Making an offer when you don't have the numbers: How to proceed?

[Marc C.]

What would YOU do?

My partners have been sending out letters to owners of multifamily buildings we’d like to own. Response, as you can imagine, has been light, but we have heard from at least two owners who have interesting properties to sell. Note that both are over age 70 and looking to retire. They have self-managed and maintained their properties. Records seems sparse and non-computerized. We know the location, the unit mix, and the rent ranges ($800-$900, $1100-$1200, etc.), and he claims that, because of the location, “it always stays full.” But we have nothing else to go on as far as the property’s actual historical performance.

He wants an offer. I want to give him an LOI this week before he calls someone else or a broker. In the past, I've only purchased through brokers, who provided their own pro-forma APODs and applied a too-low cap rate to derive a too-high purchase price. I'd fiddle with the numbers a bit to make sure they were realistic for my plans, then make an offer based on those numbers and the cap rate I was willing to pay. Sometimes, I'd include my APOD to show how I arrived at the number.

But what about when you don’t have even an estimate of the expenses? Seems a little early in the process to be asking for bank statements and tax records, although those will be required in the due-diligence period. If he will even provide real financials to a stranger, it might take quite some time for him to collect them; we could risk losing out to a competing buyer/broker.

How would you proceed to a.) Value the property, and b.) Make him a reasonable offer?

• Would you spend the time to call him, try to arrange a personal meeting, and try to get to know him? Perhaps trying to build up trust so he will provide the financials now?
• Would you just get him an offer ASAP, based only on Gross Rent Multiplier?
• Would you base your offer on the property’s square footage and the average value per square foot in the area? (If we can find that number for 25-year-old multifamily properties.)
• Would you create your own pro-forma APOD using his claimed average rents and your knowledge of market-average expense rates, then apply a cap rate? In other words, do it all with TOTALLY made-up expenses?
• Would you show him the pro-forma APOD you made up? If so, would you put in some language in the LOI explaining that we didn't have his numbers, so the purchase price is "subject to" his producing financials that closely support our estimated ones?
• Would you even bring up cap rates with an 82-year-old owner, who has no broker to ask what it means?
• Would you just “low ball” him an offer, knowing that might upset him and either have him so ticked off, he walks, or maybe he angrily counters with some astronomical number?
• Or would you "high ball" him now with a low cap rate (high purchase price) just to get him excited about selling, stop him from calling the competition or a broker, and get an offer in his hand… knowing he will counter with an even higher price? Then, once we have a signed deal at some ridiculous price, and we get the actual financials (probably limited to leases, bank statements and LLC tax returns, in this case), come back and try to "retrade" the price (ask for lower)?
• Would you just send him a simple LOI with your maximum purchase price and claim it is your "take it or leave it" offer?
• Would you include multiple scenarios in the LOI: One for cash-only, one for total seller-finance with a reasonable down, and one for a partial seller-finance?

Would love to hear from some other BP’ers who have been in this situation of dealing directly with commercial property owners who’ve indicated a willingness to sell, but can’t/won’t provide enough detail for the buyer to make a truly informed decision. 

Thanks in advance to all respondents! Your input is what makes BP great. 

[Danielle Fattizzi]

@Marc C. 

I agree with several other posters that it is important to find out why the owner is interested in selling and create a personal over-the-phone relationship with him. 

I think you are thinking too much into the many options (although I am super impressed that you have thought into it this much and have realized you HAVE this many options). An LOI is simply that: A Letter of Intent. You have shown that your intention is to purchase the property. This isn't tying you down to anything specific. Just get an LOI sent so he understands you are serious.

My take is that if he isn't being terribly helpful with offering financials, maybe he isn't so motivated? I could be wrong. That doesn't mean he won't sell eventually but you'll need to peak his interest by creating that all-important personal relationship where your focus is to help him solve his problem, whatever that may be. Make him feel safe working with you. He wants an offer? Give him an offer. 

I don't know what the deal is in New Mexico, but I know that in Texas the state requires a certain amount of flood insurance on every property due to the risk, making the properties expenses closer to 50%-55%. I am in Florida and flood insurance is not a state requirement, it is only a requirement if you are in certain areas. So if I am analyzing a property that doesn't require flood insurance, I typically guesstimate 45% expenses on multifamily if the seller hasn't provided super concrete financials. I've learned: Always be conservative. 

If I am missing documentation from the owner that could affect my offer price, I always put that in the body of the email that I attach my LOI to. I make sure to let them know that I had to make estimations here...and here.. and that my offer could change based on the availability of concrete information.

Call brokers local to that area and GET THE MARKET CAP RATES. Seriously. It makes a giant difference in the market value of the property when you're evaluating multifamily, which can make a giant difference in your offer.

I don't bring up the cap rates with older owners unless I know they are savvy investors. Just explain that you analyzed based on the income approach. 

I would do everything I could to get the most accurate offer possible rather than highball or lowball him and make sure that you state that in the body of your email. This goes back to what I said before. You tried to give him the most accurate offer you could based on the little info you had. With more info, your offer COULD go up.

Depending on his response, you can go to contract and then during due diligence (when you get your hands on the real numbers and the market value of the property is affected by this new knowledge for better or for worse) renegotiate the price down leveraged by that new knowledge (deferred maintenance, vacancies, actual expenses, etc).

I always include three options. Option one: 100% seller financing option at 5% interest with 5 year balloon. Option two: 85% seller financing at 5% interest with 15% down and 5 year balloon. Option three: All cash at closing with 25% down. (Make sure that the property's cash flow will support the payments on the seller financing options.)

Congrats on finding off market properties, direct to seller. I hope you are able to keep it that way and get these under contract! Assuming they're good deals, of course. Good luck!