How does this sound? - Posted by Tracey Wiedmeyer

Posted by Ed Copp (OH) on January 10, 2001 at 14:11:13:


What you are describing is a high risk speculation property. The sellers are setting the priced based on what they think a developer (might) will pay them.

What you need to do is to pencil this deal out for yourself. First you have $52,000 gross income from rents. Now subtract a reasonable amount for the following.

repairs and maintenence
management (Oh you are going to do that yourself, well there is still a cost)
Snow removal
Refuse collection
Utilities for common areas if this applies
Debt service, This is interest on the loan or loans that you will need to buy this property.

The gross rents against the sellers price look to me like this deal could easily be a negative cash flow situation, going in. With the only way to turn a profit being to fing a developer (or other buyer) willing to pay more than is being offered now.

It’s your deal, and your pencil… Good Luck.

How does this sound? - Posted by Tracey Wiedmeyer

Posted by Tracey Wiedmeyer on January 10, 2001 at 13:28:37:

I need help evaluating this deal from you experienced RE Investors. I am looking at a 4-flat in the Chicago area that has a gross income of $52,000 and is listed for $624K, that’s what it has appraised for. The owners are looking for a quick sale and told me that they would need at least 565K otherwise they are going to sell to a developer who has offered them the 565K. They really don’t want to sell to the developer though. The building is in great shape and has separate utilities throughout and appliances in every unit. The outside could use some work, maybe some new siding so spruce it up a little bit. I think that I can sell this property fairly easy, especially if I could put some new siding on it. Assuming I could get the building for 565K, I am wondering if you all think it would be worth it at a 90% LTV and if I could find financing for it very easily? Any help would be appreciated.


Re: How does this sound? - Posted by Jim Locker

Posted by Jim Locker on January 10, 2001 at 16:28:31:

That price is absurd.

Multi families are valued based on their earnings potential. BAsed on what you have shown here, I would estimate that the building would be valued at NOT MORE THAN about $450K, and only that much if it is in a very good neighborhood and in very good repair with a low-time roof and modern plumbing/windows/carpeting/heat. Even at that price, I would consider it to be a risky deal, since cash flowing it would depend on very low vacancies, favorable interest rates, and low maintenance.

Just run the numbers and you will see. You want a 90% LTV (which you won’t get, but that’s another story). Assume a $450K purchase, the mortgage is $405K. Roughly, your PITI on that will be about $4000/mo.

Now, this building grosses $52K/yr (with no vacancy factor, right?). So it grosses about $4333/month. So, assuming you are full, your positive cash flow is $333/mo.

Out of that you probably have to pay water and trash. Call it $150/mo for both. Leaves you $183/mo to do maintenance, reserve for major repairs, put your siding on, and maintain a vacancy factor.

So what do you think? Is it a good deal?

Personally, I wouldn’t pay a nickel over $320K for such a property, and I would need to see records showing occupancy before I would go that much.