Seller with unrealistic asking prices

10 Replies

Hey BP community! Excited to announce that I have just closed on my first investment in August. Have been meaning to get back on here for some time. Anyway, I have finally gotten my first investment under control and running the way I want, now I'm eager for the next one. I have met some owners ( three partners) that own a mix of commercial and residential building. They are willing to owner finance, and they have done lots of upgrades such as new rooves, boilers, windows, porches, all the big stuff. Here is the issue, they had the mentality that you buy a building cheap, put a bunch of money into it and see it for a boat load. They don't quiet understand that the income a building produces plays a big part in determining the value. For example, they bought a 6 unit building for 40k put 300k into it, and are expecting to get somehwere aroind 350k. The town only has the building assessed at 225k and One of the buildings I just bought was a 6 unit that appraised at 195k. Granted my purchase was all 1 bedroom, and their building is all two bedroom, in a better location, and better condition. Absolutely this justifies a higher price, but not 155k more! 

My question to you guys is this, what negotiation tactics can I use to make these guys realize that their prices are much to high and  unrealistic? 

P.S. I'm typing this on the BP app and it's being a bit finicky, I'm sorry for typos 

@Reuben Stone do you have any comps that will help you educate the sellers on the value? 

The best tactic is to give them your best offer and let them respond. If they say no right off the bat, that's OK. If their property is too highly priced it'll just sit on the market. You could then send them the same offer every week as they realize their price is too high, as Brandon Turner does. Maybe they'll come down from their price, maybe you'll just need to move on to another deal that makes more financial sense for you. 

Well assessments sometimes lag the value of the property .  Especially if the property has been renovated . 

How do we know their asking price is unrealistic and your offer is realistic?

What cap rates are the buildings and what are comparable cap rates? How much per unit are the buildings and what are the perfect unit prices of comparable properties?

"They bought a 6 unit building for 40k put 300k into it, and are expecting to get somewhere around 350k"? I reckon you can't help them. Submit your best Offer/s - no need for justification. My 2c...

@Brandon L. I have many comparable, most importantly the buildings I have recently purchased. @Matthew Paul Their asking price on all their buildings is a good amount above tax assessment. For example, the town has one building assessed at 225,700 and they are asking $350,000. This building is collecting $55380 in rents annually and is paying out close to 50% to expenses. Leaving a net of $27690. This market trades between 9-10% CAP rates. @Russell Brazil , I believe that answers your question. This is just one example. Their asking price of $350,000 put the CAP rate at about 8%. Other buildings they are selling are around 6-7% if you paid their asking price. 

Assessed value is irrelevant regarding it's actual value. You are aware that value is based on income, state it is over priced, but do not mention what the income on it is.  

Make your best offer based on your expected cap rate requirement and walk away if you do not get your price.

If market prevailing cap rates are 9% and they are asking a price that equals 8% on a newly rehabbed building, then it sounds like to me that their asking price is actually very reasonable.

Thank you for all of your feed back. I have some ammo for the negotiation now. Much appreciated! 

At 350k for 6 units, that's $58,300 per freshly rehabbed unit.  I don't know what the rents are like in that area, but for a turnkey it sounds like it may be a fair price.

My question is why would they buy for 40k, invest 300k, and only expect to get 350k?  That doesn't add up.

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