In June, we wrote about the Columbia, SC market and how much we liked the area. We have pursued several deals but only made it to best in final in one. Today we are going to talk about this very attractive opportunity to acquire 165 units in a good location. Unfortunately, we didn’t get the deal, and actually, no one did as the buyer decided not to sell at the offered prices. Below, we will detail how we underwrote the deal and contrast it to how the broker presented the opportunity. It is important to understand that the selling broker’s Offering Memorandum (OM) is a sales tool with a mix of good nuggets of information and also large amounts of wishful thinking.

The deal as presented:

The property was built in 1970 and occupancy was good at 97%, with an average in place rent of $1,183 (avg for Columbia is $1,100), The current owners invested $6.5M over the past few years to renovate all the units and repair the exteriors. When you are evaluating a property that doesn’t have upside from renovation, you have to focus on strategies to increase NOI from small value-added changes, organic rent growth and operational efficiency. In the T12, rents increased 8% YOY as a result of the ongoing renovations and organic rent growth. The whisper price on the property came in at $20.5M, which, based on the broker’s NOI, was a 5.97% purchase CAP rate. The broker claimed that the rents were significantly below the average comparable rents of $1,413. The OM listed 7 nearby apartment complexes that they were calling comparable to support their number. They also floated the idea that an additional $300K of CAPEX for modest interior upgrades could boost the rents by an additional $50, bringing the achievable rent to $1,463. In the OM, the broker claimed, “There is headroom to market of $475 per month per unit.”

CREE’s sanitization of the numbers:

The first thing we focused on was market rents and the 7 properties listed as comparable. Three had average rents above our target, and four were below. The three properties with higher rents were significantly newer (2020, 2014,1993) and had average rents of $1,933, $1,856 and $1,661, respectively. Below are pictures of the property we were looking to buy (left) and the three newer properties.