Justifying low offer on three unit multifamily

29 Replies

I'm looking to buy a 3 unit multifamily property in Baltimore. The problem is the seller, in my opinion, is asking way too much for it. I want to put an offer in but I don't want to scare them off by offending them or not taking me seriously. 

So of course I need to justify my offer. I need to prove to the seller that no one is going to make any money paying what they want. My question is how do I do this? How detailed of an income and expense estimate should I provide? What kind of explanation should I include with my offer?

IMO time-on-market and other realistic (or, from seller's perspective, lowball) offers are the main ways a seller realizes their expectations are out of whack.  

Make your offer, explain you are an investor and that you understand if your offer is lower than they want to accept, and leave it at that.  To show you are serious, including a bank statement showing you could buy for cash should do it (black out any info you don't want to share).

If this seller doesn't want to negotiate close to your price, I would move on to properties where the seller is ready to sell.  (Unless there is some reason that this property is the ONLY one that works for what you need - but then, guess what, it's worth more to you than the comps suggest...)

@Chris Purcell as Mr. Beard put it, comps are the basis for everything. Show the seller comps of other 3 units that have sold and explain why your offer is what it is. I submit offers on investment properties every week for myself and the majority of them get countered or declined. You don't know what will happen until you try. Don't worry about offending anyone, it's part of the business. 

3 unit properties are different in Baltimore.  First off, I still haven't seen a 3 unit that looks the same, except for Gywnn Falls Parkway in 21216.  The city itself is on a block by block basis, so a 3 unit 2 blocks away could be more or less, and or have a lot more crime or a lot less crime.  Your comps have to be in a very tight area of several blocks, otherwise you can't figure out the value period.

I am from Baltimore and have been investing for over 40 years here. There are a ton of property owners that would embrace your offer.

My points of negotiation:

  • if you are concerned with justifying your price, let the seller know that based on the CAP rate it is impossible for you to make a profit (now study how to do a cap rate based on the asking price. Complete an APOD, annual property operating data form, this will give you the NOI, divide the NOI into the asking price to get the CAP rate.)
  • You can justify your price if you want, but remember you are the person who can make this deal work.  Don beg for a deal, make the offer!  Some say... "If they don't cry, your offer is too high."
  • Don't be a motivate buyer, stick to your offer, if they don't like it they can counter offer.
  • Remember it is you who are willing to take over the responsibility of that property, it is you who will suffer with tenants, taxes, repairs, mortgage payments, housing inspectors and all the other stuff that makes our life miserable as investors.
  • If he does not like your offer, change the terms; 100% owner financing, delayed settlement with right of possession.
  • Subject to and contingent on flipping the property before settlement
  • Make an Hybrid Offer; this keeps the seller in the profit loop
  • Offer low, assign low and do it often
  • Don't forget the golden rule, he who has the gold makes the rules
  • If he doesn't like your offer, too bad, you offer is one that should satisfy your profit position. Don't like it.......move on to the next seller......there are about a million others who will listen to your offer.
Charles
Originally posted by @Charles Parrish:

I am from Baltimore and have been investing for over 40 years here. There are a ton of property owners that would embrace your offer.

My points of negotiation:

  • if you are concerned with justifying your price, let the seller know that based on the CAP rate it is impossible for you to make a profit (now study how to do a cap rate based on the asking price. Complete an APOD, annual property operating data form, this will give you the NOI, divide the NOI into the asking price to get the CAP rate.)

Geez Charles, Forty years doing things backwards! Who cares what number you come up with by dividing a NOI by an asking price. What do you think that number means?

I would expect you would know the value of a CAP rate as it is related to negotiating a price for a commercial property.

With all those votes on your comments, you must know something about this business.

Originally posted by @Charles Parrish:

I would expect you would know the value of a CAP rate as it is related to negotiating a price for a commercial property.

With all those votes on your comments, you must know something about this business.

Yeah I was a commercial real estate appraiser and certified by the state of CA as an expert witness for commercial valuations.

On this forum I mostly see people using cap rates incorrectly out of ignorance or to knowingly try to mislead novices into purchases of the properties they are selling.  Which are you?  I do see that you are a seller.

Yeah I was a commercial real estate appraiser and certified by the state of CA as an expert witness for commercial valuations.

I could tell by the lack of information in your Bio how professional you think you are.

On this forum I mostly see people using cap rates incorrectly out of ignorance or to knowingly try to mislead novices into purchases of the properties they are selling. Which are you? I do see that you are a seller.

I am neither, maybe you should give more options. I am not ignorant  to CAP rates nor I am interested in misleading novices in this business. Your comments are neither friendly or professional.

Your disrespect to all post on this forum is obvious!

On this forum I mostly see people using cap rates incorrectly out of ignorance or to knowingly try to mislead novices into purchases of the properties they are selling. Which are you? I do see that you are a seller.

Bob, you are asking me if I am ignorant of CAP rates or am I trying to mislead novices into purchasing properties.

I am not ignorant of CAP rates! Is that the answer you want?

I still think your comments are disrespectable to all who post here!

Why Are Capitalization Rates Important for Investors?

By Peter Barnes

What’s the capitalization rate?

The capitalization rate, or cap rate, is an important concept in the commercial real estate industry. The "capitalization rate" is defined as an initial yield on a real estate investment. It's calculated as the annual NOI (net operating income) from the property divided by the acquisition cost of that property or its current market value. Net operating income is computed by deducting the operating expenses from the gross operating income. The operating expenses can be property taxes, maintenance costs, and salary, among others. NOI is used to measure the operating performance of the company's properties

The Cap Rate is a measure of a property’s investment potential, independent of the specific buyer. Regardless of who is evaluating the property, the Cap Rate will remain the same, and therefore two investors can do an apples-to-apples comparison of the same property using this measure.

That is why cap rate is such a valuable tool.

Originally posted by @Charles Parrish:

That is why cap rate is such a valuable tool.

But ONLY if you know how to properly use it.  Again, can you answer the question I asked?

Using a CAP rate is a number that can be used to negotiate the price an investor is willing to offer on a property. It is a probable measure of cash flow after expenses.

Thank you for letting me know how wrong I am. Over the years of investing and building a high equity commercial portfolio, I am sadden to now discover that I have been doing this all wrong.

Why don't you tell us your reasoning about CAP rates and how you would use them.. It seems as if you have the answers I can't supply.

I will admit that I may not be as informed as you, I am always willing to listen to a professional like yourself.

Thank you for your input.

the answer to original question.....is that there exists no need to "justify" your offer. The seller will either accept it or reject it based on their needs, not yours......Your profit, loss, future or current, rewards and/or detriments, are of no concern to a seller in relation to the price they sell it for. They are selling the house to benefit themselves, not you. As far as what is or is not a fair price?.....relative term. Offer a price that is justified for your purposes.... justify it if that makes you feel better...but they wont believe you. You're biased. they'll take it, they'll leave it, they'll counter....you move from there.

Originally posted by @Charles Parrish:

Thank you for letting me know how wrong I am. Over the years of investing and building a high equity commercial portfolio, I am sadden to now discover that I have been doing this all wrong.

Why don't you tell us your reasoning about CAP rates and how you would use them.. It seems as if you have the answers I can't supply.

I will admit that I may not be as informed as you, I am always willing to listen to a professional like yourself.

Thank you for your input.

I'd be happy to but it will take more than a couple of posts. Cap rate= NOI/market value is not quite e=mc2 but for both knowing the equation does not mean you understand the concept. I've been meaning to start a thread on Cap Rates. The thing is that 99% of the people here have no need to understand cap rates except to determine when someone is trying to scam them. I'll ping you when I start my thread.

Hi Chris,

I agree with several posters: you make an offer that makes sense for your business, and see what they counter with. You can go through the math you used to arrive at that number, but you don't have to. Ultimately it is their choice to accept, counter, or decline. Their asking price is just the opening salvo.

What are they asking, what do you think rents will be, and what are you thinking of offering?

Good luck,

Evan

Originally posted by @Bob Bowling:
Originally posted by @Charles Parrish:

Thank you for letting me know how wrong I am. Over the years of investing and building a high equity commercial portfolio, I am sadden to now discover that I have been doing this all wrong.

Why don't you tell us your reasoning about CAP rates and how you would use them.. It seems as if you have the answers I can't supply.

I will admit that I may not be as informed as you, I am always willing to listen to a professional like yourself.

Thank you for your input.

I'd be happy to but it will take more than a couple of posts. Cap rate= NOI/market value is not quite e=mc2 but for both knowing the equation does not mean you understand the concept. I've been meaning to start a thread on Cap Rates. The thing is that 99% of the people here have no need to understand cap rates except to determine when someone is trying to scam them. I'll ping you when I start my thread.

https://en.wikipedia.org/wiki/Ignorance

I apologize to the people that were offended by my use of the term ignorance because of their ignorance of the definition of ignorance. I am ignorant of a lot of things.  Cap rates is not one of them.  Mahalo for your consideration.