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

import · April 11, 1999, 9:11am

Posted by Mark (SDCA) on April 11, 1999 at 15:16:59:

Ed,

I appreciate your comments. Believe me, I DEFINITELY respect this deal. In the past I have always had a “safety cushion” in that the number of units I was working with were small enough that I could carry the property completely vacant for a few months if necessary. That really is not true with this property.

Here is the unit mix:
38 1 bedrooms (1 bath) @ 375
3 2 bedrooms (1 bath) @ 450
1 studio @ 300.

(The studio is really weird. The front door is a sliding glass door. I am not surprised it is vacant but I am sure we could get it rented for SOMETHING.)

There is a building on the same street which a) is not as nice and b) doesn’t have on site parking (street only). Its rents are 365 for 1bd/1ba and 290 for studio. Frankly, I wouldn’t count on a lot of upside in the per unit rent. The upside is in filling the vacancies. I spoke with 2 tenants and they both said that there was no problem with the neighborhood. One had lived in the complex for 2 years, the other 3. So people WILL stay if you can just get them in. The 2 complaints were 1) the gates to the carports don’t work and 2) bugs. I can’t say I am surprised at all about #2 in a complex of that size and income level.

This is absolutely true (about the deferred maintenance). And definitely any offer would be made subject to inspection. The seller says that the vacancies need only cosmetic repairs. Obviously, that would need to be verified.

I think the vacancy problem is combination of both- ie that the entire town has somewhat of a chronic vacancy problem. But also that the owners just aren’t being pro-active enough. And actually it looks to me like the property would carry itself even with the 28% vacancy they currently have. Obviously, that is neither the desired nor an acceptable outcome. But it looks pretty good from a “downside” point of view.

I don’t think that I am smarter than the seller. However, I do feel that I would be more motivatd to turn this property around. Partnerships are renowned for going sour; getting 2 partners to agree about anything is tough. And I have been in a situation similar to this (on a much smaller scale) and did get the property fixed and fully rented. So I am not as worried about that aspect as I am about where the money is coming from.

Mark

import · April 11, 1999, 9:11am

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

Posted by Mark (SDCA) on April 11, 1999 at 09:11:54:

Here is the deal. 42U. Asking price: 695K. Projected GSI is 193,200. Projected NOI is 96,600. (I say projected because there are currently 12 vacancies.) Seller is offering a wrap with 100K down. The rents are market (this is a moderate income building but certainly no slum).
Seller is selling because they are dissolving a partnership. Also, I don’t think they want to manage the place (or manage the tenant manager). Thus, the 12 vacancies.
The exterior of the building looks in good shape. (The gates that restrict access to the carport area are broken, and the building could use a gate to block access to the building itself. Speaking of which, anyone have a ballpark figure on what these might cost?) I haven’t seen the interior yet, but the realtor says that 3-4 of the 12 vacancies are rent ready (which means 8-9 are NOT).
The neighborhood is good if a little strange. I guess this town hasn’t heard of zoning because there are office buildings, other multi residential and SFR all on the same block. All seem to be quite well kept. (Although there are some boarded up SFR a couple of blocks away. That probably is NOT unsual for this town. Additionally, there are quite a few For Rent signs in the block (on the SFRs and multis and the office buildings). But I talked to the manager at one of the multis, and he only has 3 vacancies so I think some aggressive management would help this building.
My concerns are the number of vacancies on the block. This could be a chronically vacant building. Also, I have to admit that the size scares me a little. It would be a big jump up in size for me. And of course, “where are we going to get the moeny”. Any thoughts? Thanks,

Mark

import · April 11, 1999, 12:07pm

Re: Input on this deal?? - Posted by Ed Garcia

Posted by Ed Garcia on April 11, 1999 at 12:07:30:

Mark:

You have described this deal vary well, but there are many more
questions to be answered.

If your going to look at this type of product, then you have to analyze
it differently then you would a SFR.
Also when you obtain the information that I am requesting, don?t just
relay on the Realtor for the information. Remember when doing a deal,
you need to base it on information you can relay on.

Realtors have a tendency to influence the information that they provide
you. So use other sources, appraisers etc.

(1) You need to know the vacancy factor for the area ?

(2) You need to get a rent survey of the area on multiple units.
This will tell us the market rents for the area., so that we can
determine do we have vacancies because our rents are too high ?
Or is it a combination of the vacancy of the area and poor
management. Hopefully, were below market rents and have some
additional up side.

(3) The unit mix is vary important, you don?t give that, what is it ?

(4) You need to know your deferred maintenance or tenant
improvements ? With out this information, you pricing could be
considerably off. 8 or 9 units at $2500 could affect your price by
at least 22 to 23 thousand dollars, which would effect your cap
rate as well as your price.

(5) You need to go back to the seller and ask for his Tax returns for
3 years. What your looking for, is to see what he has been declaring
his vacancies were for the past 3 years.

By the way the seller won?t want to give this information to you,
which will tell you that maybe the building has had a chronic
vacancy as you suspected. If so now we restructure this deal based
on existing income.

(6) Find out what the going Cap Rate is on this type of property for the
area ? But don?t fall in love with that information, because you
always will work your own numbers. But you need to know that
information because again you should always know your market.

There is so much more to do when working a deal like this Mark, but
for this morning, I just wanted to give you some food for thought.
Remember Mark, never think your smarter than the seller. This seller
has experience that you don?t have, and they are having problems.

Now I don?t want you to shy away from the deal, I just want you to
respect it.

Do I like the deal ? Yes, Your buying it at approximately $16,000 a

door, and that?s way below replacement cost.

I also know that this deal can be worked. So go work this deal Mark,
and good luck in doing so.

Ed Garcia