A guy forwarded me a 6-unit. What is the number on the sheet?

Cap rate is just net operating income divided by price. NOI is the income after real operating expenses and before any mortgage payment. So if a buyer tells you he needs an 8 cap, and you can figure out the real NOI, price is NOI divided by 0.08. That is the number you work backward from.

Your problem is that you don't have NOI. You have a rent roll and a fantasy expense page. 14,200 on a six unit older brick building is not a real number. Somebody is paying for water, trash, insurance, taxes, turnover, and a snowplow, and none of that is in there.

Don't sign anything until you've built the expense side yourself.

The vacant unit question: buyers underwrite in-place income, then they'll give you some credit for the vacant unit at market rent if the other five prove market rent. So it's both, kind of. In-place is what they lend against and pro forma is what they hope for. Don't ever assign a deal where the whole spread lives in the pro forma, because a sophisticated buyer will strip it out in front of you and re-trade.

Also, hard money on the earnest deposit after 10 days on your first commercial deal with a partner you met once? That's the part I'd be losing sleep over, not the cap rate.

What's the split actually documented as? "He finds the buyer and we split the fee" is a handshake. If he brings the buyer and the buyer closes and he decides your half is 3k, what's your recourse?

On the building itself. Older brick, six units, small town. Ask the age of the roof, the age of the boiler or whatever the heat source is, and whether the units are separately metered. Those three answers move the value more than 200 basis points of cap rate will.

I've walked buildings that penciled beautifully on paper where the answer was a single boiler from the sixties and knob and tube in two units. A commercial buyer prices that in immediately and your assignment fee evaporates in the re-trade.

Run it roughly. 4,050 a month on five units, call the sixth 800 so gross potential is about 58,200 a year. Take 5% vacancy and credit loss off that and you're near 55,300. Then real expenses on an older small multifamily in a low price point market are commonly 45 to 55 percent of collected income once you include management, taxes, insurance, water, and a reserve per unit. At 50 percent your NOI is somewhere near 27,500.

At an 8 cap that's about 344k. At a 9 cap it's 305k. He's asking 385. So on my rough version the seller is above where a buyer at an 8 needs to be, before you take a fee at all.

That's my assumption on the expense ratio doing all the work there. Get the actual tax bill and the actual insurance quote and the whole picture changes fast in either direction.

@keystone that's the clearest version of it I've seen written out, thank you. I've been stuck on the same thing rigging is, that with houses there's a comp and here there isn't one.

rigging, the part I'd want to know is who the buyer pool actually is in that town. Five units occupied in a small midwest market, who buys that and at what cap? If the answer is one or two local guys, you don't have a buyer pool, you have a phone number.

Nobody has said the obvious thing. You are being asked to put up 5k that goes hard in 10 days on a deal you cannot underwrite, so that someone else can find the buyer. The deposit risk is yours and the buyer relationship is his. That is a bad trade regardless of what the cap rate turns out to be.

Six units in an older brick building is my whole life. Two things from the operating side.

One, ask for twelve months of bank statements, not a rent roll. Rent rolls say what's owed. Bank deposits say what got collected. On small multifamily in soft markets those two numbers are often 6 to 10 percent apart and that gap comes straight out of NOI.

Two, ask why the unit has been vacant since spring. Six months vacant in a market with any demand at all usually means it's not rentable in its current condition. That's a scope number, and if it's 18k you just found out the building is worth 18k less than the sheet says.

I want to ask the embarrassing one. If the seller is at 385 and a buyer needs to be at 344, where does the assignment fee come from? Does the wholesaler have to get the seller to 320 or does the buyer just pay more? I've never understood which side eats it.

@compass the seller eats it, always. Your contract price plus your fee has to land at or below what the buyer will pay. That's the whole business. If you contract at ask, you have nothing to assign.

Which is why rigging's 30 day inspection period matters more than the earnest money. That window is where you renegotiate on the boiler and the vacant unit, if the seller will move at all. If he won't, there's no deal and you want out before day 10.

I went through this a second time before replying. What I'm taking away is that in commercial the value comes out of the income, so all the leverage in a negotiation is in the expense numbers you can prove. Which means the deal isn't the property, it's the documents. Is that roughly right?