We have a commercial deal under contract and after inspection have uncovered (as expected) needed repairs that not found before signing the agreement of sale.
When renegotiating, would you go for a purchase price reduction, or a credit at closing? What are the advantages and disadvantages of both options?
We appreciate all input.
Andresa & Roberto
Key words: commercial real estate, negotiation, creative finance, multi family, apartment, rehab
I don't have any experience with commercial, but in my opinion the answer to your question really depends on your specific financial situation. Here's my thinking. If you're looking to hold this property long term and have already budgeted to make the necessary repairs, I'd opt for the price reduction. If the repair weren't planned and budgeted for, I'd ask for credit at closing to cover those expenses up front.
One thing I would consider is if the price goes on the public records at the higher price then that goes to help valuers when they are setting cap rates and values on that building and others later, which may also help your ability to get finance.
So it may be better to have the higher headline price, which is not artificial as it was agreed before the reported problems were known, and then take the discount back to remedy or even have the vendor remedy the problems(your situation will effect this choice), both of which should be acceptable normal practice and not seen as trying to artificially hold the price up???
Things may be a bit different for us here in NZ though.
go for a purchase price reduction, so your property tax is less
If you are getting a good deal, I doubt the seller will give you a price reduction. If you are making a profit take the deal as is and run with it.
Thank you for your input.
Agree. Besides property tax, transfer tax will also be less, considering we get charged 4% in Philly.
4% wow, feels like the government is a partner in this transaction
I'd go with price reduction to lower that value, which in turn, would lower your tax payments. You could also tell the seller that a price reduction would also lower their payment on capital gains taxes also. If this property is NNN and taxes are covered by tenants, then get the credit for deferred maintenance.
Hope this helps. Good luck!
Great point Tim.