Should I offer The Asking Price?

Question

Looking to place an offer on a 4 unit property. I ran all the numbers and the return from a ROE and Cap Rate meet my criteria. The property is not currently listed, but my real estate agent knows the seller and approached me with the property. They are asking $314,900. If I want the property and the numbers work at that price, do I just offer their asking price or is it worth at least offering 310,000 and see if they accept or counter with something in the middle.

Anthony Griffin · Answer

Thanks for the mention Jd, I'll give you an example of an office building that I purchased 5 years ago. I bought a 2-tenant office  REO from a bank that had foreclosed 3 years prior. The bank initially asked $250,000 and I told them based on my contracting experience that the property would need significant updating (I'm a licensed contractor and did the upgrades for cost of materials and labor so no big deal) and that the tenant base was shaky due to one unit being vacant and the other unit was a 3-year old month to month lease.

At this point, the bank countered at $175,000 and I still stuck to my guns and told them it would be nearly impossible to get the building financed due to the above mentioned problems. I already know that $175,000 is a great price so I start negotiating with the current tenant and get them to commit to a new 3-year lease at higher rent and I started marketing the vacant unit. I found a tenant willing to lease the vacant unit and they were willing to sign a 3 year lease. Remember, I've done all of this without the bank knowing anything.

I come back to the bank and told them that the best i could do based on the condition of the building is $115,000 and they accepted and I closed on the property. I have now owned this property for 5 years and based on the financials, it is currently worth a little north of $500,000.

This is why you should know your walk away price before you even start negotiating. If I hadn't, I may have possible paid $250,000 instead of $115,000.

If this one gets away from you, trust me a better one will come along soon.......

Anthony Griffin · Answer

Brandon, whenever you look at a property, you should develop a strike price. This is the final price where the property actually makes financial sense. The reason you come up with this price first is that often we become emotional and want to make a deal work because we have put time into researching it or we just really like the property.

I can't tell you the number of times I've seen people at an auction blow past a reasonable offer because they wanted to go all in. A strike price will tell you when you have to pull out. Now, with that price in mind, I typically start my offer at around 10% under my strike price, this offers me a little wiggle room with the seller.

If the seller likes working with you they will likely counter your offer and then you can work with them until both of you come to an agreement on price. I want you to think about the following example:

If you immediately give them the asking price, they will feel like they didn't ask for enough. If you start with your strike price, they will almost every time, want to go higher and now you can't negotiate. At this point, you like like you don't want to be flexible and they will probably stop working with you.

So in conclusion, come up with a strike price and start your negotiations about 10% under that amount.

JD Martin · Answer

Asking price is virtually meaningless, other than to determine whether or not you might be able to do business with the seller. What do the numbers say? If it's a steal at that price, based on math, you wouldn't need to ask the question, and if it's not a steal at that price, based on math, you wouldn't need to ask the question.

Kind of along the lines of @Anthony Griffin, I have a top price for any deal. If the top price in this case was higher than the listing price, and the dream deal was close, I would probably just knock it out, because if the math truly works the property's not going to make it much past the MLS.

Eddie Werner · Answer

I don't know your market or what a good cap rate or monthly cash flow is where you invest but I think if you share more of the deals numbers you will get better feedback from BP.  Share more so members can challenge your criteria and ask questions.

If it truly is a good deal based off your numbers and goals then buy it.  You could run the risk of it hitting the market and the price getting driven higher due to people just wanting to own multi-families and overpaying which would drive you out of the deal.

Brandon L. · Answer

@Brandon Hellenbrand if the numbers work for you then I don't see a reason to offer a lower price.

Robert M. · Answer

I believe investors make the money going into the deal. I use the 25% rule.  For example, a  property that is appraised at say 100k I will offer 75k. Be sure to buy right, and you will be fine. On the other hand if the (your) numbers are right go for it.  I never pay asking price and have missed  on more deals than I can count, but at the same time the ones I did get allowed me to get a very good nights sleep. Best of luck

Dawn Brenengen · Answer

@Brandon Hellenbrand If it's not even listed yet, I would definitely offer less than asking.

Should I offer The Asking Price?

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