Broker Package Caprate is based on 100% occupancy, is this normal?
I am underwriting my first deal, self storage (130 units). And the cap rate is based on 100% occupancy, is this normal? Asking price is 1MM and cap rate is 9.5%. Actual vacancy is about 25%, If I use that vacancy and update NOI I get a fair value of 400K at same cap rate. 
Any suggestion, ask seller to sell for 400K? First time underwriting.
[{"id": "iy6z5ox", "text": "Stabilized cap is guiding you towards the desired pricing.  You can certainly offer 40% of ask but I wouldn\u2019t count on a positive response.", "replies": [{"id": "iy6zwrz", "text": "Is stabilized cap different from actual cap rate?", "replies": [{"id": "iy7326p", "text": "I guess there are \u201cinfinite\u201d cap rates based on the scenario you want to run. There\u2019s a T12 cap rate, T3 income/T12 expense cap rate, stabilized cap rate, downside cap rate, and so on. It\u2019s just going to be your NOI in xyz scenario.", "replies": [], "depth": 3}, {"id": "iy78z9e", "text": "\n\nEdited for 75% occupancy not 25% occupancy.\n\n\nYes.\n\nIs the storage investment property that you are interested in new?\n\nWhat is the storage vacancy in your market? What is the assumed vacancy in 5 years? \n\nThe broker assumes 0% vacancy, which is wishful thinking, but 75% occupancy sounds like it might be higher vscqncy than most in your area. Renting 30 more units isn't crazy, do you think it will maybe it only takes one year. Again, what is reasonable in your view and might depend on your market and competition.\n\nStabilized means, what will this achieve in the long run, will it be 10% vacant in the long run? 5% vacant? What can you reasonably expect? What will your terminal vacancy rate be?\n\nYou might start with a presumption that it will get to 90% occupied that means that when the dust settles you will have thirteen units for rent on average are any one time, run your proforma on the income minus costs with 90% occupancy to find net income. Use YOUR cap rate against the net income.\n\nIt is normal to apply the cap rate the following way:\nGross potential rental revenue assuming 100% occupancy\nMinus vacancy and collection loss allowance (x%)\nMinus operating costs (property tax, heat &amp; utilities, salaries etc)\n\nThe above equals Net operating income, and doesn't include ok there costs like financing costs and income tax which are investor specific. Basically you assume it is an all cash deal.\n\nAnyway, take your NOI, divide it by your Capitalization rate to derive your value.\n\nIf the storage site is relatively new, maybe a few years old, you might consider that you can get more of that space rented. You may want a discount given it will take time to lease up. Ie, it will take 1 year to get from 75% to 90% occupancy, so 15% per year. You need to be compensated for that. You might alternatively think it will take 2 years, so 15% for the first year, and an additional 7% for year two (22% discount) and by that I mean take the annual rental income\n\nIf you believe that is true you need a discount = 15% of one years gross potential rental income, or 22% of one years gross potential rental income (not 22% off the sale price). again what is reasonable in your view?\n\nIf, on the other hand, it's a ten year old storage site, and 75% vacant, in a town with a declining population, then assume the long run vacancy is 75%, and use current income with your cap rate.", "replies": [{"id": "iy8c42x", "text": "It's 75% occupied, not 75% vacant.", "replies": [{"id": "iy8ucwi", "text": "Ok thanks, must have been late night when I wrote that but the principle is the same. I'll update for 75% occupancy", "replies": [], "depth": 5}], "depth": 4}, {"id": "iyb0ght", "text": "The self storage unit is older (30 yr +). The vacant units are vacant due to mechanical issues that would require repair, such as broken door or roof enclosure.\nI updated my calculation to include financing. I do believe that vacancy will fill out fast, the issue is that the vacant units require repair hence the vacancy. I think I am going to ask for a discount to include the repair cost.", "replies": [{"id": "iybuefw", "text": "Don't include financing in your NOI Cap Rate calculation.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "iy70ir2", "text": "I have been hearing from multiple realtors that refer to cap rate as a \u201cgross\u201d or \u201cnet\u201d cap rate. \nThe only true cap rate is Net after operating expenses (NOI).\n\n\nSo if their vacancy is 25% all year, it isn\u2019t worth the purchase price. If their vacancy has a blip and it\u2019s a one time thing, shouldn\u2019t be figured as heavily on the purchase price.\n\nAsk for more financials.", "replies": [], "depth": 1}, {"id": "iy7yzvj", "text": "So they are asking a 3.8% cap rate on actual NOI? That\u2019s a bit rich.  Needs to be a 6-7 cap to get positive leverage on debt right now, maybe 600k.", "replies": [{"id": "iyb0l55", "text": "The 9.5% cap rate is on projected. Cap rate should be something like 3.8%, base on actual NOI.", "replies": [], "depth": 2}], "depth": 1}, {"id": "iy8bn42", "text": "If you tell me where the deal is, I\u2019ll buy it and let you invest with me?", "replies": [{"id": "iy8jntq", "text": "You might as well ask him to send you his Social Security number, birthdate, place of birth, mother\u2019s maiden name as well.", "replies": [{"id": "iy9nehy", "text": "It\u2019s almost like I wasn\u2019t serious", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "iy8ffd0", "text": "One thing to always consider is \u201chow much capital do I need to spend to achieve the proforma/stabilized rents?\u201d  And see if those numbers make sense to you. If an asset has high vacancy, there is likely a reason and some capex is required to resolve that issue (otherwise current owner would have done it). Caveat is seller is mismanaging and you are just lucky and finding diamonds in the rough.", "replies": [{"id": "iy8g5o8", "text": "I also suggest a more rigorous analysis running a full DCF and various scenarios testing the performance metrics given changes in assumptions. Making sure you are comfortable with the returns, given the risks you see.", "replies": [], "depth": 2}, {"id": "iyb0s49", "text": "That is exactly it, the vacant units are vacant not due to lack of demand. But due to mechanical issues where they are not rentable.", "replies": [], "depth": 2}], "depth": 1}, {"id": "iy8s4y9", "text": "Normal? Yes.\n\nCorrect? No. You need to double check how the broker underwrote the deal. They could be running their number off a very high RSF. When brokers start creating pro rata caps things gets messy always run your own numbers first.", "replies": [], "depth": 1}, {"id": "iyangjj", "text": "Yes it\u2019s very normal for offering memorandum numbers to appear to have been typed up after someone took a hit off a crack pipe.", "replies": [{"id": "iybgrlh", "text": "Amen", "replies": [], "depth": 2}], "depth": 1}, {"id": "iycuwz6", "text": "Broker cap rate is going to always be BS! Do your homework my guy!!", "replies": [], "depth": 1}]