Bad comps

I just went to your bio to see if you were in Ga. if so maybe I could help. Ask your agent to pull tax records of sales not just sold homes on MLS. Here in Ga, we have a link on MLS to go to reallist.com = Ga. tax records. Then I pull solds from the state records which have more info. than the MLS records.

- Hope that is helpful!

Hi Dan,

I'm from Illinois. I went on our state's website to see if I could find any tax records of recent sold properties, but found absolutely nothing. I'm thinking my only other option is to get an appraiser to look at the property. This is a Fannie Mae property, so I'm going to ask my broker if they will pay for the appraisal. Especially considering the problem we're having locating appropriate comps. Not sure they will go for it but it can't hurt to ask. I'm just trying to make this deal happen with no money out of my pocket.

The adventure continues!

Roni

What do you do when the comps you're working with don't match the property you're interested in making an offer on? That's the easy question - Circular File (the trash), every time.

The hard question is: How do you get accurate comps on a "one of a kind" property? I suppose you could analyze your "bad" comps on a square foot or per unit basis, then multiply it out for an additional unit.

I guess the $64K question is: What kind of Realtor do you have pulling these for you? If she's brand new to the biz, or specializes only in SFH's, you're probably asking the wrong person to help you. You may need a commercial REA, or at least, one that specializes in multi-unit properties.

I hope this helps you, and I know there are a few vets on this site who've ran into this problem before. Just keep your question current, and someone will be by here soon enough that can tell you more than I can. Best of luck to you...

You base your offer on the income the property is generating. NOI, cash on cash. Current leases and their terms must be considered.

Some one can say the property comps at $1,000,000 but it cash flows $100 a month. What is this property worth?

Michael Mangham
MD Home Acquisitions LLC

Once you figure out the NOI, see what the price needs to be at for a 10% cap, 20% cap, etc... What is your buying criteria? We want 12% at a minimum on multi's and 15% on SFH's. Make your offer based on the NOI number and the cap rate YOU want.

If I had an old cigar box that I bought for $2 yet it magically makes me $200 a month, what is it worth? Base it on income, not just comps.

What's the formula for doing this. I came across a multi unit and need to do the same as well. I already have the info on how much the units are renting for but, what's the rest of the formula for figuring out what I should offer to buy the multi unit?

Thanks David:) Roni

Cap rate is NOI Divided by purchase price
Cash on cash is NOI minus dept service divided by acquisition costs
NOI is effective Gross Income minus total operating costs. Do not include dept service.

The higher the cap rate, the higher the risk. The lower the cap rate the lower the risk.

When determining NOI NEVER use pro forma or the sellers numbers.

Effective Gross income is Gross potential rent minus vacancy cost.

Michael Mangham
MD Home Acquisitions LLC

The owner that's selling the units are tenant occupied. So, shouldn't I go what the tenants are paying?

PART of the equation is collected monthly rents. You must verify actual rents collected. Rent rolls verified by bank statements. Also, what are the current leases for each tenant. Where are their deposits? ETC ETC ETC.

Michael Mangham
MD Home Acquisitions LLC

Thanks for the clarification, now I understand!

Hey Dan,

I have another question for you since you're a broker. My broker said Fannie Mae had the property I'm interested in appraised and the price was high, which my broker said is why they priced the property a bit high. However, she did NOT tell me the price the property was appraised at. Aren't I entitled to that information? I meet with my broker tomorrow and plan on asking for that information.

Roni

Hi Sheila,

Thanks so much for your input. I really appreciate it.

I have a question regarding the NOI. The 3 unit multi-family I'm interested in has been vacant for a year and is currently vacant. I spoke with a property management company in the area and they said I could get $1000-1200/month for each unit, so do I calculate the NOI based solely on that information?

The property was initially listed at $131.000, then it went down to $122.900 and now it's $119.000. The repairs will cost about 30.000. The property is in a great neighborhood with beautiful single family homes. This multi-family unit in the only one in the area.

Under these circumstances and without any comps, how do I determine an offer price? And because I'm a newbie (first deal), I really can't tell you what cap rate I want.

Thanks!

Roni

Here's how we look at the cap rate. Take your NOI and Divide by purchase price. A $100,000 purchase that has a $10,000 Annual NOI is a 10% cap. If the NOI was $20,000 then it's a 20% cap rate. This is your capitalization rate and we use it as our ROI indicator. Find your NOI by taking your gross annual income and then subtract ALL of your expenses except debt service. (add up your taxes, insurance, trash, water, maintenance,... Whatever owner pays from the income.)

For our purposes, a high NOI and a low purchase price (2 things investors require) will cause a higher cap rate. We want a high cap rate! We have a 4 unit that we bought for $10,000 that makes $9,000 NOI. That's a 90% Cap. I won't buy a low cap because I couldn't pay debt service on it.

But, I could turn my 90% cap into a 9% cap by selling it for $100,000. it's just a number that tells us the value of something if we can expect a certain ROI%.

A shoebox that costs $100 that spits out $100 bills every month is worth more than $100. It isn't only about how much it costs to replace the shoe box, I could get them for free. It's about the income that you are getting. If it pays me $x,xxx a month, what would I pay for it? That's the beauty of investing.

It's how we determine our purchase price if you don't have comps. If I want a 20% ROI and I know the NOI, I can figure out my max offer that way.

Hope this helps.

Look at this scenario:

In Illinois, our taxes are kinda high. I'm assuming yours will be around $5k annually due to rent price and insurance will be about $1000 annually. So that's $6k off of the NOI. Who pays water, trash, electric & gas? If its all on your tenants that's the best. If you are nabbing $3k a month gross and they pay utilities. You have a pro forma NOI of 30k. Divide by total cost of purchase and rehab, say $150k (remember, this is your "value" or "what is it worth? Whatever someone is willing to pay for it" amount) and you have a 20% cap. This is assuming you are 100% occupied every month and have no maintanence issues.

You will not be 100% occupied and you will have maintanence issues. That's why previous owners records are so important. Let's say you stay 90% occupied as an average. You are now down to $26,400 income after taxes and insurance. If you are lucky, you are only shelling out $1,000 per unit annually on maintenance, parts and labor. Your new NOI would be $23,400. Now this is a more realistic number and you will need to do you due diligence before buying to keep your upkeep to a minimum. This takes you down to a 15.6% cap (still good if it's in a good area and you have good tenants!) If you want to keep a 20% cap or ROI, your purchase plus repairs needs to be $117,000. There are more numbers that need factored for "true" numbers, but this gives you a very close idea of your ROI without busting out a scientific calculator and factoring in the time-value of money and depreciation and all. This is just to tell you if it's a deal first and if it meets your investing criteria.

Your debt service on $150k at 8% for 30 years is $1100 a month, $13,200 annually. How are you financing this? Banks are doing 5.5% commercial loans but you could probably get 8-10% private money for a couple of years if it looks good.

So if you are at 90% and you don't have more than your $1k per unit issues, you could still plan on making $10k a year profit on this after debt service. If you do your homework and the rehab isn't more than you think, this could be a good long term hold for someone, especially if the $1200 a month rent is possible.

Who pays the utilities is still a concern for me though. That could make or break this. Get more info on this and find out if that rent amount is realistic. Get the taxes and insurance numbers too.

Hope this helps.

Wow Sheila, you're fantastic! This information helps me tremendously! This building has been vacant for a year, so I have to do a little digging to get the previous owners records.

I do know that the tenants pay their own utilities and owner pays water (uncertain if either pay for trash). 2011 taxes are $7483. Waiting for my insurance guy to give me a quote for coverage sometime today. Will probably only get $1000/month for rent.

My plan is to offer no more then $70.000 for the place. Repairs $25.000-$30.000. I believe the place is worth $140.000 to 150.00 after repairs. However, no real comps to back that.

If it's worth mentioning the place was priced at $275.000 at a Sheriff's sale in 6/11.

Anyhoo, will continue working on my numbers. Thanks for taking so much time to help me out. How sweet:)

Roni

Talk to the county about getting your taxes lowered. If you are trying to fix up a vacant building, they may wave the taxes for a couple of years or at least lower them.

Keep us updated!