A buyer with a 1.1 debt service coverage ratio on a 21-unit Norman, Oklahoma property listed at $1.4 million asks if an option contract could help. Christian Osgood says no unless the seller agrees, and recommends raising the DSCR to 1.2-1.25 through rent increases or other NOI improvements instead.
Update on the 21-unit in Norman, Oklahoma.
Yes.
The seller didn't officially decline my offer. Now, I don't want to lose this deal if I don't have to, but I also have to be logical. Last resort, I was considering offering an option contract because he wants $1.4M and it doesn't work at $1.4M. Like my DSCR is like 1.1%.
Yeah. Okay.
What are your thoughts on doing the option contract?
That— because 1.1%, you're not way off, right? You're— close-ish on DSCR, but you need to be a little bit higher for most bank products, or they're going to make you put a lot more down to get conventional, which defeats the purpose because that wrecks the returns.
I'm already at 40%.
Yeah. So yeah, don't do that. So short answer, yes, I believe you can get that done fairly easily if they accept it. So of course, that one's a very personal seller by seller. They're either comfortable or they're not. It's that The nice thing is it's a very binary decision for them. It's either a yes or no. Give yourself more than a year, but you wouldn't need to do 2 years for that. You're doing a modest increase over a midsize multifamily building. You just need to buy yourself enough time to get the perfect scenario. One year of books so you can go to the bank with your current performance. And for the— to get a year of books of current performance, you'll get access to the best debt products. They give you 6 months to refinance. That's kind of what you're looking at for that. And it's just executing the management plan decently well. If you're trying to get to like a 1.2, 1.25 DSCR, you need to be able to get your, you know, your net operating income a little higher and you shouldn't have too much trouble covering that. Yeah.
I think that's— It's not that far to raise the rents at 1.1. It's at a, at $1.1 million, it's at a 1.30 DSCR. He doesn't want to go lower than— 1.4. He says he's motivated. It's been on the market for over a year.
Yeah, so this, this, this sounds to me like a deal that's likely to be accepted. This is exactly a perfect illustration for everyone when I say your target is writing like on average an offer a week where you have like a 50/50 shot. This sounds like it. You've identified what we believe he wants. He hasn't been able to move it before. This deal's been around, you have a proposal that makes sense. You've tried to win on price and he's not having it. This sounds like the most— you're not solving a you problem, you're solving a him problem by offering the option contract. That's why I like it. He's more likely than not to accept it. I would put this in the like 60% chance they probably would say yes to that because I don't think anyone's going to buy it at his price on his terms. I just— and we know that because no one has bought it. It's been on market forever. I think it's really reasonable. option contract, minimum 18 months to execute it, ideally 24. And then try to— and then just tell them as soon as it is bankable, I will refinance it. Like the goal is to get done as fast as possible. I want to own it. I don't want an option agreement. I'm building the 20— I'm asking for 24 months so that there are no surprises.
