Landlording & Rental Properties

The Step-by-Step Guide to Making Offers on Apartment Buildings

Expertise: Business Management, Commercial Real Estate, Landlording & Rental Properties, Real Estate Deal Analysis & Advice, Mortgages & Creative Financing, Personal Development, Real Estate Investing Basics
126 Articles Written

Are you wondering at what point in the process of evaluating apartment building deals you make an offer and what that looks like? It might seem a bit of a mystery, but let's shed some light on the matter.

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

What exactly does it mean to “make an offer”? Is it verbal or does it have to be written? If written, could it be an email, or does it need to be something more formal like a purchase contract?

The short answer is: all of the above.

Making offers on houses is a fairly well-defined event: it's the point at which you send a purchase contract to the broker or seller. With commercial real estate, it's a more interactive and prolonged process, starting with a series of "informal" offers that precede the more formal purchase contract.

Here’s the step-by-step guide to making offers on apartment buildings.

4 Steps to Making Offers on Apartment Buildings

Step #1: Provide Initial Feedback to the Broker

When a deal initially comes in from your broker, your goal is to provide the broker with feedback as quickly as possible. You need to answer the question, “What is the most I am willing to pay for this deal and why?”

Why is this important?

Brokers have told me that only 25% of people on their list respond to a deal. By you responding with feedback, you are suddenly in that broker’s top 25% of buyers, which means you’ll be taken more seriously — VERY important, especially if you’re just starting out.

The second reason this is important is that this initial feedback actually starts the negotiation process.

Let’s say the asking price is $1.5M, but your initial 10-Minute Analysis is that the building is worth no more than $1.1M. You came to this conclusion because you felt you had to make two adjustments to the broker’s underwriting in the marketing package:

  1. The income in his underwriting was actually higher than what was in the rent roll provided; and
  2. The expenses were only 35% of the income, and you use 55% as a rule of thumb, which is both more realistic and conservative.

Related ArticleYour Complete Guide to Analyzing a Property in Just 10 Minutes

This is the feedback you provide to the broker: "The property was advertised at a 8.5% cap rate. But the rent roll was actually lower than what was reported, and the expenses are only 35% of the income. I adjusted that to 55%, which is probably more realistic. Obviously, this reduces the Net Operating Income. In order to preserve the advertised cap rate of 8.5%, the value of the building is $1.1M, quite a bit lower than $1.5M. How set is the seller on that asking price? It seems a bit unrealistic, what do you think?"

There might be some discussion about your assumptions, etc., but this is a good dialogue to have with your broker or seller. The other thing you did is that you started the negotiation process.

Yup — you got it. You just “made an offer”!

If there’s a nibble, then you move on to Step # 2; otherwise, you just move on.

Step #2: Make a Series of Informal Offers

After the initial feedback, there might be some back and forth. Perhaps the broker will supply you with updated income and expense numbers. Maybe you visit the property and discover more repairs will be necessary than the broker initially told you.

Each time there is a revision of numbers from the additional information you are provided, you may have to adjust your informal offer price. You do this via emails, phone calls or in-person meetings. As long as the two parties are still talking, then you’re still in the game.

Step #3: Submit a Letter of Intent

Once your offer price moves into the “strike zone” of what the seller is looking for, the broker will tell you to submit your offer via a Letter of Intent (LOI).

The LOI is not legally binding, but it communicates the major points of the transaction: the offer price, the amount of down payment, and how long you'll need to complete due diligence and to close.

Related: How to Be Reasonable As a Landlord With Apartment Wear and Tear and Security Deposits

Once you have the LOI signed, it’s time to move to Step #4.

Step #4: Submit a Formal Purchase Contract

No one wants to pay an attorney to draw up a formal purchase contract before the main terms of the transaction are agreed upon. The LOI is the document to do that. Once it’s signed, you (as the buyer) can ask your attorney to prepare the purchase contract.

Once the purchase contract is ratified, you are officially “under contract.”

As you can see, there are a series of steps in the “offer-making” process that begin informally at first and become more formal as you progress in the negotiation process.

But if you’re keeping track and have a quota to meet for making offers (which you should), providing that initial feedback to the broker after you first get the deal package counts!

What comments or questions do you have about the offer-making process? Any cool stories you can share?

Don’t forget to leave a comment!

Michael Blank is a leading authority on apartment building investing in the United States. He’s passionate about helping others become financially free in 3-5 years by investing in apartment buildi...
Read more
    Ben Leybovich Rental Property Investor from Chandler/Lima, Arizona/OH
    Replied almost 6 years ago
    Nice, Michael – now, if I could just find a building that made a damn bit of sense, I’d go do exactly what you just described…:)
    Michael Blank Rental Property Investor from Northern Virginia, VA
    Replied almost 6 years ago
    You are NOT kidding …!
    Roy N. Rental Property Investor from Fredericton, New Brunswick
    Replied almost 6 years ago
    Ben, I hear you. I’m looking at a one now (30 units) where rents are 12(ish)% below market, but the vendor has it priced slightly above a reasonably value if it were fully performing …. making it considerably overpriced (27%) at current performance. First words from the Vendor’s agent – we’re non-negotiable.
    John Hamilton Real Estate Transaction Engineer from Jacksonville, Florida
    Replied almost 6 years ago
    And you say, “Call me when you’re ready to negotiate.”
    Sean T. Rental Property Investor from MA
    Replied almost 6 years ago
    Thanks for the article!
    Alan Malicse Real Estate Agent from Hercules, CA
    Replied almost 6 years ago
    Great Blog! – I’m very new to this so I actually did my first “informal” offer on a property and it went exactly as you stated on step 1! Unfortunately the seller wasn’t flexible on the price. But its good to know I went about things the correct way. That in itself has boosted my confidence – so thank you!
    Michael Blank Rental Property Investor from Northern Virginia, VA
    Replied almost 6 years ago
    Alan – you’re on the right track!
    Replied almost 6 years ago
    I thought my first (and only) apartment purchase was kind of cool because I looked at apartments all over the state trying to find something that made sense. I spent 3 months trying to get a seller to sell a property that was 1 1/2 hours from my house and listed for a reasonable amount. My realtor submitted a written offer for the asking price and we could not get any kind of a response. Finally, after threatening to pursue legal action if our offer was not submitted by the seller’s agent and either accepted or denied, they said the owner had decided not to sell the property. We never did figure out what the situation was there! However, the next month our hometown realtor said that the apartments in our hometown had just been listed and we purchased them. Since we had done our research and had our financing lined up, we were quite sure it was a good price and were able to act quickly. I guess what is meant to be, will be.
    Frankie Woods Investor from Albuquerque, NM
    Replied almost 6 years ago
    You make it look easy! Thanks for the article!
    KYLE Z. Investor from Ironwood, Michigan
    Replied almost 6 years ago
    Michael, Thanks for the great read! I am looking at a nine unit right now and I got to admit I am pretty frustrated with the broker. The appraisal Is so far off It should be against the law! I have just completed the first step and we will see what happens. Also thanks for the podcast’s great info!!
    Aaron Wyssmann
    Replied almost 6 years ago
    Great article. Thanks for sharing. I just a couple weeks reread Ken McElroy’s book through Rich Dad and this is exactly what he was talking about. I’m still trying to decide which route I want to go in the future, SFRs or Multi. I know so much more about SFRs and have bought and sold many. If I may, why have you chosen Multifamilies to invest?
    Michael Blank Rental Property Investor from Northern Virginia, VA
    Replied almost 6 years ago
    Hi Aaron — I recently wrote an article about this very question! Check out: Single Family vs. Multifamily: Which is the Better Investment?
    Replied almost 6 years ago
    great primer. I am really looking for a mentor to help with my first purchase and ongoing mgt. Have my I on a 140 unit that is in foreclosur, you help and guidance is much demanded, needed, and appreciated.