Coming to terms w/ seller on 5-unit w/ signif. negative cash flow

19 Replies

I am looking at a property I REALLY want...but at their asking price, we are at significantly negative monthly cash flow (-$2500). This is assuming me dedicating $ to capex, R&M, Prop Mgmt. I'd like to live in one of the units here, which would also take $2000 income out of the mix. My question is, what negotiating strategies can you employ to REALLY move people from an asking price that is $400K too high for a commercial property? I realize that I will probably not get this property. But I want my best shot. I'm willing to take -$500/mo cash flow. I want to sit down with them and go over the numbers, but this is an estate with 5 adult kids who want the $$$. Being commercial, lending terms are not helping me any. I want a fixed rate so I have to go with 20-year term.

Jocelyn Canfield

    Most commercial loans will not permit you to live in the property.

    Also, is there asking price too high, or are your numbers not correct? Probably a little of both actually.

    Russell Brazil, Real Estate Agent in Maryland (#648402), Virginia (#0225219736), District of Columbia (#SP98375353) and Massachusetts (#9​0​5​2​3​4​6)

    Why would you want a 5-unit with negative cash flow?  Best way I know to get a property that is way overpriced........let the owners sit on the property for a while without selling it.

    @Jocelyn Canfield I know this may not be what you want to hear but it is highly advisable to focus primarily on numbers when analyzing a property. In this case you may be at -$2500, you should always do your best to acquire properties that are cash flow positive as they can become a burden otherwise. 

    In addition, like @Russell Brazil mentioned, you may not be able to live on the property if it is zoned commercial. 

    Juan Vargas

      @Russell Brazil i use the calculators on this site and my numbers are not off. This is in a higher value area. I did mention to the lender I was interested in living in one of the units and they said they would simply take that income out of the calculations. This is 5 residential rental units. 

      I am interested in this particular area because my partner and I are constrained to living in a fairly small geographic area based on his work situation and this meets all our criteria and then some. And of course I don't want it with negative cash flow...they just want more for it than it is worth...as a commercial investment property. I agree about the sitting and waiting.

      Jocelyn Canfield

        I think your best bet is to submit an offer at the price that works best for you. They most likely won’t accept at this time but situations change and they may turn to your offer later. 

        Juan Vargas

          What exactly is it about this property that makes you "like" it so much? You must be pretty in love to want to spend 4500 (-2500 cash flow, -2000 income) mo to be a on site property manager. 

          @Kim Meredith Hampton  and @Juan Vargas  have good suggestions.  Show them your underwriting and rental comps in the area.  Be cautious that "emotion" is not a deciding factor with a negative cash flow property.  Have you done a rental rate market survey of the area to determine if the current rents are at market?

          Michael Dang

            I am with @Russel Brazil on this check your numbers. Sellers routinely inflate their numbers to put the property in the best light but I think your evaluation is probably off as well. If you are confident and you believe they are hemorrhaging cash like that wait they will get desperate and drop the price.  

            Jimmy Dudley

              If the cash-flow is negative it's not a good deal, plain and simple. Have you negotiated price? Have you calculated raising rents on the other units if they are below market or renovating them to force appreciation and rents? What about not living there yourself or at least make yourself pay rent to at least make the numbers work. If you run the property well you can start to pay yourself a salary as PM. 

              That all being said just go off the numbers and if it does not cashflow keep looking! I would rather buy a nice house for myself with a $2000 mortgage as it would be less risk, less work/headache and give a better standard of living. 

              @Jocelyn Canfield To both buyers and sellers, I always ask, "How did you arrive at that number"? Then you have the opportunity to educate them on why they are wrong (using bad comps, missing expenses, inflated income, etc) or you'll know that they just pulled it out of thin air and explaining the metrics is useless. If you get an ambiguous response like, "That's just how much we need", keep pushing to determine where they came up with the amount they "need" and how motivated they are to sell.

              With this being an estate sale, they likely don't have experience with the building and are just looking at their gross income thinking its awesome and easy money. I find this with old sellers too who have owned their building 30+ years - they don't take expenses into consideration. But again, you first need to get into how motivated they are to sell and how open they are to being educated on the market.

              Matthew Olszak, Real Estate Agent in IL (#471019601)

              Thanks all for your input. Intend to sit down with listing agent and the numbers. 

              Jocelyn Canfield

                Just my 2 cents...but it looks like you are mixing the "place to live" with "good investment" sort of thing. If you want to live there, great, go rent a place....but don't leverage up and buy a MF with a large negative cash flow. 30K/year is a pretty big drain, and you can get a lot of house for that in most places...

                @Jocelyn Canfield

                Hi Jocelyn,

                we are all coming up against this problem in this part of the real estate cycle. You can send over your underwriting to the seller or broker and show them why their number does not make sense.  You can let your banker underwrite it and share his analysis with the seller.  The power of showing a seller with red numbers on a document is much more powerful than simply throwing numbers back at him.

                The fact that the bank will not finance the property at his number may also sway him.

                My recommendation is to NEVER buy a property that negatively cash flows, unless an experienced operator can turn around very quickly. Still, it is risky.  The goal of investing in real estate is to generate a yield, not generate a loss. Commercial will allow you o go to 25 yr. amort and 10 year term with a good community bank

                Good luck

                @Jocelyn Canfield Solid advice on offer by knowledgeable people. 

                My two cents: but you're confusing emotion with logic. This property might be a great fit with your lifestyle or you really like it for some reason. But, as it stands the #s, in your estimation, do not make sense. 

                If you have hard #s backing up your valuation - comps (rent, sales, expenses, cap rates) - you can always run them by the lender and the seller. Gently, inquire how the sellers have come to their current # and walk them through your model. Maybe you're missing something or they are missing something. Initiating a respectful conversation from an open-ended education-backed focus does wonders. The initial #s is usually an opening gambit to see if someone bites. For e.g. a friend just bought a 52-unit Class B-/C value-add MF property in Houston for $1.3-1.4M. It was listed for $1.8M. He had back and forth but educated the seller on why he came up with that valuation and got seller financing thrown into the mix!

                In particular, it's concerning that the lender will not lend at the current value. That alone should give you pause. 

                so considering this is a commercial property and I want a 20 year fixed rate loan, is it reasonable to expect it to cash flow with 20 year amortization? what is the expectation with commercial? obviously the numbers are very different.

                Jocelyn Canfield

                  Jocyln - you need to provide more info on ur analysis. Earlier did u imply it has negative cash flow with 15-yr amortization? Does it +cash flow with 20/25yr amortization? What's ur downpayment?

                  Commercial loans are typically 15/20/25yr amortization with 20-40% down based on cash flow of the property. Rate are locked only for 5/10yrs. Sometimes lenders do fixed rate for loan amortization period but this is rare.

                  Your first sentence tells a LOT...... your numbers should tell you that you REALLY want this property....not your emotions. Go through you numbers and don't fall into the trap of letting your emotion fudge the numbers to make them look better just so you can justify satisfying your emotional wants.....

                  Run the numbers and have your lender run the numbers..... stick with the fact of the deal....not the emotions of the deal.

                  Unless you have some seriously solid way to immediately make this place cash flow don't buy it...... its rarely a good idea to accept negative cash flow on day one

                  Ned Jackson

                    Jocelyn, i am with most of the people above wondering why you would be so in love with a property with negative cash flow AND you should not invest with your feelings, you should invest because the numbers make sense. That said, if you are still going to buy it, a useful negotiating term to use that will buy you time is a MORATORIUM PERIOD on an owner finance. Close on the deal with a down payment and your first monthly payment will not be due until say 3 or 6 months from closing. That will buy you some time to reposition the property and hopefully break even when the first payment is due.

                    Good luck,

                    Mauricio

                    Mauricio Ramos

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