How do experienced investors actually get an offer price?

Question

I want to understand the practical process investors use to determine what they're willing to pay for an income-producing property.

I get the basic valuation concepts—NOI, cap rate, DSCR, LTV, and the rest—but I'd like to know how this works in an actual acquisition.

Say, comps indicate a market cap rate of 6.5% and subject underwritten NOI at $500,000, that would lead to a value of ≈$7.69M.

But that doesn't really mean $7.69M is the price I should offer.

How do you experienced investors move from market value → financing constraints → required returns → actual offer price?

Or do you just agree with the derived market value?

And what makes you to reduce your offer the most?

I'd particularly like to hear from people investing in CRE/Multifamily or other income-producing properties.

Denise Supplee · Answer

I wouldn't automatically pay what the market says a property is worth. The numbers have to work for me at the price I'm paying. I'd want to make sure the income is realistic, the expenses are accurate, and I know what repairs or other costs are coming. As a passive investor, I also pay close attention to the operator and their plan. If the deal only works when everything goes right, I'd either want a better price or I'd pass.

David Switzer · Answer

I'm not an expert on buying income producing properties because I only buy vacant retail and then lease them up myself.  However I did buy a building that had two month to month tenants which led to an interesting negotiation.

The tenants were paying something like $4000 between them which was far below market, and the owner was trying to quote me a price based on a market rent.  I said buddy you don't get to use NOI valuation on an unknown future tenant just because that's what the market rate is, this isn't residential.

Luckily I found a dog daycare tenant months earlier who wanted a very similar space, so I got them to sign a lease before I even signed a contract with the seller.

What I've found is that commercial negotiations can be quite wild based on how long the property is on the market and how competitive the area is.I don't think I answered your question at all but anyway that's my take lol

Robin Simon · Answer

Generally should come down to two different buckets:

1) General investor solve for a price that would yield the required returns to get to the true market value -- i.e. if the true price like in your example if $7.69M, then solve for a lower price that hits the required returns (i.e. IRR 16% over 3 years) or like 6.2M or something like that

2) Investor has some sort of market edge that can produce more returns than "general market price" like tenant relationships, economies of scale, etc.

Don Konipol · Answer

Good questions, lots of good answers posted

My PERSONAL approach is I have a ROI minimum and a risk profile established BEFORE I look at investment opportunities 95% of the time.

The other times (5%) I’m presented with a deal outside those parameters, and evaluate it (unless it fails to pass my “interest” test) based on a scale of risk adjusted return.

Here’s the interesting thing - very rarely does a deal “pencil out” to my minimum risk adjusted ROI at ASKING price.  Most of the deals I complete, whether purchasing property or lending secured by property are the result of my offering below, often FAR below what the borrower has stated they want.

So, this leaves two approaches on deals that would meet my criteria at a price significantly below asking price.

• 1. Make offers on many deals, and hope to have a small percentage countered at prices somewhere near our target price
• Or
• 2. Research for motivation/likelihood of deal completion and work diligently on those deals only
• I in effect now do a combination of those two approaches.  I have no problem initiating an offer far below asking, but only if I’ve already been provided with sufficient information to know that the deal has a good chance of completion should an adequate price and or terms be negotiated.  This usually includes past financials, tax returns, rent rolls, environmental reports, etc.
• 
• All that being said, investment opportunities brought by intermediaries differ considerably from opportunities direct from sellers.  Further, as to seller direct, those deals that the seller comes to us differ from those where we initiate the approach.
• 
•

1. Make offers on many deals, and hope to have a small percentage countered at prices somewhere near our target price

Or

2. Research for motivation/likelihood of deal completion and work diligently on those deals only

I in effect now do a combination of those two approaches.  I have no problem initiating an offer far below asking, but only if I’ve already been provided with sufficient information to know that the deal has a good chance of completion should an adequate price and or terms be negotiated.  This usually includes past financials, tax returns, rent rolls, environmental reports, etc.

All that being said, investment opportunities brought by intermediaries differ considerably from opportunities direct from sellers.  Further, as to seller direct, those deals that the seller comes to us differ from those where we initiate the approach.

Chidiebere Stanley Ogah · Answer

You're right that I'm developing a business around independent acquisition research and underwriting support. I'm not building a stand-alone modeling tool, though, The goal is to give investors a second, independently verified set of numbers and assumptions before they make an acquisition decision.

Your point about putting the framework through a real listing is totally valid. I'll work through an actual property from the initial listing/OM, through financial verification, NOI/CapEx, Comps valuation, financing, stress testing, and the non-financial factors as you mentioned. That should make it easier to identify where the framework itself is weak.

I appreciate the challenge.

Henry Clark · Answer

OP.  Looking at your background.  Looks like you're trying to develop or have developed an underwriting business.  And are also developing an underwriting Modeling tool?

Since you should already be deep into the weeds on this topic.  Please present a start to finish scenario with a property listed on Crexi or Loopnet or another listing.

There are a lot of different Financial steps or controls to look at.  If you start by listing an actual valuation project, then we can give input per item.  For example above, I don't note any comments on Capex.  Or Stress tests.

Non Financial valuation items:  land to expand, street access type, any anchor stores, grocery stores, restaurants, etc. close by, Drive time to ???,  VPD, Occupancy rate, Rental Rates to area Market, New competition being built, land zoned for competition, etc etc., is close to your other projects so you can leverage your management or maintenance tea, or 3rd party management team,

Although you need to start with the financials, your modeling or checkoff list for helping investors analyze deals has to include the Soft items.

With the two areas of concerned completed, now what price point for your service?  Does the tool have Risk testing scenarios built in to the model?

Start to vet your product in detail.

Gregory Acs · Answer

I don't usually start with market value and assume that's my offer. I work backwards from the deal I need. I'll stress test the financing, cash flow, reserves, and target returns, then determine the maximum price I'm willing to pay. If the numbers only work with optimistic assumptions, I'd rather walk away than force the deal.

One thing that's helped me is running the numbers with a few different financing scenarios before making an offer. It gives you a much better idea of what the deal can realistically support. If you'd like, I'd be happy to help you think through the financing side or run through a few scenarios.

Chidiebere Stanley Ogah · Answer

Thank for that. I sent you a message.

Chidiebere Stanley Ogah · Answer

You are right about that. From what Robin said, I realized that the property In-Place NOI and the market Cap Rate is not enough to determine what you should pay for a property; it only serves as a price benchmark. The Max Purchase Price depends on what your lender financing underwriting concluded, added to your Max equity derived from the Net Cash Flow and required/needed return; %% of Cash-on-Cash Return or IRR.

Chidiebere Stanley Ogah · Answer

That seller was trying to sell you future upside at today's cap rate. Commercial value has to be supported by the In-Place NOI, not speculative Pro Forma rents. But how did you handle the day care tenant lease? If the deal failed and you didn't buy the building, does that lease become void? And when did you let them move in; exact close day or you left a buffer timing?

How do experienced investors actually get an offer price?

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