Investor · Loves Park, IL · Member since 2015 · 53 posts · 17 votes
Dear BP community,
I just made an offer on a fourplex and am looking for negotiation advice. The property is in really good shape and had a new roof done on 2014. The area is a B- neighborhood so it will not be too difficult to find tenants but the appreciation will be minimal. The seller listed it at $170,000 and I just made an initial offer of $144,000.
How do I negotiate once the seller counters? In what amount increments? What amount should I set as my max offer? Any other advice? Please see the following for more details.
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
11y
Dude - what's the thing worth to you? Whatever underwriting methodology you are using - what does it say the thing is worth? Pay that or walk - property ownership is no freaking picnic; we do it cause it makes money. Well, it only makes money if you buy right. What's it worth?!
Why are you talking about market value - what does that even mean? And why does it matter?
Pay whatever the property is worth - to you - based on your business plan.
Investor · Edmond, OK · Member since 2014 · 9 posts · 4 votes
11y
I am not an expert but your seller will counter your offer a certain amount and there is no rule that you should fall into that trap. For example is the price is 200k and you offer 175k. The seller may counter at 195k (5k). I would counter in 1-2k increments. People think that logically its fair to match his % and meet somewhere in the middle. Remember, you make money when you buy.
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
11y
@Ernad D. You should determine your Maximum Allowable Offer (MAO) BEFORE making your first Offer. Decide your desired cap rate in advance. If you want at least 10% cap rate (and why wouldn't you?), then in this instance your next Offer should be LESS than your first, not more! That might scare the Seller into reality! Cheers...
Investor · Loves Park, IL · Member since 2015 · 53 posts · 17 votes
11y
@Jeff Hendley, thanks for the advice, countering in $1-2K increments is very smart. I was not initially planning on countering in $1-2K increments because I did not want to annoy the seller but you're absolutely right, we make money when we buy, even with a buy-and-hold strategy. I still do not have my maximum offer set in stone, but am thinking $148-150K. What are your thoughts?
@Brent Coombs, my current offer of $144K is at 11.5% cap rate. If I were to close at $150K, that would be a cap rate of 11%. I am using the "Cap rate = net operating income / price" formula (NOI does not consider debt payments). After debt payment, the cap is roughly 6.5% at $150K. The best deals over the past few years on similar properties in the neighborhood was at 7% cap after debt payment, but those properties were not in as good of a condition.
The appeal is that this property will net me nearly $200/mo per unit (will eventually exceed as rents increase) and is a well maintained building that will not need any major capex improvements for a long time. It was just listed a week ago and the owner is trying to get out of the business because she is tired of landlording. That being said, I am fairly sure that the seller will not entertain my next offer being less and that this property will sell quickly. What are your thoughts?
Investor · Phoenix, AZ · Member since 2015 · 12 posts · 4 votes
11y
I would recommend finding your bottom line such as desired CAP or COC and go from there. Numbers don't lie and most of the successful investors use preset numbers to determine whether or not they can advance on a property and bid higher. Stick to the numbers. For example, I only invest with CAP rates of 10% or higher, and figuring out the CAP rate beforehand and knowing my bottom line is a necessity.
It doesn't look like you have COC on your spreadsheets, which is important when calculating a bottom line. Just subtract total investment by loan amount then divide the annual cashflow by that amount.
The seller just countered my offer of $144,000 at $167,500, coming down just $2,500 from list price. They want a response by tomorrow. This is discouraging as I thought they would meet me somewhere in the middle on their counter. My agent is saying they have another showing this week so the seller may be feeling comfortable. An interesting piece of information is that they pulled in all the dates along with closing date in their counter offer and even called my bank to see how quickly I could close. Seems like the seller is in a rush to sell, but only at their price. My max offer would be $155,000, which would give me a nearly 11% cap rate (not considering debt payments) and a 25% cash on cash ROI.
What amount should I counter with? I am looking for advice to see through this negotiation.
Investor · Loves Park, IL · Member since 2015 · 53 posts · 17 votes
11y
@Account Closed, the county assessed value is $112K, however, the seller put on a new roof and gutters on the building and the garage in 2014.
Similar fourplexes in the same neighborhood recently sold for $130-$140K, but were not in as good of a condition as this property and needed the roof replaced.
Investor · Grand Prairie , TX · Member since 2015 · 12 posts · 0 votes
11y
Hello,
@Ernad This is exactly the type of situation I was looking for,I'm still new at this but the seller counter offered your initial offer and wants your response by tomorrow but what happens if you don't respond by tomorrow and it takes you a few days to get everything together whats happens then? Does the seller not consider your offer because its not in his terms and time deadline? Just asking :)
I'm definitely following this one, Doesn't get any better than this and I applaud your courage Keep Fighting DON'T GIVE UP!!
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
11y
OK. County assessments are not market value and the current one is from a valuation date up to 24 months old.
All your cap rate calculations are incorrect an inappropriate for a 4plex.
2400 rents x 12 ÷ 140,000 = 4.9 GRM which is generically low. Maybe not a good place to invest. So if subject rents for 50 bucks more per unit them $152,880 but units are upgraded and new roof worth $20,000? So $173,000 value? Owner doesn't seem to think its worth much less but willing to deal for quick sale. I doubt they'll take your 155000 but if market value is 170+ and works 4 u at 155 why not make that final offer & promise quick close if u can.
Investor · Loves Park, IL · Member since 2015 · 53 posts · 17 votes
11y
@Account Closed,
After doing a little research, it seems cap rate may not be the best way to asses a fourplex.
Why do you say this may not be a good place to invest? I thought that one would want a lower GRM. What GRM range do you aim for and why?
I used 600/mo rent just to be safe, I expect rents to be between 620-650/mo. It seems that you believe the property is actually worth more than $155K. Please explain why. What would you say is the fair market value of this particular property? What would be your max offer?
@Jeff Hendley, thanks for the advice, countering in $1-2K increments is very smart. I was not initially planning on countering in $1-2K increments because I did not want to annoy the seller but you're absolutely right, we make money when we buy, even with a buy-and-hold strategy. I still do not have my maximum offer set in stone, but am thinking $148-150K. What are your thoughts?
@Brent Coombs, my current offer of $144K is at 11.5% cap rate. If I were to close at $150K, that would be a cap rate of 11%. I am using the "Cap rate = net operating income / price" formula (NOI does not consider debt payments). After debt payment, the cap is roughly 6.5% at $150K. The best deals over the past few years on similar properties in the neighborhood was at 7% cap after debt payment, but those properties were not in as good of a condition.
The appeal is that this property will net me nearly $200/mo per unit (will eventually exceed as rents increase) and is a well maintained building that will not need any major capex improvements for a long time. It was just listed a week ago and the owner is trying to get out of the business because she is tired of landlording. That being said, I am fairly sure that the seller will not entertain my next offer being less and that this property will sell quickly. What are your thoughts?
I've never heard cap rate used after debt service. As you noted cap rate is based on NOI which doesn't include debt service. An easy explanation of cap rate is the return if you purchase all cash. If you want to include debt service my preferred metrics are cash-on-cash return or IRR.
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
11y
From your comps the market is saying it will only pay 4.9 times the gross rents. Here in HI & CA 15- 25 is pretty common. 10 GRM was very common in the midwest in the 70-90's.
If 4.9 is typical it is saying demand is low.
I was putting market value at 2600 monthly rent x 4.9 GRM + about $20k for upgrades and newer roof. $173,000ish.
I am not addressing profitability. You have to choose what it is worth to you. But you should know what the market value is and decide accordingly.
Investor · Loves Park, IL · Member since 2015 · 53 posts · 17 votes
11y
@Account Closed,
Thanks for the info - quite interesting. Please correct me if I am wrong, but it seems that the low GRM is a good thing for a buy and hold investor. This should mean a higher rate of return in income.
$20K seems a lot for new roof. I have heard $5-10K is more accurate.
I would be at ~25% cash on cash return at $155,000. That appears to still be a good investment. Would you agree?
Thanks for the info - quite interesting. Please correct me if I am wrong, but it seems that the low GRM is a good thing for a buy and hold investor. This should mean a higher rate of return in income.
$20K seems a lot for new roof. I have heard $5-10K is more accurate.
I would be at ~25% cash on cash return at $155,000. That appears to still be a good investment. Would you agree?
I'm adjusting the upgraded units at $2500 each and $ 10,000 for roof. I am guesstimating from several thousand miles away sight unseen. Pay my expenses and I can give you a great appraisal and I'll throw in a profit assessment.
A low GRM means the market has less value for the property. If that stays the same or decreases then you are screwed. I'm sure Detroit went fron 13 to 10 to 8 to 5 to 3. I would be happier to bail at 10 than 5.
The strike price (my max offer) would be $155K. What advantage do I have in offering my max instead of increasing my offer in increments? In case the seller has other showings/potential offers? Please share your thought process.
The strike price (my max offer) would be $155K. What advantage do I have in offering my max instead of increasing my offer in increments? In case the seller has other showings/potential offers? Please share your thought process.
I didn't mean that you should offer your strike - just know what it is. Do a search on the liens - if seller owes more than your strike, then unless you want to do a short sale or some kind of creative sub2 deal, there is no deal. But, if what's owed is less than your strike, then negotiate. Frankly, you don't have that much room in this deal...
Cincinnati, OH · Member since 2013 · 1k+ posts · 1k+ votes
11y
Listen to @Ben Leybovich and then figure out your cash flow target from there.
As far as pure negotiation tactics, gather as much info as you can about why the seller is selling and see how you can help the seller. Research purchase history, neighborhood trends, and even google the seller if you can. He's selling for a reason (burnt out/bad tenants, needs the $$, wants to exchange for bigger building), make it your mission to find out the reason and use this knowledge to make a more compelling offer to solve the problem for the seller. Find out what's driving the urgency on the offer timing.
Ignore the "Vendor has another showing tomorrow and Wednesday" pressure from the vendor's agent ... you cannot control who looks at the property and what they are willing to pull from their wallet and you definitely *do not* want to fall prey to the prodding and go off your plan. Always slow the game to your speed and control the puck!
If your analysis says $155,000 is as high as you can go and still hit your profitability projections ... and this is your first property? .... I would consider keeping a little buffer between you and your ceiling in the event your underwriting missed something. In that light, a counter at $148 - 150K (ish) would be a sufficient move (larger than the one the vendor made, but not large enough to be a blink)
Residential Real Estate Broker · Winston Salem, NC · Member since 2011 · 345 posts · 120 votes
11y
@Ernad D. do you have a realtor? Is the property on the MLS? I used to live in Roscoe, IL and am pretty familiar w the area. Give me a call if you'd like to chat.
How are you funding the deal? When will you close? How large of a deposit will you put down? Did you ask if there have been other offers? How long has it been on the market?
There are many ways to position an offer but you really should take all of the above (and more) into consideration if you're trying to get the best deal.
Residential Real Estate Broker · Winston Salem, NC · Member since 2011 · 345 posts · 120 votes
11y
I will add that a common negotiation tactic used to counter a low offer is to come back where they did. This is done to take the low offer out of your head and get you to make a big jump while they move only slightly. Ask them to be serious if they want to make a deal.
Investor · Loves Park, IL · Member since 2015 · 53 posts · 17 votes
11y
@Ben Leybovich - After doing some research, the property appears to have been inherited via deed in trust last month. That being said, I imagine the seller has a lot if not 100% equity.
@John Casmon - I know that the property has just been listed and the seller is in a hurry to sell because they don't want to deal with landlord responsibilities. Also, two leases expire at the end of this month and tenants are moving, leaving three vacant units beginning July 1st.
@Roy N. - "Always slow the game to your speed and control the puck!". This is great because I definitely felt pressured to move faster after my realtor told me they had another showing scheduled.
This is my second property I am purchasing. I actually bought a fourplex in the same neighborhood back in 2012 as a short sale directly from the bank for $135K. It was not in as nice of a condition and the roof was not new, needs replacing soon. However, it has been a good cash flow property at around $9K NOI/ year.
@David Avetisyan - Agreed, I don't want to play too much ping pong. My thoughts were to submit one offer tomorrow at $148K and then one final offer afterwards.
Realtor · Torrance, CA · Member since 2014 · 49 posts · 29 votes
11y
@Ernad D. Just remember your offer price does not have to be the price you pay. If you offer over your max strike price and they accept ,thats ok. You will always have time to negotiate that price down after inspections. The advantage being ... you are the only one in the game.
They are more willing to give concessions after you are under contract because they don't want to start over. You will have a 17 day inspection period where you can back out for any reason and your ernest money won't be at risk. (please check with your realtor) in Illinois.
You always want to get your cap rate from existing rents and not the pro forma. Sounds like you did. And it wouldn't hurt to see if they will carry any portion of the loan if it is all paid off.