Houston/General- Multi-Family Strategy To Put Under Contract or Not

4 Replies

My partner and I invest in the Houston area. Currently we are looking at 5-30 unit multi families. We got brought a deal that seemed to be priced at a 9% cap. We assumed with the fudgey numbers we were most likely looking at a 7.5-8%. Yesterday we were 3 hours from making an offer when we got the accounting books. They were in rough shape and were missing a dramatic amount of costs. The new value of the property at an 8 cap was roughly 35-40k less than the initial offer we planned on making (479k). Is this common? How do you approach this problem? I've heard/read that some folks will get a property under contract and then negotiate down, others will just make an offer with what they would pay. Our earnest money was $479 per the contract what amount do you use? Will you sign a contract prior to seeing financials? This seems to be a little more straightforward in SFR so wanted some opinions.

Medium wb logoKevin Wood CPA, WoodBaker LLC | [email protected] | 832‑444‑9284 | http://www.woodbakercompanies.com | TX Agent # 684674, TX Contractor # 000000 | Podcast Guest on Show #167

I'd negotiate down, esp. since the seller misrepresented the profitability of the business.    If you can't negotiate an agreeable price, it's better to walk away from a bad deal and potentially losing earnest money than to buy a bad deal.

Originally posted by @Chris Soignier :

I'd negotiate down, esp. since the seller misrepresented the profitability of the business.    If you can't negotiate an agreeable price, it's better to walk away from a bad deal and potentially losing earnest money than to buy a bad deal.

 Thanks Chris. We ended up walking away. The seller scoffed at our 440k offer and said they would "never" sell at that price. So we ended up not submitting one. Still not sure how to handle this in the future.

Medium wb logoKevin Wood CPA, WoodBaker LLC | [email protected] | 832‑444‑9284 | http://www.woodbakercompanies.com | TX Agent # 684674, TX Contractor # 000000 | Podcast Guest on Show #167

@Kevin Wood , I've heard people talk about their philosophy of just "tying up" the property with an LOI, then worry about negotiating down later. That is one way to do it, but the MF business is a small world, and your reputation is REALLY important if you want to build relationships with brokers. I personally would never sign a contract without seeing financials, but I have run into a few sellers that won't give tours without an LOI, or possibly even a contract. If that's the way they are, then you don't have a choice if you want to see the deal, but make sure there are plenty of contingencies to allow you out. In that case, they certainly couldn't hold it against you if the financials were misrepresented. Word absolutely does get around though, so if someone constantly tries to retrade on every deal, the brokers are not likely to sway the sellers towards your offers. Of course if there are things discovered in due diligence that require renegotiating, thats a different matter.

I like to only make offers with terms at which I would be absolutely confident in closing.  You asked what others are using for earnest money.  I think 1% is typical, which would be $4790 in your case rather than $479.  In a hot market they may ask for more.  Lots of popular deals require non-refundable earnest money in order to be considered. 

Originally posted by @Tom Lafferty :

@Kevin Wood, I've heard people talk about their philosophy of just "tying up" the property with an LOI, then worry about negotiating down later. That is one way to do it, but the MF business is a small world, and your reputation is REALLY important if you want to build relationships with brokers. I personally would never sign a contract without seeing financials, but I have run into a few sellers that won't give tours without an LOI, or possibly even a contract. If that's the way they are, then you don't have a choice if you want to see the deal, but make sure there are plenty of contingencies to allow you out. In that case, they certainly couldn't hold it against you if the financials were misrepresented. Word absolutely does get around though, so if someone constantly tries to retrade on every deal, the brokers are not likely to sway the sellers towards your offers. Of course if there are things discovered in due diligence that require renegotiating, thats a different matter.

I like to only make offers with terms at which I would be absolutely confident in closing.  You asked what others are using for earnest money.  I think 1% is typical, which would be $4790 in your case rather than $479.  In a hot market they may ask for more.  Lots of popular deals require non-refundable earnest money in order to be considered. 

Thanks Tom. A lot of good information here. I think our earnest money was going to be 4790 with 479 non-refundable. Glad to see that was reasonable. I probably prefer your approach of waiting for financials. My heart sinks a bit when they don't account for a lot of the basic expenses in their NOI calculation.

Medium wb logoKevin Wood CPA, WoodBaker LLC | [email protected] | 832‑444‑9284 | http://www.woodbakercompanies.com | TX Agent # 684674, TX Contractor # 000000 | Podcast Guest on Show #167