Category Archives: Negotiation

Viewing Properties – How real estate investors differ from home buyers and why they differ

 

 

In the single-family home buyers market, a buyer looks for homes in areas where they want to live. They line up an agent, gather a list of properties, and then make an offer after viewing properties and picking out the best one. For a real estate investor, the perspective and approach is different. Why? Because, a real estate investor has to be more prudent with the use of their time and money, or they could quickly find themselves out of business. This is especially true for investors that have to look outside of their home states for real estate opportunities that pencil out and make sense to them.

For example…

Over the past day or so, I found myself having a very interesting exchange with a listing agent about an offer made on one of his apartment listings.  Aside from the earnest money and the due diligence period, which would have been easy to work out, the listing agent said that his seller would have had a problem with the fact that we had submitted the letter of intent without making a personal visit to the property first, which would have required an upfront cost of airfare, hotel, etc…all without the property being contractually secured.  While I realize that some buyers might make it a common practice to jet set all over the united states in search of properties, in reality, this approach is a risky and unwise practice. Here’s why:

A buyer could be wasting their time and money.

1. During a visit to the property, the seller could sign a contract around with another buyer

2. After visiting a property, a buyer might discover that they are dealing with an unreasonable seller

3. Doing business this way would waste a significant amount of time and money

4. Waste enough time and money, and a buyers’ business will eventually find itself driven into the ground with nothing to show for it

 

 

Investment Value: The Crux of the Deal

Investment value….

By definition, investment value has been defined as being specific to an investor, “based on that investor’s requirements, tax rate, and financing” (Section 5.3 CI 101 – Financial Analysis for Commercial Investment Real Estate).

What a buyer needs is not always going to be what a seller—or the listing agent–wants to hear in terms of a sales price. There is a natural tension between buyers and sellers in this respect, but it need not be an impossible situation. Approaching negotiations with the genuine intent to explore the issues would no doubt open up the possibility for discovering a third alternative. Ideally, within a third alternative is a solution that creates a transaction beneficial to both sides. When all the pieces align and everyone is getting what they need–and not necessarily what they want–a meeting of the minds becomes a realistic possibility.

Inflexibility is an opportunity cost

Let’s say we have a seller that overpaid for a property seven years ago; does this obligate the future buyer to accommodate the sellers’ expectation of value? On the other side of the table, let’s say we have a buyer that’s pretty hard-nosed about maintaining a 25% internal rate of return from all rental properties acquired. Let’s also say that the buyers’ situation would allow them to do very well at 15%, but it doesn’t matter. The buyer remains inflexible. They are happy to warm the benches on the sidelines as spectators looking on while real estate opportunities pass them by.

Is a disagreement of investment value holding you back?

It’s an unending surprise to see how many buyers and sellers believe that their way is the one true way of determining investment value. In their minds, they are right and everyone else is wrong. In reality, investment value is a subjective opinion of value that is unique to the individual investor, and each will have their own opinion of what that value is for them.  The income and expenses of a property are the main determining factors. There are a variety of considerations that affect these factors. Let’s take a look at operating expenses and how they can differ between an investment group and an individual owner.

Higher operating expenses means a lower investment value

The operating expenses of an investment group tend to be higher than an individual owner because of the increased administrative costs to oversee the management of the group itself, which is often formed for the sole purpose of holding the property.  The added administrative expense means a lower net operating income, which in turn, lowers the investment value for the group. The sellers’ opinion of value–while valid for the seller–does not come into play for the buyer. Buyers and sellers need to keep this in mind before writing each other off at the slightest disagreement about investment value.

Defensive positioning is counter-productive on so many levels.  

Primarily because it prevents the discovery of a third alternative.  Even in a hot market, properties can and will sit for years if buyers and sellers hold fast to a stubborn mindset, and a counter-productive holding pattern. In effect, they would be sitting on the sidelines as spectators and missing out on one of the greatest times in history to be a real estate investor.