Input on this deal?? (long) - Posted by Mark (SDCA)

Posted by JPiper on April 22, 1999 at 01:18:43:

I’d want to determine the reason for the vacancy rate. You can fix the property, you can lower rents, you can manage and market better. But if the vacancy is a result of the city or the location, you can’t change that.

I can’t see these lenders taking a hit while the seller and realtor walk with their money. I’d make an offer that reflected a reduced commission for the agent, only some small walk away money for the seller…and subject to approval from the lenders. That’s where I would start.

But the important issue is the vacancy…start there.


Input on this deal?? (long) - Posted by Mark (SDCA)

Posted by Mark (SDCA) on April 21, 1999 at 17:58:17:

Motivated seller. (I am SURE since their 32U has 27 vacancies). Asking price is 215K- down from 285K (VERY negotiable I am sure. If I offer, I was thinking along the lines of 170-180). 1st mortgage of 151K which seller suggests buyer would take property subject to. (Works for me). 60K second and 40K second which would accept short pay. (My realtor would not give me many details on these. He said they were 10% interest only loans due NOW. But that the property is not in foreclosure. Basically, he said the 2nd and 3rd will get a few thousand out of my down but that it was eentirely between the seller and the noteholders.) Seller is asking 42K down. My realtor said 30K would get it. I am not sure I want to offer even that much (maybe 20). All that is the good.

Here is the bad:
Unit mix:
12 studios @ 180 per mo.
12 1 bedrooms @ 200 per mo.
8 2 bedrooms @ 300 per mo.
GSI (projected): 83K
NOI (less 35% expenses and 20% vacancy): 38K
Debt Service: 15,852
Cash Flow: 22,884
Cap (@ 215K): 18.0
Vacancies: 27 of 32.
Distance: It is a good 2 hours from me. Great onsite management is critical (although it would be regardless) since I am not going to plunge the toilets myself anyway.
Condition: I haven’t inspected it yet. (Still deciding if I even want to consider it based on the numbers.) My realtor said the vacancies will need some combination of a/c units, paint and carpet, but even the owner doesn’t what condition they are in. (And my realtor said “the management kind of got away from him”. I guess so.)

I have not been able to determine the city vacancy rate. The listing agent “had no clue”. I would guess it is pretty high. This town is WAAAAY out of town although it is on a major trucking route (on the way to Las Vegas).

I don’t see a lot of downside here since the payment is only $1321 a month. (And it’s not like the occupancy rate could get much worse). I also LOVE the turnaround opportunity. And motivated sellers are certainly at a premium around here so that is good.

The problem is that I don’t see that much upside either. With this unit mix in this town, chronic vacancy is a real concern.



Vacancy Rate - Posted by Sean

Posted by Sean on April 22, 1999 at 10:29:57:

Talk to So. Cal. Edison or DWP or whoever provides these people with utility services. They can give you a good idea of the vacancy rate in the area by zipcode. I review this information every month as it gets published (where I am) by AAGLA (apartment association of greater Los Angeles).

I question your expense numbers, but since the ones you used show a capitalization rate of 18.0% I’m sure that my lowering the NOI wouldn’t affect the fact that the numbers show a great deal in the works.

Since you’ve got over 16U you’re going to need an onsite manager, but I caution you from assuming that you can just find a good manager and your problems will vanish. You should expect to be onsite quite a bit acting as a leasing agent to get this place going. The manager can handle the toilet problems.

Short pays are a nightmare of bank paperwork, review, investigation and bull manure. It could easily take 30 days of bank review before they would even consider your low offer acceptable, and then they’d tell the Realtor he’s not entitled to full commission. He’ll start fighting that decision and it will get gummed up further.

Of course if it was easy everyone would be doing it. Good luck and count on a long, long escrow.