How to Make an Offer

Question

This technique was taught to me by Jimmy Napier and it worked for me on a few occasions.

Don’t make your offer based in absolute price, make it based in cap rate.  Seems like this is easier to swallow for the seller than an offer that states a price far below asking.

As an example: an income producing property is being offered for sale for $1,800,000 and shows a current operating profit of $112,,500 annually.  This is a 6.25 “cap” or a capitalization rate of 6.25%. Say you would buy the property for $1,285,000.  Instead of offering $1,285,000 as your “lead in”, tell the seller that his cap rate of 6.25 is just too low given the type, location, and or size, risk, etc. of his property, but that you’d like to buy it if he can accept a price reflective of a 8.75 cap rate. This accomplishes the following:

1. Instead of the seller defending an abstract number backed by his “feel” as to what the property is worth  he’s now forced to think in terms of return on investment to a buyer.

2. The above leads the seller to consider the interest rate a buyer will have to pay to get financing to buy his property.

3. The seller now has to consider all potential real estate investments as his selling “competition” instead of just similar type properties

4. Psychologically it much easier for the seller to agree that his cap rate may be “overly aggressive” rather than his price is outrageously high.

5. The seller is given a solid reason to sell at a drastic reduction from his asking price.

Let me know what you think of this technique.

Henry Clark · Answer

Just realized this is the Innovative Strategy section.  Just started looking at another Timber deal in Belize.  Although what I’m about to say is very specific to this market and deal, the same holds true for other deals people are making.   You never know what the sellers situation is.

1.  Seller just bought this property 2 years ago and has decided to move out of Belize to be near family.  And they want to move within the next year back to the states.

2.  A portion is timber ground which most people don’t understand how to value.

3.  Belize is a Buyers market.   Some properties can stay listed 5 to 10 years. 4.  There are very few Belizeans who can afford to buy large pieces of land.  Plus they have other ways to get it, than paying large sums.

5.  It is hard to get money out of Belize.   You have to have government permission.  So you prefer a buyer who can pay you Stat side which cuts out most Belizeans.

Don as you mention flipping the conversation to the financial side.  The above is an example of using the Abstract side to set a price.

Folks the point is you never know the sellers situation.   Make offers at your price with a 3 day window and move on to the next property.   Never get hung up in a property.

@Ale Ayestarán. Please put Don on a podcast.  Would love to hear him on several podcasts with different topics.

Henry Clark · Answer

The last deal we looked at the Seller had an Abstract number as you mention.  Actually he had logic but it had to do with personal expenses and paying off some debt. Not the actual value of the property.  He was $300,000 higher than what I came up with from a NOI cap rate and a new cost to build approach.

As you mention, try to get them to look at it from a business standpoint, but they were locked in in a number.

Told him for me to do his number I would need some help from his end.  $500,000 5 year no interest loan, $100,000 per year for 5 years paid to him as consultant so I could deduct plus acts as a free loan, possibly $500,000 noncompete but we can’t write off very quickly so didn’t like that.

Henry Clark · Answer

Understand the flip from abstract to financial.  Realize there are many components of valuation.

If we were to just look at Interest rates compared to cap rate. What views would you discuss? Example 6.25 cap rate versus 6.25 or 8.75% interest rates. Or the reverse 8.25 cap rate versus 6.25% interest rate.

For me in self storage there are several other triggers such as capex, expansion land, potential rental increase, location.  But just interest rate in the above discussion.

Dan H. · Answer

The problem with this approach is a seller with just a little knowledge would realize cap rate does not dictate the value for non commercial properties.  The value of non commercial properties is based on comps.

If you want to purchase based on NOI and cap rate, then buy commercial properties.

Of course you may get an uneducated seller that does not realize the folly in this valuation, but I question if this is taking advantage of someone’s ignorance and whether your morals would permit you taking advantage of the uneducated seller.   It certainly is not black and white.  If a seller accepts a below market offer, is the buyer taking advantage of the seller.  I could say yes, but not to the extent that the buyer convinced the seller of a low value based on a flawed valuation method.   Lots of moral decisions.   I think I am fine with a seller accepting a below market value due to their existing ignorance.   I am not as sure that I consider it moral to provide the seller a false valuation methodology and then purchasing based on that false valuation.

Best wishes

Henry Clark · Answer

Wish I did housing.  There are deals everywhere.

When you’re not looking.  Or as you mention they will come to you.

Henry Clark · Answer

Don, your situations noted above. We don’t do housing but near us.

First house brother died 5 years ago.  Tied up in estate.  The second brother lived in it.  He just died 9 months ago.  Sister was able to get thru estate.  Now wants to price and sale as fast as possible so she doesn’t have to upkeep. Listing this week. I’ve been mowing the lawn.  The two brothers were good neighbors.. Just showed outside to one of my other neighbors who invests in housing.The second house don’t know what the story is.  A sister owns it  A brother lived in it.  Moved out a year ago.

Both are Fluid properties.  Took years to come to market as you note.

How to Make an Offer

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