Lately we have been spending a great deal of time underwriting deals and have not made much traction. What are the risks in using the following process.
1. Market analysis
2. BOE analysis with the following basis:
T3 Income - OpEx (50% minimum) = NOI / Advertised Cap rate = LOI price
For value add deals I could just make sure that the blended post-renovation premium produces a decent return.. we prefer 20% minimum..
What are your thoughts? We are really trying to scale things but just spending too much time and money underwriting deals that lead to nothing. How can we submit decent LOI's quickly? These are obviously not binding but I get the feeling that too many BS offers and brokers/wholesalers will stop dealing with us.
Also, account for vacancy/bad debt, loss-to lease... thinking 10% min.
How large are these buildings? Your opex maybe too aggressive, thus leading to you losing the deals. I typically go 35-40%, on older outdated assets with utilities paid by ownership, and as low as 25% on renovated assets with separated utilities.
Our preferred minimum is 75 units but we will look at anything if it makes sense. Our properties are running between 40-45% expenses on average. You might be right though.. maybe we should be less conservative.
25% op ex in nyc is tax alone. 75+ unit buildings with seperate utilities? opex should be closer to 40% - 45, assuming non union staff. even with a tax abatement for new construction buildings you wont see 25% op ex.
I agree, 75+ units you will have much higher expenses. Still at 50%, you may want to get down into the details. Still think that’s a bit aggressive.
What’s the correlation of more units and expenses. I was thinking if anything you have economies of scale
Ask the broker for whisper pricing and underwrite BOE to that. If the deal pencils, make an initial offer a nominal amount below whisper pricing to get into best and final. Once you’re in best and final, spend the time to properly underwrite the deal. Wait until the day after the call for offers, call the broker, and try to get a pulse on where the other offers have landed and at that point basically just ask where you need to be to win the deal.
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