What's the right offer????

Question

Hi All,

I'm new to the forum and hoping for some guidance!

I’m about to put an offer on a property that fits my criteria and goals. However, I’m a little confused on my proposed offer. The seller is asking $259,000, which is reasonable as it’s in a B class area. I also did the calculations based on the seller’s asking price and the CAP rate is high 7.8 (CAP rate in the area is 6.5), positive cash flow and high ROI.

Comparables in the area were sold at a CAP rate of 6.

I feel the property is a catch, so my question is, knowing the numbers make sense, should I put an offer based on the full asking price and try to negotiate during due diligence (I know some of the Windows need to be repaired), OR should I put a lower offer and see how it goes (but then I’m worried they reject the offer, the seller seems to know what’s going on)

The property was assessed for $271,000

Opinions and/or suggestions on the best way to approach this would be appreciated.

Russell Brazil · Answer

I prefer to do my negotiating on the front end (before contract acceptance) as opposed to the back end (During home inspection contingency period). I feel that doing it on the front end is more ethical, and on the back end can be seen more as not negotiating in good faith.  The inspection period, or due diligence period is to find things you can not see (And there are always some, most of which are not big deals and should not knock the price down)...but if you are asking for credits on things that you can see with your eyes, and do not need an inspection to know, then I would view that on the other end as someone not negotiating in good faith, and I would be more apt to take hard line stance and get out of the contract.

I think we are in better position, especially long term, if we foster positive relationships in the market as opposed to negative ones. In the future you may do a deal with this person again, and having that reputation as someone who is fair can go a long way, and conversely someone who is unfair will also go a long way but not for the good.

Ned Carey · Answer

When negotiating you try to find out as much about the other side position as possible. What do you know about their position and needs? Why are they selling at such a good price? How competitive is your market?

In a competitive market often things sell for over list price. Often properties are deliberately listed low to get attention and then let multiple buyers bid it up.

If the seller knows "what is going on" then it sounds like you may be negotiating yourself out of a good deal.

Paul MacInnis · Answer

Akram A. -  where exactly are you looking to purchase? I live here in Nova Scotia and would be happy to help you out on this and if I can.  Sounds like it must be in Halifax, as outside of the city the cap rates are quite a bit higher .

Akram A. · Answer

Thanks all for your help.  The seller accepted my offer :-) Now the hard work starts, hopefully the inspection goes OK.

Paul - We should keep in touch for future investments. My short term goal is to establish two multifamily  properties before end of year. All my family lives in Halifax/Sackville/Fall River area. Please let me know if anything interesting comes your way.

Thanks

Akram A. · Answer

Thank you all :-)

Ned -  In terms of the market we are looking to buy in Nova Scotia so no bidding wars, listings sell generally within their asking price. The seller wants to stay living in one of the units just doesn’t want to deal with the maintenance and tenants, which is also why she’s selling. (she will be signing a lease). Property was off the market last week but the deal fell through after inspection, the seller’s realtor said the reason was windows needed some repairs and other minor things and the seller wanted to fix the issues rather than decrease the selling price.

Russell -  So to be clear, if I noticed the windows need replacing when I did the initial viewing then your suggesting I estimate the cost and reflect that in my asking price rather than looking to knock it off during due diligence? Correct?

Bob - Here is the comparables, the first one is the one I’m trying to put an offer on.

Account Closed · Answer

You cap rate comps were probably analyzed incorrectly.  Can you post them here and I can analyze them for you.

What's the right offer????

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