Making the offer. Full Price or reduced price

Multi-Family and Apartment Investing
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Making the offer. Full Price or reduced price

Jonathan Jewell
Investor · Bensalem, PA · Member since 2011 · 146 posts · 93 votes

How you all doing fellow Bp'ers.  Gotta another question for the group.  I came across a multi-unit, that  did a walk through on and I want it.  It would be my first, just an FYI.  But  it has all the ingredients, great location, safe area, long term tenants, which I met and interviewed each one of them.  Cashflows pretty decent too.  The thing is everything is dated I mean everything.  Its also has some trouble spots that are in need of immediate attention.   I estimated the repairs and some of the upgrades are going to be around $15K  maybe even a little more once I open up the problem wall.  (water leak from outside)  So here is my question: 1) Should I submit a full price offer pending outcome of acceptable appraisal and inspection, just to get it under contract knowing I'll be negotiating a lower price later 2) submit my offer with my adjusted lower price with or course the appraisal and inspection clause 3) Go real low (like worst case scenario repairs and waive the appraisal and inspection clauses).  I wanted to go in strong with at least 2 options the seller can choose from.  Your experience and insight would be greatly appreciated.  Also would especially like to hear from @Cody L. , @Andrew Johnson , @NaDean Bowles and @Jay Hindrichs on this .  Thank you!

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Austin Fruechting
Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes
9y
Originally posted by @Jonathan Jewell:

Thanks for the advice guys!   I just wanted to clear something up.  

When I asked the question in regards to option #1.  Its not with the intent of hammering the seller on every nook and crany in regards to repairs to get the price down.   Its with the intent to "tie up the property" per se, and reasonably ask for a lower price based on the appraisal and inspection.  I mean there are some glaring obvious issues standing out like a full rotted and soaked wall, broken windows etc.  Its obvious to everyone  (seller, seller agent, myself, partner) that, those things will have to be addressed.  I was just thinking it would benefit all parties involved knowing phase 1 is complete (a contract has been signed and we can move forward with the rest).  

 Your offer and contract price should be reflective of all issues you are mentioning that are glaringly obvious. A renegotiation later based on issues everyone knows about isn't looked upon kindly. If the appraisal supports your contract price and the inspection doesn't reveal anything major beyond what you can see, then you should stick to your contract price. 

Now if the inspection reveals larger hidden issues behind the wall that you can't determine at this time, or the appraisal comes in lower than your contract price, then renegotiate. That's reasonable.

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  • Kimberly Keesler
    Investor · San Francisco, CA · Member since 2016 · 29 posts · 8 votes
    9y

    I've done option 1) twice.  Gotten under contract and then when I had the appraisal and inspection asked for a lower price.  Both times the seller agreed and my most recent time I got $10K off the asking price.  

    1Reply
  • Jonathan Jewell
    OP
    Investor · Bensalem, PA · Member since 2011 · 146 posts · 93 votes
    9y

    @Kimberly Keesler, any other contingencies you put in place on contract other than appraisal and inspection?

    0Reply
  • Bruce Petersen
    Rental Property Investor · Austin, TX · Member since 2017 · 254 posts · 265 votes
    9y

    I always make a fair offer with the info I have at the time.  I typically over capitalize a deal and only re-trade if the deal dies without it.

    I NEVER EVER want to re-trade, I value my reputation greatly and want the transaction to be a positive one for the seller.  I don't want to be the guy that has the rep of getting under contract and then hammering them with a re-trade.  People learn and or hear of you and your tactics and it can follow you.  

    Think about how you want to be dealt with as a seller when the time comes and conduct yourself accordingly.  You don't have to "win" the negotiation.  Let the seller think he has won, if you get his property from him you succeeded and won. 

    4Reply
  • Kimberly Keesler
    Investor · San Francisco, CA · Member since 2016 · 29 posts · 8 votes
    9y

    @Jonathan Jewell  I also always put in a financial contingency just to be safe. 

    1Reply
  • Bryan C.
    Investor · Spokane, WA · Member since 2014 · 733 posts · 155 votes
    9y
    Depends on the numbers and location. Not all sellers will agree to lower prices
    0Reply
  • Jonathan GreeneBusiness Member
    Real Estate Consultant · Madison, NJ · Member since 2016 · 6k+ posts · 7k+ votes
    9y

    @Jonathan Jewell you don't want to make offers that you are actively trying to reduce in the inspection period. You need to do your initial due diligence on the property and make an offer that accounts for the work you think needs to be done on the property versus how reasonable the price is, as well as taking into account the ARV. You won't develop a good reputation (no one will want to sell to you) if you constantly offer asking price and then hammer them over every nut and bolt.

    There are so many offers on multis here that all of my investors are taking the properties as-is, doing a pre-inspection with their contractor or at least including a limiting clause in the contract to show they are not looking to nickel and dime the seller.

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    2Reply
  • Charlie MacPherson
    China, ME · Member since 2014 · 3k+ posts · 4k+ votes
    9y

    @Jonathan Jewell  If you don't get it under contract, you won't be in a position to negotiate a price reduction based on the home inspection, so that's your first priority.

    That said, there are limits.

    If you go in $50,000 over asking but actually intend to hammer the price down to $25,000 under asking based on the inspection results, you're not dealing honestly.

    My recommendation is to look at the market.  If it's super hot and similar properties are selling at 5% over asking price, I'd make my offer based on that.

    If it's a slower market and a full price offer seems fair, I'd go with that - presuming that in either case the numbers work.

    I would not try to negotiate the price downward based on things that are obvious to the naked eye, but only on those things that were not.

    In general, I recommend that my clients negotiate a price reduction rather than asking the seller to do repairs.  Sellers are naturally motivated to do repairs on the cheap, while the buyer can control the repair materials and quality if they do or manage their own.

    2Reply
  • Jonathan Jewell
    OP
    Investor · Bensalem, PA · Member since 2011 · 146 posts · 93 votes
    9y

    Thanks for the advice guys!   I just wanted to clear something up.  

    When I asked the question in regards to option #1.  Its not with the intent of hammering the seller on every nook and crany in regards to repairs to get the price down.   Its with the intent to "tie up the property" per se, and reasonably ask for a lower price based on the appraisal and inspection.  I mean there are some glaring obvious issues standing out like a full rotted and soaked wall, broken windows etc.  Its obvious to everyone  (seller, seller agent, myself, partner) that, those things will have to be addressed.  I was just thinking it would benefit all parties involved knowing phase 1 is complete (a contract has been signed and we can move forward with the rest).  

    Reason I wanted to clarify is some in some of the responses, I got impression that I was some sort of scumbag investor going in high and then hammering the seller till hes black and blue, waiving a signed contract around.   That is 100% not my intention.  I am a graduate of the win/win school of negotiating.  My philosophy with a business transactions has always been, if you bump into the person in the supermarket are you still friends afterwards.  I was just asking advice on how others present their offers, since this is newer territory for me.  Thanks again for all the input.

    1Reply
  • Jonathan Jewell
    OP
    Investor · Bensalem, PA · Member since 2011 · 146 posts · 93 votes
    9y

    Not sure why the links didnt work in original post but would really appreciate your thoughts on this as well. @Cody L. @Andrew Johnson @NaDean Bowles             

    0Reply
  • Austin Fruechting
    Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes
    9y
    Originally posted by @Jonathan Jewell:

    Thanks for the advice guys!   I just wanted to clear something up.  

    When I asked the question in regards to option #1.  Its not with the intent of hammering the seller on every nook and crany in regards to repairs to get the price down.   Its with the intent to "tie up the property" per se, and reasonably ask for a lower price based on the appraisal and inspection.  I mean there are some glaring obvious issues standing out like a full rotted and soaked wall, broken windows etc.  Its obvious to everyone  (seller, seller agent, myself, partner) that, those things will have to be addressed.  I was just thinking it would benefit all parties involved knowing phase 1 is complete (a contract has been signed and we can move forward with the rest).  

     Your offer and contract price should be reflective of all issues you are mentioning that are glaringly obvious. A renegotiation later based on issues everyone knows about isn't looked upon kindly. If the appraisal supports your contract price and the inspection doesn't reveal anything major beyond what you can see, then you should stick to your contract price. 

    Now if the inspection reveals larger hidden issues behind the wall that you can't determine at this time, or the appraisal comes in lower than your contract price, then renegotiate. That's reasonable.

    7Reply
  • Christopher Blanco
    Real Estate Consultant · Cleveland, OH · Member since 2016 · 511 posts · 345 votes
    9y

    @Jonathan Jewell I would also re-estimate your repairs to be higher than $15K. For a four plex that would be low even if you were doing ALL the work yourself. Remember with MFR Quads you have 4 kitchens, 4 bathrooms (at least) to think about. I would put your repair budget at AT LEAST $40K. That's only 10K per unit. I would also recommend including the cost of an updated HVAC system and roof if they are more than 7-10 years old. Try and maintenance proof the property going in and you won't need a gigantic CapEx budget to start.

    3Reply
  • Matt K.
    Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes
    9y

    If you're going to present a lower offer you'll have a greater chance of it being accepted if you document why. Maybe attach a bid and break it up w/ some "optional" parts, but let the seller know you're taking care of that. You just want consideration for the "required" work.

    4Reply
  • Jonathan Jewell
    OP
    Investor · Bensalem, PA · Member since 2011 · 146 posts · 93 votes
    9y

    @Christopher Blanco.  Wow thats good to know.  Yeah, I estimated doing everything myself, and not accounting for my labor.  Its a bad habit that I'm slowing getting out of.  You know I don't know WHY or how I forgot to mention this but here it goes.  This is a 6 unit apartment complex with NO, HVAC (Only window units.  ONE heater for all the Units and ONE 40 gal water heater shared among all the units.  Is that even code???  None of the residents complained to me about lack of heat or hot water when I specifically asked them (Do you have heat or hot water issues)  All of them said no.  Its just insane to me.  I put  40gal WH in mobile homes, let alone a whole building running off of one.

    1Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    9y

    My Letter of Intent on this one would provide 2 options, one for cash out and one with seller financing.  Sometimes there is also a 3rd option that includes a lease option/ master lease option, but not if a lot of work is involved.  Don't want to fix something up you don't yet own.

    Either way, open and obvious condition issues will be mentioned and discounted for in my offer price up front.  Not sure if it's priced with comps or cap/noi, but the condition issues need to be accounted for.   My repair estimate would be reasonable, but not with me doing work for free.  

    Exterior water penetration is usually a bonus I have found.  Looks awful, but usually corrected with proper gutters, flashing, roof repair that is accessible and not too expensive.  It's phantom leaks in walls or ceilings that scare me.

    Good luck out there @Jonathan Jewell!  I remember the exciting days of a new deal brewing!

    3Reply
  • Todd Dexheimer
    Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
    9y

    @Matt K. said it right! I would schedule another walk through with a contractor and get a quote. Give that quote with the offer. At the very least write your own list of deferred maintenance with prices and present that with the offer. The water issue alone could be $5k+

    2Reply
  • Cody L.
    Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
    9y
    Originally posted by @Jonathan Jewell:

    How you all doing fellow Bp'ers.  Gotta another question for the group.  I came across a multi-unit, that  did a walk through on and I want it.  It would be my first, just an FYI.  But  it has all the ingredients, great location, safe area, long term tenants, which I met and interviewed each one of them.  Cashflows pretty decent too.  The thing is everything is dated I mean everything.  Its also has some trouble spots that are in need of immediate attention.   I estimated the repairs and some of the upgrades are going to be around $15K  maybe even a little more once I open up the problem wall.  (water leak from outside)  So here is my question: 1) Should I submit a full price offer pending outcome of acceptable appraisal and inspection, just to get it under contract knowing I'll be negotiating a lower price later 2) submit my offer with my adjusted lower price with or course the appraisal and inspection clause 3) Go real low (like worst case scenario repairs and waive the appraisal and inspection clauses).  I wanted to go in strong with at least 2 options the seller can choose from.  Your experience and insight would be greatly appreciated.  Also would especially like to hear from @Cody L. , @Andrew Johnson , @NaDean Bowles and @Jay Hindrichs on this .  Thank you!

     I haven't read the replies yet and it wouldn't suprise me if I'm answering different from the rest but here is my take:  I always make an offer "as is".  I've never retraded (requested a lower price after going under contract).  Ever.   

    You've done some good DD to know what you're getting (more than I do, I just bought a 200 unit w/o seeing it in person).  So you have some good assumptions of what it will cost to fix.

    So, make an offer that you're comfortable iwth based on the condition of the property as-is.   If they want $300k but there is $30k in work, then is it worth $300k still with that in mind?  It could be that if not for those problems they'd want $350k.   But either way, simply bid what you'd want to pay for the property knowing you have to do work to it.

    You can get an inspection all you want (I never do), but that inspection should just be to make sure you're still fine to buy it -- not as a tool to lower the price.

    FYI the biggest reason I don't retrade is sellers and brokers hate it.  They hate that most buyers do it.  I like that I've developed a rep for quick easy 'as is' closings.  Why?  When a broker has a pocket listing, who do you think they're going to call first?  The buyer that's super easy to work with and doesn't retrade?  Or the one that offers $x, and then says "Well, xyz is broken, I want to lower my price by $y".    Be the buyer that broker want to deal with.  You'll save more money in the long run and get better deals then if you're the buyer that tries to beat up someone AFTER going under contract

    3Reply
  • Troy Fisher
    Specialist · Kirkland, WA · Member since 2013 · 1k+ posts · 817 votes
    9y

    So, it took a couple of replies to get to my question, but on a Residential Purchase (4<) I would offer list price, and then come back with an inspection report and bids/quotes on the repair.  It's about the psychology of the person who is selling.  Sometimes they are personally invested in the property and they need that extra "third person" opinion in report form to "see" the problems and accept them.  Otherwise they may reject an initial lower offer as a "Lowball" offer.  This will also be influenced by the agent the seller has.

    However, since this is a 6 unit, which means it's someone who went through the trouble of being an investor, and getting commercial financing, they probably think of the property differently, as an asset or investment  and an offer with an attached, here's a "why" I'm not at list price is going to be fine, but I'd make sure your bids are within your budget, because if you are coming across as professional and ready to deal, and then find more repairs on an inspection contingency you may run into resistance.

    1Reply
  • NaDean Bowles
    Investor · Little Rock, AR · Member since 2016 · 152 posts · 40 votes
    9y

    It cash flows well with the current dated state, without upgrades.  I would not put in an offer you know you aren't going to stick to, it only makes you look bad.  I would add in what you know you are going to do, the immediate needs, and make the offer pending inspections.  You can make your offer lower with the upgrades that would make it look better or you can use that point as a bargaining chip when they want to haggle.  

    Have you discussed terms with them?  I would make a cash offer that includes everything you want to fix, an offer of some money now and yearly installment payments; and a monthly cash flow offer that is higher/closer to what they really want.  

    2Reply
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