OfflineI've got a scenario I'd like some input on.
I've got a guy who's selling an 8 unit (efficiencies and 1 br's; fully rented) building with a small semi-detached cafe/deli that he is currently running.
The rents are pulling in $4300/mo. He's asking $450,000 for the property. He paid in the $130s for it in 2007. He re-wired the whole property and renovated the 8 units.
I asked when was his last appraisal and he said he's never had it appraised. I asked where he came up with the 450 number. He said he was just sorta "guessing because of what the rents are bringing in". OK, dude!! (is what I thought!!)
My question is, can I ask him if he minds me getting an appraisal on the property before I move forward? I'd rather pay $300 for an appraisal than over pay by $150,000!!!
Any thoughts will be appreciated.
Thanks,
Melanie
You have a unique property with the cafe semi-attached in the deal. You'll probably want to find similar properties to the 8 unit if possible and then comp out the cafe separately. If working with an agent have then work up some comps for you. We'll see what the experts on this site tell you. Sounds like an interesting property. Why does he want to sell? Motivated seller? If not, may want to pass. He may be fishing for "most he can get" rather than it being a good deal for you. What is your goal with the property?
Jill Holden | San Diego
Investor Services
Team Development
Most commercial deal values ARE based on what the property produces. What if the property produces $4500 a month and the building appraises for $150,000? Is it only worth $150,000? No! Its worth closer to $450,000 because of the cash flow it generates not the appraisal. Of course if it has a bunch of deferred maintenance, that can effect the value. Vacancies, downturn in the area also to name a few things more. Owner carry?
Cap rates, NOI, cash on cash, dept service, rent rolls are several of the many terms and numbers you must know and analyze on a commercial deal.
Good luck! It will be a great learning experience for you whether you close or not.
Michael Mangham
MD Home Acquisitions LLC
Knowledge is power, but execution trumps knowledge. Tony Robbins
http://www.mdhomeacquisitions.com Seller site
http://www.mdhomeacquisitionsbargainhouses.com Buyer site
http://www.mdhomeacquisitionshousehunter.com Bird Dog Site
http://www.mdlodeals.com Tenant/Buyer site
Melanie,
alot more info is needed. at what you indicated rents pulling $4300 mo. which is $537.5 per unit. on that basis would put it at $51,600 yr GOI. with a $450k asking he's calculating at a 12% cap. Which may or may not be close. You'll have to identify that. at first look it barely passes the 1% rule (break even point). on the basis of the 1% rule being 1% of purchase price should equal monthly gross operating income just to break even (income to cover expenses)
being a mixed use property. will he continue the deli? if so, lease to bring in additional income to offset if not, what could be done with the space?
get min 2 yrs. P&L, expenses, rent rolls. determine your true market cap. THEN you know what your working with and based on facts (performance) to determine your offer price. it's basis for your LOI. You'll dig deeper of course if accepted, during your due diligence period.
remember: NOI/Cap = PP
huge advantage is you are dealing with the owner. a ton of different approaches and creative strategies can be negotiated IF he's motivated.
Find out:
why he's selling, recognize his situation, does he need upfront?, why he needs the money? how soon would he need it? figure out how you can help him. Is it a situation for a ML (master lease), owner carry 1st or 2nd, wrap, option, etc?
Best wishes,
Jen
Thank you all for responding; you've given me some other things to look at and chew on.
Yes, I'm very glad that I'm dealing with the seller himself. I don't feel he's intentionally "over-asking"; however, like Jen said, it's barely touching the 1% rule.
He's a bit motivated. He's tired, doesn't want to run the deli anymore. He wants to be at home with his 2 small children and wife. They're even contemplating moving out of the area.
it might be a good fit for a master lease and provide the owner an alternative to paying capital gains tax on the official sale of the property, yet he's tired of being an owner. The investor agrees to pay the owner a set lease payment every month. Typically you are going to run the property (or contract out), including collecting all the income and paying all expense associated with the property over say 3 to 5 yr period. The reason you'd want to do this is that you also get an option to purchase the property, usually at about it's current value. You goal is to then increase the value of the cash flow as much as possible.
or structuring and owner carry back or joint venture since it doesn't sound as he's rolling this gains. (1031 exchange). if you are looking to acquire funding (small 1st), would seller be willing to subordinate (junior lien position - 2nd)
but like I said depends on how much he needs, and how soon he needs it.
take him through the pre-screening process:
1) strive to take at huge discount
2) motivation of seller
3) distressed property (not necessarily deferred maintenance)
4) negotiate great terms.
5) big upside
then look to structure and negotiate
1) getting in light - little skin
2) no personal guarantee
3) more time
knowing whether you are looking to hold or sell. determining your strategy, time frame, what you're willing to negotiate and identifying what will be your non-negotiable, walk away point.
good luck and keep up posted!
blessings,
jen
Thank you, Jen! I'll keep you posted.