The 10-Minute Offer: How to Analyze and Make Offers on Apartment Buildings in 10 Minutes

When I first got started with looking for multifamily properties, it took me 4 hours to answer the question “what is the most I can offer for this particular deal?” As you probably know, you gotta kiss a lot of frogs before you find a good deal and can put it under contract. The time it took to analyze deals was a real issue, and that impacted my ability to get deals done.

Watch this video to learn How to Analyze an Apartment Building Deal and Make an Offer in 10 Minutes.

Waste Less of Your Valuable Time  |   Make More Offers  |   Do More Deals  |   Achieve Your Financial Goals Faster.
 
 

When you first get a marketing package from one of your commercial real estate brokers, it can be overwhelming. Some of these packages are 20 pages or more! I found myself reading every page, and of course I wanted to be detail-oriented in my analysis. I was examining the financials with a fine tooth comb, comparing the reported real estate taxes with what’s published online, doing rental comps for the area and comparing them to the reported rents, and doing other research.

 

Did I mention this was a waste of time?

Your goal at this stage is not to begin due diligence on this property but to assess the fair market value of the building based on the information you were given. Many times, the marketing packages are not only incomplete but they’re overly optimistic with the income and expenses. You can use this to your advantage to start the negotiating process. If we get a positive reaction, we can then delve into the deal a bit more. But only if there’s a nibble!

Here is a better way to do this: The 10-Minute Offer

Learn More About the Syndicated Deal Analyzer I use to Demonstrate the 10-Minute Offer

Step # 1: Adjust the Income – 4 minutes

If the marketing package contains actual financials, look for the gross scheduled income and adjustments for vacancies, concessions, and bad debt etc. If these adjustments are greater than 10%, then use that number, otherwise use 10% as a vacancy factor. If you have a rent roll as well, compare the bottom-line income in the rent roll with the financials in the marketing package, and use the lower of the two. If you only have the ProForma financials, then use those numbers. Keep track of any adjustments you make to the income because you’re going to be communicating those to the broker later.

Step # 2: Adjust the Expenses – 3 minutes

This is going to be easy. If the reported or ProForma expenses are greater than 55% then use that number, otherwise use 55%. Often, when the reported expenses are less than 55%, they’re missing something. For example, the expenses may be missing a management fee (because the current owner is managing the property himself), or perhaps its missing insurance or some other expense. Don’t spend a lot of time on this, but see if you can find SOME expense that is missing from the broker’s marketing package. You’re going to use that as an argument that the expenses are unrealistically low. Now, determine your Adjusted Net Operating Income (NOI) by subtracting your adjusted expenses from your adjusted income.

Adjusted Net Operating Income (NOI) = Adjusted Income – Adjusted Expenses

Step # 3: Use the advertised cap rate to come up with a revised fair market value – 3 minutes

Usually, the marketing package advertises a certain cap rate for the property.

“Awesome deal at a 8.6% cap!”

If the cap rate is not that obvious, you can quickly deduce it by taking the NOI from the package and dividing it by the asking price.

Cap Rate = Net Operating Income / Asking Price

Make a note of that cap rate, because you’re going to use it to your advantage shortly. Now, determine your adjusted NOI from Steps 1 and 2 and divide it by the advertised cap rate. This will give you the adjusted price for the property. Typically this number will be lower than the asking price. That’s because the income and expenses in the marketing package were overly optimistic to begin with! Make note of the adjusted price. Your offer price should be below that to give you some negotiating room.

Step # 4: Get back to the broker with your analysis and informal offer price

Compose an email to the broker in which you explain your adjustments to the income and expenses. Explain that after applying the broker’s cap rate, the adjusted price is X, and that you’d be happy to make an offer at the price if the seller would be amenable to that. Send your broker something like this:

Hey Rob — I looked over the package you sent me. Everything looks good: it’s what we talked about on the phone. I made a few adjustments to the underwriting in the package though. For starters, I don’t have the actual financials, so I had to rely on the ProForma numbers, and we both know those are going to be better than actuals, right? Well, that’s all I have at the moment, except you also sent me the rent roll. The rent roll income is about $30,000 less than what you have in the ProForma, so that’s what I’m using for the underwriting.

 

WRT the expenses, I don’t have the actuals, but the ProForma expenses in the package only added up to like 35% of income. For example, it looks like the insurance expenses are missing, and there are hardly any repairs in the P&L. Based on experience and looking at actual financials from similar listings in the area, I know those are way low. I normally use 55% of income for the expenses, and that’s what I’m using here. You’re advertising a 8.5% cap rate for this deal. I’m not 100% sure if that’s fair for this area, but let’s assume it is. If you apply an 8.5% cap rate to the adjusted Net Operating Income, the valuation of the building is $1.75M, quite a bit away from the $2.4M asking price.

If you see something awry with my underwriting, let me know. I could make an offer at asking price, but I don’t want to waste your time if we both know the actual NOI will be lower than what you have in the ProFormas once we get into due diligence. So I’d rather be a bit more realistic upfront.

I’m not sure how set your seller is on the asking price, but I’d be pleased to put in an offer at $1.75M if he would consider it.

Let me know what you think. I look forward to hearing from you.

What have you done?

  • You’ve spent no more than 10 minutes analyzing the deal to come up with an offer price. You used the information you were given, plus some rules of thumb. But you didn’t launch an investigation to get better numbers. At least not yet.
  • You got back to the broker quickly with feedback. Brokers tell me that only 25% of their buyers get back to them with feedback. So if you do, you’ve elevated yourself to the top 25% of that broker’s list of buyers. A good place to be, no?
  • You’ve started the negotiation process. Yes, you have. It starts informally, but it started. The broker may not respond, or he may say that the seller wants asking or that there are multiple offers at a higher price. Or you may get a counter. And now you’re in the game!

Whether you realize it or not …

You just made your first offer in 10 Minutes or Less!

So, don’t waste your life away analyzing deals. Work smarter, not harder. If you do, you’ll be able to look at more deals and increase your chances of finding a deal that will actually work.

Learn More About the Syndicated Deal Analyzer I use to Demonstrate the 10-Minute Offer

 

What Do You Think about the 10-Minute Offer?

29 Comments

  1. So do you find deals first and then the capital or Visa-Versa or do you do it at the same time? Can you also write equity into the deal making you the arranger as part of the deal to earn monthly income? Can you do this same thing with NPN’s that you get directly from the banks?

    Reply
    • J.R. — best to do both at once. Yes, you must ABSOLUTELY get equity in the deal as the syndicated. If you haven’t done so already please download and read (or re-read -;) my free ebook at http://www.TheMichaelBlank.com/ebook.

      Reply
  2. Thank you! i guess what holds alot of new investors back is the ability to come up with the DP. I know that partnering is an option but then it eats up the Cash on Cash where the deal isn’t a deal anymore. You suggested to try for bigger commercial properties but wouldn’t the banks or lender look at a newbie with no income as a risk?

    Reply
    • Hi Lane, yes newbies are viewed as a risk for sure. And yes, you will need down payment money as well as money for due diligence. You can overcoming both by having a strong financial partner. He or she will of course receive equity like the other investors, but if they need to co-sign on the loan with you or fund the down payment or due diligence, then you give them something extra, either some additional equity for the favor or a flat fee paid out to them at closing. Thanks for your question!

      Reply
  3. Awesome easy to follow instructions, my guess is you’ll be going over returns when investors are involved in a deal. Don’t have two questions yet but I know it’s coming 🙂

    Reply
  4. Can this be done with no money down?

    Reply
    • Of course. Always good to strive and ask for, but the reality is that this is not common. So don’t count on it, but be grateful when it happens!

      Reply
  5. Great video Michael. Is it common to have your investors pay the down payment also? Are acquisition fees common on every multifamily deal?

    Reply
    • YOU as the syndicator normally pays for the down payment as well as due diligence costs. But see my comment above for Lane Kessler about partnering with someone. Re: your second question, yes, you should always build in an acquisition fee for yourself.

      Reply
  6. Michael, many thanks for making this video series available for others (such as I) to learn from. Great presentation, explanation/description, and visuals. Using all three together serves to “draw the picture and then color it in”.

    What I’m most interested in seeing in your future website blogs, BiggerPocket articles or videos is your explanation of structuring deals and investor-partner carve-outs.
    Sorry if I’m getting ahead of myself here, but when it comes down to it, I truly believe that effectively (or successfully) funding deals is probably the biggest obstacle or challenge to any starting investor. IMHO, finding a great deal is challenging, sure, but with time & practice one can get pretty good at identifying a good one. But it does not pose the same challenge as funding the deal (or the next step down the path – managing the property once under control).

    So unless one has the financial resources to finance these deals completely solo (i.e., one with very deep pockets, and obviously not your average starting investor), one needs to understand the most effective way to structure the deal so they don’t sell the farm in the process. The questions that come to mind include: How much equity (%) should one be prepared to give away investor-partners when starting off? Is it always better to refinance and pay off your investors early or should one wait out the full holding period and cash them out as part of the sale? How frequently should one pay their investor-partners? Monthly or quarterly? Is there ever a reason to work with debt partners as opposed to equity partners?

    All that said, I look forward to seeing your next video and learning your step-by-step process. I’ll keep my fingers crossed that you’ll cover some (or all) of the questions I posed above 🙂 Thanks again & best with all.

    Reply
    • Thanks Albert. These are good questions. And you’re right, the biggest “obstacle” is funding the deal. So learning to raise money is key. While I have a HUGE chapter on this in my course I will be teaching on this topic in my next live Webinar in a few weeks. So please stay tuned …!

      Reply
  7. Whats best way to estimate loan structures, rates, amortiz.? Without speaking to a bank initially. Are there any rules of thumb you can give us from your experience?

    Reply
    • Michael — good question for a future podcast, thanks!

      Reply
  8. You only estimated 20% down payment, but isn’t the absolute minimum 25%?

    Reply
    • It varies from 20% to 30%, depending on the stability of the deal and the appetite of the lender to fund it -;)

      Reply
  9. Mike, if I were to buy your software, can it run on my google chromebook? Does it run on Mac as well?

    Reply
    • I believe the answer is yes based on feedback from other people who are using it both in Chrome and on the Mac. Thanks for considering!

      Reply
  10. Nice video, Michael. In your experience how well do these metrics apply to smaller deals for example 3 or 4 families? I live in the Boston area and have a 4 family that is cash flowing pretty nicely around 2k a month, however the cap rate is only 6% and this would suggest a purchase price of around 150k. I bought this property for 385k.

    Reply
    • Yes, BUT: smaller properties like that tend to be valued more like houses, i.e. based on market comps. But at the end of the day, if it’s an income producing property, the cash flow etc still have to make sense. Even though the cap rate may not be as relevant for valuing the property. Hope that helps.

      Reply
  11. Thanks for sharing the nice video. I look forward to seeing the second and third video when they become available.

    Question 1: I read in a book that to succeed in multi-family investing/syndication you need to be successful in creating marketing system that allows you to find deals and money. What methods have you found to be successful in marketing for money (investors)?

    Question 2: I see you spend a lot of time focusing on analyzing deals which is very important. What methods do you find effective for creating a pipe line of deals coming in so you can analyze them? Do you only go through brokers, or do you contact owners directly?

    Reply
    • Hi Matt – an excellent set of questions. I do address this in detail in my course because it’s requested so often I will add to my list of topics for an upcoming Webinar or podcast. Thanks Matt !

      Reply
  12. Thank you for the video. First, are there financial brokers that can help find private money investors for you and if so who are they? Second, how many real estate brokers or agents do you suggest working with and how do you suggest finding the ones that sell apartment complexes?

    Reply
    • Excellent questions Brian, thanks.

      Reply
  13. I am looking for monthly income without having to manage or owning multifamily units. How do I apply a 3%-5% residual to the the contract in order to receive this income?

    Reply
    • Hi Robert … you’re talking about wholesaling a multi-family, right? And instead of (or in addition to) you’d like to build in a residual into the deal so you receive cash flow distributions? Very clever, I like it. You can capture this in a contract or in the operating agreement of the LLC that will own the building. My concern is that your buyer/partner could of course decide not to pay you and then you’d have to enforce the contract etc. This is why it’s normally cleaner/better to just get your fee at closing and run. But by all means, it can be done!

      Reply
      • Thank you so very much for the information Michael. What you are saying is the “operating agreement” does not automatically pay that particular expense of which is my residual income, correct? That to would be a concern for me.
        Please continue this conversation via my email address below. I have been following your teachings and watching your videos that do help me. Though I must say that I have never, since starting in the real estate business in 2001, bought or paid for any educational or instructional materials. Some of the material you provide has me thinking twice to that last statement.
        Robert Hernandez
        robert@cash4housesrh.com

        Reply
  14. Very good. I also took 3-4 hrs to analyze a package. I think I can speed that up now.

    Line 24 “Other Income” is showing “-2,300”. Why would income be a negative?
    Thanks!

    Reply
  15. Thank you. In 10 minutes I learnt something which was not clear to me earlier.

    Reply
  16. An excellent solution to evaluate a deals worth, Thanks

    Reply

Leave a Reply