him?
Good luck. On the face looks good.
Lucius
Hello Thomas,
To answer your financing question first:
The 15 year land contract is a much better deal. 12 months is not enough time to move from lease to purchase on a property like this. Plus commercial lenders will consider your option price after 12 months to be an www.acquisition--i.e. they will be underwriting on 80% LTV using your option price as value. If you do a land contract purchase they will consider your outstanding balance to be a refinance of an existing purchase so they will use 80% LTV using appraised value instead of purchase price.
Now, my objections to the deal itself. These are pretty minor but I thought I should mention them. 4 units vacant out of 21 is closer to a 20% vacancy factor than the 10% you have built into your projection. Is there an explaination for this abnormally high vacancy? That explaination may be relatively easy to fix (seasonal turn-over, units just came on-line after rehab) or it may be difficult (market saturation). Either way I would want to know.
Your question about the "reliability" of the sellers numbers is a valid one. If you are seriously concerned you can compare operating expenses on this building to others in the area. IREM publishes an annual income and expense guide which is vital for that process.
and turn to some
I have found out that there is only 3 units that are not rented and that is because they are still being renovated. Bascially someone came and bought a 31 unit run down apartment complex and is fixing it up to sell. The area is in a good but not great location. I found out the taxes are only 2,850 and the vacancy rate will be lower than the 20% you mentiioned. All but 3 units are renting for 450 and that is low for the rental rates in the area. They were still in the process of renovating last year and the gross income was 98,438 and so far this year it is 61,300 through June. Number is low but they still have 3 original tennants in apartments from when they first bought the complex 2 years ago at $280 and there were 4 units that were still being finished.
Anyone who has any experience with buying apartment complexes (after they have been rehabbed) can you please tell me the best way to value an apartment complex that has been had a complete renovation.
Thanks.
The old german guy I sorta apprenticed with in this business had a saying:
Any building anywhere any time is worth 10 times one years Net operating income.
9 times is a good deal
8 times is a very good deal.
At 7 times, come get me.