In the last article How to Find Multifamily Properties, we focused in on the search and targeting of markets near you. I stress the importance of finding properties near you, because getting involved in properties out of town or in another state is extremely costly and difficult to manage. But after you find a potential property, now what? Sometimes putting an offer together and negotiating is not so easy. Here’s my approach to negotiating a purchase of a property:
- Zero Emotion
This is a hard one for some people, as they get caught up in the emotional game of negotiating, and once they get entrenched, they will do anything to close the deal. Their thought process is that they have spent so much time on the deal, that they don’t want to “lose” their time investment, so therefore they “pay” to recapture that time investment. Doesn’t make any sense does it? Exactly. Getting yourself into a bad deal to save your time investment is not a smart idea. So just put off emotion completely. This is business.
- Calculate Your High Water Mark (highest price point)
This is the absolute maximum you will go when buying the property. When buying multifamily properties to be used as rental properties, you want to make sure that the rental amount you receive will be at least 1% of the purchase (e.g. if you can rent 2 units of a duplex for $700 each per month, that is $1,400 per month, thus your highest possible price is $140,000). Personally, I like to be closer to 1.5% or even up to 2% due to vacancy issues and maintenance. However, working those high profit deals gets pretty tough. This number needs to be an all in number, in other words, this number should include in fix up costs, closing costs and other up front expenses.
- Low Ball the Offer
Your first offer should be considerably lower than your high water mark. Showing the seller a pre-approval letter for financing or offer to buy with cash always makes a low ball offer look better. If and when you talk to the seller about your offer, mention fallacies with the property, and other reasons why the property isn’t worth as much as the seller thinks its worth. If you have access to the MLS, run the comps, and if they lean more towards your number, than show that to the seller as well.
- Make one or more increases in your offer, before ending at your high water mark
Always seem pessimistic about increasing your offer, and never seem eager. Again, zero emotion, this is all business to you. When push comes to shove, the last offer should be yours (unless their number comes in at or less than you high water mark).
- Make your final offer
End with your high water mark offer. I recommend something other than a whole number. For instance, if your high water mark is $125,000, then offer $124,823, or something off like that to give the perception that it is a calculated number, and you can’t go above it. Most sellers haven’t seen an offer like that, and it will sure get them thinking.
One final thought on how to buy a multifamily property. THERE ARE OTHER PROPERTIES OUT THERE! Just because you can’t come to terms with a seller doesn’t mean the sky is falling. This goes back to point number one, and the most important point, do not give in to emotion. Be patient, submit several offers to different sellers, and wait for the “Yes” answer to a golden deal. I have submitted many, many offers in the past, and have only closed a fraction of the deals. But the deals I have closed have been very good deals, greater than the 1% you should shoot for.
Other Articles in this series: