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.
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.
Done!
I'm not sure how 'in love' you are with the property, and if you are willing to walk away.
I say this, because I always let sellers know that I am in no rush, and I will not enter a bidding war with anybody.
But, since were buying, and they want to play, we can always negotiate from another angle.
So consider the following:
What is the condition of the property?
Do you see any repairs necessary that haven't been calculated in the sellers price already?
Condition is key when negotiating.
You can always work your way up to an acceptable price before escrow, and negotiate during your inspection period.
You can overwhelm them with repair lists, and ask for a reduction of small to medium size and put a marker so you meet and your exceed your target number.
Remember, opening escrow puts you in the drivers seat to negotiate.
Don't be scared to learn from this experience. You can always walk away within your contingencies.
can you close quickly? If not, can you handle PM duties on the property so you address the seller's concerns? Play up the work that needs to happen with the tenants to setup the accounts, notify them of contact for repair, etc and that you would be willing to handle those items if the seller considers those "costs" in the price. Solve the problem.
@Joey Dwyer, @David Avetisyan - they are selling the property 'as is' and have crossed out the seller's warranty portion on their counter offer. That being said, I will not be able to negotiate during inspection period and must agree to a price beforehand.
I am not 'in love' with this property and will only invest if the numbers work out, however, I have been searching to buy a property for a few months now and this is certainly the best deal so far (great income, area, property condition, etc.), as long as it is at the right price.
I have asked my realtor to counter at $148K, make it clear that I want the property and will move as quickly as possible to close the deal, and to tell the seller to be serious if they want to make a deal.
Let's see what happens.
@Jeff Hendley, @Brent Coombs, @Austin Stanton, @Account Closed, @Ben Leybovich, @John Casmon, @Roy N., @David Avetisyan, @Jeff Valentino, @Joey Dwyer
Gentlemen,
An update: I have asked my realtor to counter at $148K and seller now feels we are just too far apart and decided not to revise her last counter offer of $167.5K. According to her agent, she sees me as trying to get it in the 150Ks and she wants something in the 160Ks.
The actual market value of the property is 165K-170K, but as investors, we want to make money when buying. Should I just submit my max offer of $155K and go no further? I would hate to lose the property over a few grand.
On the other hand, my monthly mortgage payment will not change much over $5K, so the cash flow will not change much. This property will be a buy and hold long term investment. Am I being unreasonable at $155K? Should I go up to $160K?
What are your thoughts? Any advice?
Thank you
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.
Done!
Repeat after me: "There will always be another deal."
If the present performance of the business only warrants a valuation $148K, that's all it's worth. Even if the potential for performance improvement could see business support a valuation of $165K, unless the Vendor is going to do the work to improve the performance, you do not pay her/him for the potential ... you pay them for what they have in-hand.
As Roy said, there will always be another deal. I wouldnt bother getting emotionally tied to an investment whereas those 'few thousand' dollars could impact your cash flow drastically. Stick to the numbers.
I agree with Ben and Roy and Austin - and you! If "deals" are scarce in that particular space then missing it for just a few thousand dollars could be a disappointment. But, the Seller might also be thinking - what if I end up not being able to sell because I am hanging out for a measly few extra thousand dollars?
There is good reason why it is always good to have an upper limit in mind before submitting Offers. The main one is: keep emotion out of it - ie. stick to what your analysis has told you. In this case it seems clear to us that your business analysis has warned you not to offer ANY more than $155k. (You can see where I am going with this line of thought).
When you said "I will not be able to negotiate during inspection period and must agree to a price beforehand", that almost sounds like any Offer you make is unconditional?! Really?...
@Jeff Valentino, @Ben Leybovich, @Roy N., @Austin Stanton, @Brent Coombs
You guys are completely right, I have to stick with my analysis! I have asked my realtor to submit final offer at $155,000.
There will always be another deal if this one does not work out. Thanks for all your great feedback! The BP community is truly awesome.
It's a grind man. I just recently got into the game in Houston. Bought 5 houses and working on a multi right now. On a multi I'm working I'm in my 3rd month of negotiations. I thought I had it locked in today actually, but the owner calls back with a ridiculous (and stupid) concession.
My point is that at least from what I have seen there are plenty of "ok" deals around so don't settle for ok. Sometimes you may have to negotiate for a long time to find what you need, but when you do get into the right property at the right price it will be worth it.
.
Only you know what to offer based on the numbers you looked up. Also think of it as your in control because you have your max number in your head (based on your budget/ what kind of cashflow/gains you want)and if it doesn't fit what your trying to accomplish leave it and find something better. You negotiate with the seller based on figuring out his lowest selling price and why he want to sell. All of this is Based on my limited knowledge I've been thru a lot of the negotiation phases but now I'm actually closing next month!
Ernad, the way I see the negotiations is that the owners have it priced for a quick sale. Based on your original figures I said market value of about $173,000 and now you think it is between $165-170,000. I don't know if your market is moving up or down though.
I'm guessing they think it is worth $170,000 and were probably amused by your $144,000 offer but were not offended and gave a token counter to let you know they'd be happy to sell at market or a smidge below. I think your best bet would have been to quickly counter at your $155,000 as final and thank them for thoughtfully considering your highest offer. Instead I think they see you as a noodge with your 2%ish increase offer.
Then you question whether your strike price is correct. Not good. But then maybe you do need to consider if you'll regret letting this go over maybe just a few thousand. Let's say $155,000 is where it pencils out for you. But is it worth your time and trouble to try to find a deal as good as this? Is that deal out there? Right now you have a possible opportunity to place 3 new tenants of your choosing at todays market rents. How much is that worth over your strike price?
If you go back at $155,000 I would as @John Casmon mentioned offer to do all the work to place the new tenants (with their oversight and approval since they still own it) and sell your ability to quick close or whatever your strength is.
I would seriously consider getting to that 160,000 number as you are still getting it under market. I think they are definitely looking at a 16 number but they may really want the $167,000 but I think the psychological number to them needs to have a 6 in it.
But again you have to offer what your are comfortable with. Good luck.
@Ernad D. And now, I also agree with Bob. It does look as though the Seller's Agent knows what they are doing, and $160k may well be a psychological bench mark in this negotiation.
I believe the first investment property I bought was won because I was the first to offer an amount beginning with 5 ($50k) whereas every one else thought they were being clever by only offering in the high $40k's [I sold it seven years later for more than $200k]!
So, a lesson here about knowing what your upper limit is:- In future, before starting negotiations, remember this exact example scenario. Looking back, why wouldn't you have considered $160k in the first place? In other words, don't play tricks with your own mind! Cheers...
@Account Closed, @Brent Coombs,
I do not want to question my strike price, but at the same time, I don't want to regret losing this deal over a few thousand because the investment will still offer similar returns in this price range. The issue is that if I go over my strike price by a few thousand and the seller asks for another few thousand or more, it will be difficult to just walk away and I may end up paying more than I should. My thought process is that even though this is a buy and hold, I need to buy at the right price for exit strategy purposes.
I probably seem unreasonable to the seller based on my offers so far, but it should not change their willingness to make a deal if we can get to a certain price. The psychological aspect is definitely a good point and I may have played tricks on my own mind by over analyzing. That being said, the current situation is that my realtor submitted my offer of $155,000 yesterday and now all I can do is wait for the seller's response. Hopefully that is soon.
Update:
The seller will not go down to $155K and did not even counter. Not sure if this was a good idea, but I drove past the property last night and the seller has a sign and brochures out for rent at $675/mo. My calculation is based on $620-650/mo rent.
I am seriously considering submitting an offer of $160K, but am not even sure that will be enough now. Jeez, I don't want to offer $160K, be countered, and end up $10K above my strike price...
I am certainly leaning towards submitting an offer of $160K and make it my max no matter what, even if the seller counters within a few thousand.
Gentlemen, any thoughts?
I think you need a better grasp on market rents (use craigslist, rentometer or other rental management companies listings). Just because they put a sign out for $675/month does not mean that is what tenants will pay. Will tenants pay all utilities, are they split? Compare similar properties and use a realistic rental amount in your analysis. If you feel $620/month is what the units would bring then do your analysis based on that. Don't get caught in the "well, I could probably get $675....and then the numbers would work, and I could pay more!" I think we all fall into this when we start to get attached to a property. Don't get attached or think you are losing a great deal. You are only getting a great deal if you get it at the right price. You might be surprised to pass on this now and in a few years it might be back on the market for a lower price because someone paid to much and didn't know what they were doing in the first place.
I think you need a better grasp on market rents (use craigslist, rentometer or other rental management companies listings). Just because they put a sign out for $675/month does not mean that is what tenants will pay. Will tenants pay all utilities, are they split? Compare similar properties and use a realistic rental amount in your analysis. If you feel $620/month is what the units would bring then do your analysis based on that. Don't get caught in the "well, I could probably get $675....and then the numbers would work, and I could pay more!" I think we all fall into this when we start to get attached to a property. Don't get attached or think you are losing a great deal. You are only getting a great deal if you get it at the right price. You might be surprised to pass on this now and in a few years it might be back on the market for a lower price because someone paid to much and didn't know what they were doing in the first place.
Eddie,
Thanks for the input. I did research via both craigslist and rentometer, and $675 is on the high end, but still realistic. The only reason I used lower numbers to do my analysis is to create a safety buffer. I truly feel that even at $160,000 this would be a good deal (based on location, condition, improvements, etc). I have second thoughts because I am looking for the perfect price, not just a good price.
Eddie,
Thanks for the input. I did research via both craigslist and rentometer, and $675 is on the high end, but still realistic. The only reason I used lower numbers to do my analysis is to create a safety buffer. I truly feel that even at $160,000 this would be a good deal (based on location, condition, improvements, etc). I have second thoughts because I am looking for the perfect price, not just a good price.
Ernad:
You may be right and your initial analysis may be incorrect or you may be on the slippery slope of self-rationalization.
Either way, slow the puck down and wait a bit .... The vendor is not going to counter you now as s/he thinks you are too eager and if they wait, you will come back with a better offer.
Roy,
Agreed. However, the seller for some reason seems to have shifted from must sell now to finding tenants and waiting for the right offer. Also, it doesn't seem the seller will counter my offer at all.
Either way, I will just wait a bit and if I hear nothing in the next week, I may just submit a final (this time I mean it) offer of $160,000.
Not seeing lines items for vacancy factor 7-10% or management. Maybe that's why your NOI is higher that it should be?
5% vacancy rate, capex, utilities, and maintenance is included in this number. I do my own property management so I do not include that expense.
I have just fine tuned some numbers, such as vacancy rate % and rent per unit. The following is my buy and hold cash flow calculation. Results are $10K annual cash flow and 15.59% ROI per year.
Given that the sellers literally inherited this building last month, maybe they need several weeks/a few months of frustration in managing it before being willing to come down in price? I'm guessing they're not RE investors/landlords if they're putting on the market immediately.
As @Frank Chirkinian pointed out, your spreadsheet is missing vacancy, although this could be offset by your conservative rent estimate. I assume your plan was to self-manage, but in terms of valuation I think you should put PM in there.
I think it's okay to not question your final offer price so long as you've properly vetted each and every input into your spreadsheet. For the most important ones (such as rent), employ a sensitivity analysis to give yourself more confidence in the range of outcomes. This may inform your opinion of whether to offer a higher price or walk away.
Lastly, cap rate incorporates NOI relative to price or value. This intuitively makes sense, as the value of a fourplex should be independent of how a prospective purchaser plans to pay for it.
Good luck - I have a feeling this deal isn't dead yet.
I think you are negotiating with yourself at this point and talking yourself into increasing your own offer. There are 4 possibilities regarding this "other buyer": 1 - there isn't anyone else, 2 - there is but they will not be interested, 3 - there is but they offer less, 4 - there is and they will offer more) you are focus solely on number 4.
You said in earlier posts that this seller does not want to be a landlord and has just seen a chunk of their cash flow disappear with 2 tenants moving out. I would be willing to bet that once they have had to dig into their pockets for some turn over costs for those units, spend 3 hrs waiting for showings that never happen, had to deal with some of the questions that they will get from those that do show, etc, they will be more motivated.
In the end you have to do what the numbers tell you makes sense, but don't keep talking yourself into "just a few thousand more".
Sometimes when I'm working w clients they get into " I wanna buy something" mode, especially in a negotiation or after missing a deal. I'm not saying you are, but step back run the numbers again and adjust your price if you'd like. 5k over the longterm isn't much but it sounds like you think they won't take 160 and you'd end up at 165k.