My First Offer
Hey yall,
Need some guidance on my first offer. It's on a 20 unit apartment complex. I'm going to request seller financing offering 15% down. The seller is asking a lot for it, and frankly I'm pessimistic about my chances, so I view this as practice more so and if by some stretch of luck I can get a deal, I'd be more than tickled.
1. When someone asks you to make them an offer, it isn't binding unless it's on an official LOI, correct?
2. I plan on creating an entity soon. Does the entity buy this property or do I buy it in my name?
3. How specific should I be in my first offer? Do I outline things like preferred length of due diligence, certain contingencies, etc?
4. I saw a checklist on due diligence periods when purchasing these types of properties, can someone direct me to that link?
5. Any info on the financial analytics of purchasing these types of properties would be helpful too.
Thanks guys. Any advice or help will be greatly valued.
Hey @Brett Thomas it is great you are looking to invest in an apartment building. Have you invested in real estate before? Here are my thoughts on the questions you posed:
1. When someone asks you to make them an offer, it isn't binding unless it's on an official LOI, correct? Correct, it is not binding just making an offer. It is binding once you have signed a purchase agreement and paid earnest money,
2. I plan on creating an entity soon. Does the entity buy this property or do I buy it in my name? I always recommend putting investments into an entity to protect your personal assets.
3. How specific should I be in my first offer? Do I outline things like preferred length of due diligence, certain contingencies, etc? I would be very specific. Outline what you want out of the deal.
4. I saw a checklist on due diligence periods when purchasing these types of properties, can someone direct me to that link? Not sure on any checklist.
5. Any info on the financial analytics of purchasing these types of properties would be helpful too. You can try and find sold comps, but with an apartment building, it's not as easy as finding comps for single family homes. I would enlist the assistance of a broker to conduct a BPO for you, or even go a step further and order a full appraisal. You don't want to overpay for this investment.
Thanks for the response, @Chris Erwin. As expected, he rejected my offer on the grounds that he was dissolving a partnership and the property had to be sold immediately. I was requesting seller financing in the deal. But, for learning purposes, here's what I wrote him. PLEASE critique this if I did something incorrectly.
My offer, verbatim:
"Good Evening Seller,
I want to reiterate that I'm only interested in seller financing. I know you're trying to sell quickly, so I just want to make that clear to respect your time involvement.
My offer is as follows:
-$150,000 seller financed with 15% down payment
- 20 year term at 4.5% interest rate, no prepayment penalty
- Seller pays closing costs
- 30 day due diligence period
- Seller must provide rent roll history and other financial information
Thank you!"
So, what did I miss or mess up? Tear this limb from limb, pick it apart, totally berate it if it requires, I just want to learn from this. And to answer your question from last post, I'm sure you perceived that yes, indeed I am a newbie.
@Brett Thomas I guess my first question I would ask the seller is if they are even willing to seller finance if that is what you are looking for. Did you ask the seller this?
Yes sir, I did on the very first email I sent. His response was, "We would prefer cash, but I'll take your offer to my investors and present it." So I was assuming it was still a viable option up until the end, when he oddly denied knowing that's what I wanted.
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You're trying to buy 20 units for $7,500/door, and only 15% down? W/o seeing the numbers, or having familiarity w/ the market it's in, I can only assume that you're trying to steal it for a small fraction of market value. Not surprised at all that your offer was declined!
@ Chris Soignier I have no experience, and I'm not surprised either. Again, this was mainly for learning purposes, even though if he decided to bite, I did have the funds to make something happen.
He was asking $395,000, and said it recently appraised for $319,000. After visiting the property, it was obvious that it needed work. Off the cuff, it needed a new roof and a bunch of fascia repair. Some windows were broken on the units, some were missing exterior door handles. He asked me not to talk to the tenants, so I didn't get to see inside any of the units. I can only assume that they were in just as much need of repair as the outside. There's government housing across the street from this property.
This is in middle Georgia, and the seller was in California. In his add on craigslist, the seller claimed that it was a turn key property because they recently renovated it. His detachment to the current status of the property became evident upon viewing it. It was anything but turn key. He told me it grossed 7k a month fully rented, and that it currently only was half rented out, producing around 3k.
Was I trying to steal a deal? You bet I was. That's the name of the game isn't it? ;) The seller claimed he was motivated, I had nothing to lose, so I went for it. Also, I feel it important to mention that I wasn't going to offer him after I viewed the property, but he insisted that I did, no matter how "low ball" the offer was.
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Good for you trying to steal a deal! I wasn't trying to imply there's anything wrong w/ that, I just don't think it was a very realistic offer.
I know you weren't. I agree it really wasn't a very realistic offer. Just figured I'd try. I knew it was going to need TONS of reno, so that's what mainly led me to that number.
@Account Closed Absolutely, and I can't help but feel like him saying that "he didn't know I wanted to seller finance" was just his polite way of saying "that's too low of an offer, and I now know you aren't working with as much cash as you let on".
I'd even take it further by assuming that offering a low ball right off the bat was an automatic death sentence for the deal, and that I could've had more negotiating power after some due diligence, not before. Lesson learned!
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The problem w/ making an unrealistic offer is that it often repels the seller, whereas if you made a low offer but within reason, they'd be more likely to negotiate w/ the intent to find a mutually acceptable middle ground.
Even at the price he's asking, that seems pretty low for a 20-unit building, although I don't know your market. May I ask why you insist on seller financing? The combination of the lowball offer, seller financing, and low interest rate are guaranteed to scare away just about anyone, even if they're motivated.
You already have the 15% to put down, why not put in the extra 5-10% to get a commercial loan? If you don't have that kind of money on hand, there are a number of ways to scrounge an extra $15k for a down payment. I suspect you'd still get rejected, but at least the seller might consider making a counter-offer at that point.
I see the error of my ways. I was a bit too aggressive, and just didn't make a reasonable offer. Thanks all for your guidance.
@Jacob Pereira We are about 2 weeks from the completion of our house, and my lender told me to under no circumstances use my credit, so I was hoping to get a seller finance deal to avoid that. It was basically the only viable way for me to have a shot.
@Brett Thomas Reading everyone's comments above, I can't help but say - great job for trying. RE is a game, and many have read Rich Dad Poor Dad but only a few have taken action. Low ball or not you've taken action! Congrats!
Thank you sir! @Ola Dantis
@Ola Dantis, right you are, sir. You have to kiss a lot of frogs to find your prince, as they say.
We would be glad to walk you through one of our next deals and let you watch as it goes through the process. We are buying in middle Georgia and have 7 properties in Macon/Warner Robbins under contract right now. Feel free to send me a connection request and I'll get you in touch with my assistant and we can see how we might help each other?
I would recommend getting a start in single family or duplex-fourplex. Four Green houses then the red hotel...just like Monopoly! When I worked with Robert Kiyosaki he would frequently reiterate that.
@Jared Garfield that would be fantastic! Sending one now. Sorry for the slow response, I'm on vacation with my wife and 10 month old son. It's almost like more work than vacation I'm finding out!