Pay a premium for last unit in building that I don't own?

Question

Another owner in a building I own in asked me if I'm interested in buying his unit. It's a 3-unit building in a desirable block of Wicker Park Chicago and I own the only other 2 units. This is an older building in an area that's being upgraded with new construction bi-level and tri-level homes (e.g. one home nearby just sold for $1.7 million).

The other owner said he's planning on listing next spring but figured he'd see if I was interested since I'd own the entire building outright.

Would you pay a premium for the unit? iow would you compromise on the usual %s and ratios we use to value a property?

As a side note - if we do a transaction off-market, do you have any recommendations on how best to do that?

John Warren · Answer

@Stewart McMillan is this a building you want to own forever and give to your kids? If so, pay up for it. If not, then have your agent run a CMA on it and don't overpay. A lot of off market "deals" are really lousy for the buyer. The seller is often times unrealistic when they are premarket, and there is a lot of value in a listing agent (and the market in general). While there is a lot of truth to the location, location, location saying, there is still a price for every piece of real estate that the market will pay. If you are worried about cash flow, you probably are the wrong buyer for this property.

James York · Answer

@Stewart McMillan I believe this is absolutely worth a premium if, and only if, the added benefit of controlling the entire building makes your other units more valuable or makes some tangible benefit that you can’t create in any other way. If it’s simply to say you own the entire building, I would not pay more than its worth. I am a RE broker so I believe there is a value in engaging an agent, but if you decide to go it alone, it may work out. Don’t assume that you get all (or any) of the saved commission the seller would have paid. It’s his money. It’s up to him what he does with it. If everything goes well, you may not need an agent. If things go bad, you’ll wish you had one.

Michael K. · Answer

Are you sure you have to pay a premium? If you and the other owner have a good working relationship you might be able to agree on a reasonable price, might not be a steal but doesn't have to be a premium either. Also, when estimating value, compare your building to buildings of the same age and quality - not new construction.

Jonathan Klemm · Answer

Hey @Stewart McMillan - If you are in a prime-time Chicago neighborhood, I'd definitely go ahead and try to purchase the other unit if you already own 2 of the 3 units in the building. You have the advantage of deconverting the condos into apartments and selling the building as a whole. I don't think Id look at it as paying a premium but rather paying with what it's worth discounted by the cost of not using realtors. Closing cost will still be similar to a normal transaction I've helped several friends negotiate off-market transactions so feel free to reach out to me and id be happy to walk you thru the process that worked for them. At the end of the day, there's a right way to do everything.

Jonathan R McLaughlin · Answer

@Stewart McMillan have to disagree with the idea it’s worth pursuing a discount if owning the building is a good thing for you. You want him to know he’ll get every bit of value from you and none of the hassle of the market. No broker commission, full price and easy timing. Not to mention he may take a haircut with the other units being only one owner. Tougher to finance and it scares a typical buyer.Go inhard early and lock it up.

Crystal Smith · Answer

I'd offer fair market value for the unit. I wouldn't pay a premium unless I had some data to support paying above the market. Regarding doing the deal off market I'd recommend you get a copy of the the Standard State of Illinois Realtor's contract. Use the sections that apply to your deal. Both parties sign and then have your attorney's take it from there.

Sergey A. Petrov · Answer

Tell him yes you are interested. Comp it (next Spring not now) and see what it is worth, then offer that less 8-10% (no staging, no moving hassle, no commissions, no holding costs while it is vacant and on the market, no other headaches with the sale, etc). If you can come to terms, great. If he wants the deal now, I wouldn’t agree on a price to purchase something in 9 months. Either buy it now and rent back (the buy it now price formula is as per above) or negotiate a first right of refusal. He puts it on the market in the Spring, you match the best offer if you want. For off market deals, either hire a real estate broker on an hourly basis to help with the transaction or have an attorney draft it - the Buyer and the Seller can split the cost.

Paul De Luca · Answer

@Stewart McMillanPrice in the eye of the beholder. I would first see what price he has in mind and then determine the actual market value. Then give him the data (comps) that shows what it's worth and then it's up to you to decide how much more you're willing to pay than that.It really comes down to the potential as an investment/for appreciation and how badly you want the unit.

Logan Webb · Answer

I would think that you could get the building on a discount if anything. If you guys are going off market then he would be saving on commission by bringing an agent in, which could be resembled back in the purchase price for you. As far as protecting yourselves in the transaction without having representation, I would study up on whatever contract you will be using. You could reach out to a local team who would potentially assist in the deal, and see if they have a copy of a contract you could use. Hope that helps!