Hello! I'm trying to buy a multi-family apartment building in Houston. I'm facing two challenges:
1) Incentives are not aligned in my favor. The deal is through Marcus and Milichap. I'm working with 1 broker from San Antonio, but that is not the Seller's broker. The Seller's broker in Houston also has a client who I'm competing with. He would obviously much prefer it to go through him, so he gets twice as much commission. Has anyone encountered a situation like this? If so, do you have any advice for me? Can I ask my broker if he'd hand the deal over to the other broker - and I'd pay him on the side?
2) I've just offered asking price for the property. It will give me a 8% Cap Rate. It might need to go above asking price. I'm thinking of offering up to a cap rate of 7.5%. How does one decide what price to offer up to?
Any advice or suggestions would be much appreciated.
1. Generally there are not buyer's brokers involved in apartment transactions. The listing broker doesn't have to worry about sharing his commission because they don't usually offer splits. If there is a buyer's broker then the buyer normally pays for them. Do you have a signed contract with the San Antonio broker? Also, why do you have a broker based in SA looking for properties in Houston?
2. I'm concerned with how you have underwrote this property (if you did) based on this question. I hope you did not just take the broker's numbers at face value. Considering that I seriously doubt you will find a true 8-cap listed by a broker, I assume you might have just used the numbers listed in the offering memorandum. Either way, how you decide what price to offer should not be simply based on what you perceive to be the cap rate coming in. You have to base it off of what you plan to do with the property, what sort of income/expenses you think you can achieve after you execute that business plan, and what your exit plan will be.
Highest price doesn't always win. What other concession could you give up to make it easy for the seller? No contingencies? Faster closing? Non-refundable Earnest money upon acceptance of your full price offer? To do this, you have to know it's a good deal or that you can turn it into a good deal.
Consider, NOT using Cap Rate. As investors, our cash is usually the determining factor as to when we can take on the next project. We always look at Cash on Cash, especially if you are 'assembling' a cash-flow portfolio. Make sure you remain focused on your 'end game' as a total make-up of your portfolio.
@Kusum Chanrai I recently made an offer for a larger complex in Houston with M&M. However, I don't think you have to worry about being disadvantaged if you are not represented by M&M.
In my case, the offer price was not stated and I offered the "whisper number" that the selling broker had suggested. The broker came back and upped the number even more and I chose to walk away from the deal. The key question to ask yourself is not what the cap rates can be, but what will your exit pricing look like? Hurricane Harvey has created an artificial pricing demand with many (like me) out of state buyers thinking there are deals to be made. For example, if you buy at $80K per unit in an okay part of Houston and in 5+ years, sell again at $80K per unit, the cap rate or cash on cash may definitely not be worth the investment.
Good luck and hope this helps.
The best way to win a deal is to pay more than the other guy, and by that I mean offer the highest net total to the seller.
Of course, that may not be the best course of action, but that's how you do it.