Ed, I need pricing advice.... - Posted by mike

Posted by Ed Garcia on March 12, 2002 at 10:35:26:


I answer question here on this forum day in and day out. I do the best job I can. I’m not a mind reader. I knew that you wanted to buy these units at the best price you could and with little or no money down.

I not only was going to help you establish the value, but I was also going help you establish a strategy for the offer and the financing.

I needed to get a feel for the deal, the area, the rents, and what I had to work with in regards to the buyer. This is two 4 unit properties not one 8. The method used should be a GRM (Gross Rent Multiplier) not a cap rate method that is used on multiple units and commercial.

Once you didn’t cooperate and answer my questions, and instead acted as though they were unimportant, I frankly didn’t give a sh-t.

I hope I’ve made myself clear,

Ed Garcia

Ed, I need pricing advice… - Posted by mike

Posted by mike on March 09, 2002 at 11:55:29:

I have been contacted by an older couple that are getting out of the rental business. They have 2 quadplexes that bring in $500 per unit, total gross of $4000. Both quadplexes are roughly 30 years old and could use some updating. The combined property taxes for both units is $7000 for the year. The owner is also responsible for water which is roughly $2500 per year. I am guessing insurance will total $2000 for both units. I have snow and lawn care at about $1200 per year. And I have total maintenance per year at $3000. They want me to make an offer but I am struggling on what my initial offer should be. Any analysis on what I should offer them would be greatly appreciated. Thanks.

Re: Ed, I need pricing advice… - Posted by Ed Garcia

Posted by Ed Garcia on March 11, 2002 at 10:57:25:


JohnBoy has given the correct answer. I made a mistake.

If you haven’t already seen it, check below for JohnBoys post.

Ed Garcia

Re: Ed, I need pricing advice… - Posted by Ed Garcia

Posted by Ed Garcia on March 10, 2002 at 11:52:50:


I know that you answered some of the 18 questions in front. Don’t ask me why, but I also knew that you wanted to do a deal with little or no money down.

What questions that were important that you didn’t answer are,


Apparently Mike you don’t think that these questions are important.

They help me analyze how to help an individual make an offer. They should also help you as well. If you know how much the seller owes on a property, you know how much room there is in the deal. If you know if the loan is assumable you may want to just get a second money purchase loan and see if you can assume the first for an assumption fee.

The second time you still didn’t tell me about your credit but you made me feel that you feel that you’re bankable, so I know now that your credit must be good.

Mike, I can only know how to analyze a deal by the information available. I think you are short changing yourself because you are in haste to make an offer with out all of the facts.The answer to the 18 questions not only tell my how to analyze the deal but give me some direction in negations. You have not told us the MOTIVATION of the seller.

Look Mike you give me no feel for this deal. So I’m going to just bottom line it for you.

I’m not in this business for the practice. If I can’t steel a property or have cash flow, then I’m not interested. You’re obviously trying to leverage the deal and in doing so you can take less profit and make a more aggressive offer. But all you want from me is a number. When I make my offer it is based on a strategy off the information given.

I can’t tell if there is up-side in the rents so I’m going to base everything just off of the info you gave me period.

Based on your information, they are worth $150,000 a piece.

Ed Garcia

Re: Ed, I need pricing advice… - Posted by Ed Garcia

Posted by Ed Garcia on March 10, 2002 at 09:42:09:


I’m sorry I need more information then you’re giving. Here is a list of questions you should ask in order to analyze a deal. Yes you have answered some of them so add that to the list.

Questions to ask for commercial

(1) Describe The Units and the surrounding area?
(2) How old are the units?
(3) What’s the unit mix ( how many 1 br. 2 br etc)
(4) What’s the vacancy factor in the area?
(5) What is the gross income of the units?
(6) What is the vacancy of the units?
(7) What is the NOI?
(8) What are market rents in the area?
(9) Are there any other Units in the area for sale?
(10) If so at what Price?
(11) What are the going Cap rates in the area on multiple units?
(12) Have any other Units in the area recently sold?
(13) If so at what price?
(14) How much does the seller owe on the units?
(15) If there is a loan, is it assumable?
(16) Will the seller carry a second?
(17) Is there any differed maintenance?
(18) If so, estimated cost of maintenance?
(19) How’s your credit?

If you answer these questions, then I can answer yours, with a meaningful answer.
Otherwise, it’s just, What ifs? or hypothetical.

Ed Garcia

Re: Ed, I need pricing advice… - Posted by JohnBoy

Posted by JohnBoy on March 10, 2002 at 20:48:40:

OK, I know you need more info and your estimate is shooting from the hip based on the info you have, but how did you arrive at a value of $150k for each property? That seems a pretty generous estimate in my opinion based of the info Mike provided so far.

$4,000 month income = $48k Gross Annual Income (both properties)

Mike’s expenses given for both properties:

$7,000 taxes
$2,500 water
$2,000 insurance
$1,200 lawn/snow
$3,000 maintenance

$15,700 total expenses

Add in:

$2,400 vacancy allowance (5%)
$2,400 deferred maintenance (5%)
$2,880 management (6%)

$7,680 Total

$15,700 + $7,680 = $23,380 total expenses

$48,000 - $23,380 = $24,620 NOI

$24,620 / .11 cap = $223,818.00 total value or $111,909.00 for each property.

OK, so how did you estimate your value to come up with an extra $38,100 value per property?

Re: Ed, I need pricing advice… - Posted by mike

Posted by mike on March 10, 2002 at 10:21:17:

Ed, some of the questions were answered in my original post but I will add some information.

The two 4-plexes are located in a pretty good area. They are located directly across the street from the headquarters of a fortune 500 company. These units are roughly 30 years old but there are two apartment complexes that are less than 5 years old in the same area (these are two bedroom apartments that rent for $650/month). All of the units in the 4-plexes contain 2 bedrooms, 1 bath, kitchen and living room. The interior is in decent condition but I think the exterior could be upgraded (original shrubs that are over taking the yard and aluminum siding that probably be replaced). The units fillup very quickly, even in the winter time, due to the good location. No other units have sold in the area recently, except for some brand new duplexes that probably are not good comparables (they sold in the $175,000 range).

The owners have owned the units since 1980 and paid roughly $160,000 for them. They would like to sell but have don’t have to sell.

I plan on financing through a friends bank with no money down. I have bought a couple duplexes this way and it works fairly well. Initially I purchase the units using collatoral from other properties. Once purchased I refinance through the same bank based on an appraisal much higher than my purchase price. This ultimately gets me in with no money down and free’s up my collatoral.

I just want to get your professional opinion on the maximum price you would pay for the two 4-plexes. Your help is greatly appreciated. Thanks.

Re: Ed, I need pricing advice… - Posted by mike

Posted by mike on March 11, 2002 at 20:46:27:

JohnBoy, excellent information and just the type of analysis I was expecting. I am not a seasoned veteran and have only one question. What do you mean by “deferred maintenance”? This is obviously in addition to general maintenance.

In my analysis I had a total value of $225,000, or $112,500 for each property. Not too far off from your analysis. Thanks again for taking the time to digest the given information and presenting a meaningful analysis.

Re: Ed, I need pricing advice… - Posted by Ed Garcia

Posted by Ed Garcia on March 11, 2002 at 10:53:51:


To be honest, I got a little frustrated with Mike. I felt he wanted me to take my time to answer his post, but didn’t want to take the time to answer the questions I had, to help him answer his post.

After that I didn’t care and I just looked at the deal as a lender. I broke the deal apart because it’s two 4-plexes NOT 8 units.

I then took the gross income and cut that in half allowing each 4-plex to have a gross income of $2000 per months.

Instead of using the formula you would use for multiple units I used the formula used up to 4 units, which is 25% for vacancy and costs. This as you know, is being very generous to the deal. It would give the deal an NOI of $18000. I then quickly 12 caped it and came up with a $150,000.

Another reason I used that formula is because I miss read Mikes second post. I thought it said that the seller paid $160,000 per property not realizing that was for both properties. At the time that could make sense because a new duplex sold for $175,000.
And was getting $650 per unit. I didn’t pick up that the seller purchased it in 1980. So for me to come with $150,000 which was as I thought, less then what the seller paid for it, I was being conservitive.

John, I think once I didn’t get the information from Mike that I wanted, I didn’t pay attention to the deal like I should of, I just blew it.

Ed Garcia

Re: Ed, I need pricing advice… - Posted by JohnBoy

Posted by JohnBoy on March 11, 2002 at 22:07:52:

General maintenance are things like painting, carpet cleaning, repairing things that break down like a furnance, a/c unit, unclogging drains, patching holes, etc.

Deferred maintenance is to cover the cost of replacing major things like a roof, furnance, a/c unit, appliances, carpet, siding, resurfacing parking lot, etc.

These are things that eventually will need to be replaced. You need to account for the costs of these things so you can be able to set money aside from the rents each month so when these things need to be replaced the money will be there. Otherwise you’ll be coming out of pocket to pay for it or scrambling around trying to get financing somewhere just to be able to pay for these things when the time comes to replace them. If you don’t account for these things and later you end up having to replace them by paying for it out of your pocket or getting financing somewhere, your cash flow would be eaten up for years just to recoup all your costs.

Let’s say the life expectancy on a roof is 20 years before you would have to replace it. Assuming a new roof would cost $10k to replace on your building, you would then divide the number of months by 20 years, which is 240 months. Then take the $10k replacement cost and divide by 240 months which would be $41.66. So if the roof had 20 years left on it before it will need replacing you would need to take $41.66 out of the rents collected each month and set that money aside so when it comes time to replace it the money will be there.

You would do the same thing for all major items that will need replacing in the future. Take whatever the life expectancy is for each major item and divide the replacement cost by the number of months they are expected to last. Usually this averages out to be about 5% of gross income for everything.

Now if you are looking at buying a building where the roof will need replacing in the near future then you would need to account for that cost when determining the purchase price you are willing to pay. If the building will need a new roof in 2 years from now then I would deduct the 18 years use the seller has already gotten out of it since I would have to come up with all the money to replace it. So that means I would need to deduct $9k from my purchase price to cover the replacement of the roof since I will only be getting 2 years use out of it before having to spend $10k to replace it. This is why you need to account for the condition of the property when determining what value to place on it, in addition to everything else.

In my opinion this is probably one of the biggest reasons you see some multi-unit buildings that are run down so bad. The owners never accounted for setting money aside for deferred maintenance and when things needed replacing they didn’t have the money to pay for it. So the property continues to deteriorate as a result and eventually these owners become don’t wanters because they can’t pay to fix up the property and end up having problems with getting them rented out.

The 3 most common things you will usually find that sellers leave out on their expenses is, vacancy allowance, management expense, and deferred maintenance. Deferred maintenance being the most common expense of all left out.

If you don’t account for these things then you aren’t making the cash flow you “think” you are and it won’t be until you finally get stuck with absorbing these costs until you realize that! Then you will find out the hard way that what you “thought” was a good deal wasn’t such a good deal after all!

Re: Ed, I need pricing advice… - Posted by Mike

Posted by Mike on March 11, 2002 at 20:04:28:

Ed, I certainly appreciated the time you took to answer some of my questions but quite frankly I don’t understand your frustration. I thought I gave ample information in my two posts to get a ballpark figure on what the property was worth. I wanted a quick analysis from the professionals and didn’t expect anyone to do all of my homework. Most of the other people that replied to my posts (both on your page and on the general post board) gave constructive advice on what they would expect to pay for this property given all the information. They did an analysis on the given information, like I expected. And after reading your last post I’m not sure you were doing such a good job reading the post in the first place. If you are going to get frustrated over someones posts you should certainly have all the facts straight from the beginning. I believe I gave enough information to warrant at least a ballpark value of the properties. When it gets time to purchase the property I will worry about the details.

Once again, I appreciate your time but in the future try and not get frustrated over these things.