Submitted an LOI on a 28 Unit Apartment

A few days ago we made an offer on a 28 unit apartment in Colorado Springs. It’s in foreclosure and about 30% full as near as we can tell. The phone number on the management company sign is disconnected and emails bounce. A broker from Denver has started negotiating a short sale with the lender. We offered $700K as is, with an inspection contingency. If they accept our offer (a long shot) we get 60 days to do our due diligence. We can pull out at any time and get our earnest money back. 

The property sits on a high hillside with great Peak and foothill views to the west and south. It consists of 7 fourplexes, the first of which was built in 1978 and the rest in 1984. They are a townhome style, with a single attached garage and no one above you.

The two empty units we saw were in pretty decent condition. They had dual-pane vinyl windows and a fireplace. There was a half bath on the main floor. A full bath was upstairs with the two bedrooms. One had a leak at the washer hookup, but it was going down the drain. Stuart turned it off to save water. We later found out he had also turned off the water to the next door unit, so we got to meet one of the neighbors that way. 

The first garage we tried had the handle broken, so we couldn’t get in. The second one opened right up, but we only went in a couple feet before noticing the walls were splotched with black mold. The garage is deep enough for two cars, but they’re too narrow for today’s trucks or SUVs. I think most people use the back for storage and bring in a compact car. There seems to be plenty of extra parking, but it’s uncovered. The two residents we met had big trucks, so they were using their garage for storage. Apparently, the moldy garage was the exception.

The beauty of this deal is in the exit plan. Each of these fourplexes has its own property tax id number, so they can be sold off individually. If we can buy these at $100K each (our offer), update and repair them quickly and fill them with good tenants, they should sell for a fast and low $200K each in 18-24 months. If it’s a buyer’s market at that point and we want to hold longer, it will run just fine as a 28 unit apartment.

In order to complete a short sale with a lender, you have to come to the closing table with cash. Above the $700K offer, I’d want to have an additional $150K for closing,due diligence, maintenance, and holding costs. You don’t want to come in under-capitalized, because you know things will take longer to fix and cost more as well. Plus, you can probably count on at least one surprise along the way.

The letter of intent (LOI) gave the seller one week to respond. We’ll know by 5pm Wednesday if we’re close enough to talk. They have the property listed at $1.7M, so this is quite a low offer. However, we also sent a list of recent comps, including both fourplexes and apartments. The fourplexes sold for an average of $23,143 a unit, while the apartment sales brought in just $18,759 per door. That makes our offer of $25K per door more palatable (we hope).

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