Potential Property - How would you approach it?

Question

So I spoke with a friendly couple this morning about a property they have for sale.  They are in their 70s and have 12 other properties and are looking to down size some.  Sounds like they actually built this property back in the 80s and it has treated them very well.

Some details:

$4,000 a month in Gross Rents - Tenants pay electric, LL pays Gas.

Taxes and Insurance in my area are low, property appears very well kept, 50% rule is conservative.

They are willing to Owner Finance, he mentioned 20% down and 6% for 20 years.  He also said there was $10k of wiggle room in the price maybe.

My situation, I don't have 20% down for him, I have 10%... the property is a very strong deal @ 10% down even at full asking price.  How would you approach the negotiation?

Things to be negotiated:
1)  Down payment (most important to me because of cash availability)
2)  Loan Length (20 years is fair, 30 years is better for a cash flow player but at his age he'll baulk)
3)  Interest Rate (6% is fair and .5% either way is only about $50 a month)
4)  Price (I'm long term buy and hold and this is priced below FMV so I'm not real worried about a discount beyond asking)

So what would you do?  Go see the place obviously to talk face to face.  How would you approach the negotiations?  Do you go for it all ($10k off, 10% down, 5% Interest for 30 years)... do you work one and offer concessions on others (10% down but I'll pay 7% or 6% for 15 years?)... do you just lay it out that you can only do 10% down and see what he offers?

I'm not going to call back immediately and sound too excited so I figured I'd see if you guys had any tips.  I have no experience negotiating face to face with a FSBO and all my negotiating classes seem woefully inadequate at the moment!

Ibrahim Hughes · Answer

I deal primarily with FSBO's. Many older folks are 'old fashioned' and not necessarily business savvy. So trying the new age negotiating tactics might turn the seller off and cost you on this one.

I recall several years ago an older gentleman calling me off of one of my bandit signs looking to sell his vacant lot to me for $45k. Lots at that time were going strong for $80k. Rather than be greedy or slick I asked him (instead of assuming)if the price was negotiable. He stated that the last guy he called tried to counter at $40k and he said he would call him back, thus the call to me. I wisely took that as a 'no', accepted his price and double closed it to a builder at fmv.

If the deal is as strong as you say I would tell the seller "I'll pay your full asking price because I don't want you to think I'm playing games and negotiating back and forth. However, I would like to put 10% down and I can close in x number of days". Say it with confidence (not arrogance) and he'll likely appreciate your honesty and accept your offer.

That's my take with the understanding that others may see it differently.

Account Closed · Answer

Nathan,

Did you mention the purchase price in your original post? If so I must have missed it.

In my opinion it would probably be a mistake to negotiate on all the points you mentioned. He is already offering some pretty good seller financing terms, there is no need to try to be a tough negotiator and stick it to him. Like you mentioned the downpayent is the biggest issue and I think you had a great idea by offering him a higher interest rate in exchange for a lower downpayment.

It sounds like this couple is getting closer to retirement age and has alot of other properties. So I would try to work out a win-win situation and maybe you can slowly take over their entire portfolio. Just my 2 cents. Keep us updated and good luck.

Chris Masons · Answer

That would probably make him feel more comfortable getting rent directly.

I am about to close on a contract for deed deal here in NJ on a 2 family where new wner is taking first floor and current tenant is remaining in 2nd floor. The 2nd floor tenant will still be paying rent to me directly and new owner will be paying the difference to me.

good luck and let us know how it pans out.

regards,
Chris

Nathan Emmert · Answer

It's a multifamily unit, two of them really.  He's selling it at what many would consider about an 18% CAP rate so it's an insane good deal, if I can get it with only 10% down... well, Merry Christmas :)  If I can convince him to give me similar deals on his remaining 12 properties as he ages over the next 10 years, well... retirement at 55 is looking VERY good :)

I'll follow up with him and probably go up to negotiate in person.  My tablet is giving me fits but someone brought up a good point.  If he is handing me the quality of tenants he claims to be, I will have to ask him where his risk is (the monthy payment would be about 25% of GOI.

Hmmm, that's an idea... can I flip this on it's head.  Have the rent checks sent to him and have him send me the balance of what's left after he subtracts his payment?  What's the downside to that?  I'm just trying to creatively think of ways to derisk this for him.

Chris Masons · Answer

Hi Nate,

Is this a multi family or a business rental? Sounds like your in a good position if the owners arent looking for a large lump sum payout up front but just want steady income without the hassles of Landloring. I can see myself in this position in oh 40 years, God Willing, LOL.......

Maybe agree to all his other terms but try and get him to go from 20 to 10% as your only request. IF the tenants are good paying tenants I would think he would be ok with it as he knows the monthly income is steady and reliable.

good luck,

wish I could find a deal like that on a multi family here in NJ!!!

Chris
Chris

Nathan Emmert · Answer

Quick update.  I called them back and essentially took Ibrahim's advice and told him where I was at with it (10% down).

I now have a clear understanding that his biggest need is security.  He doesn't need immediate cash, the cash flow isn't a huge deal... honestly, he just doesn't want the property back!

With that, I discussed Joel's option of using a balloon to lower his risk some.  He seemed to like that idea though he wasn't familiar with it.

He was going to think about it this weekend and get back to me.  Any other thoughts on good ways to de-risk seller financing outside of a larger down payment?

Nathan Emmert · Answer

My impression talking to him, they just want the burden of managing the property off their shoulders.  They don't seem to have a strong preference over lump cash versus recurring payments.  They've been managing it themselves and it's just too much work at their ages.

While I like the 30 year amortization and 5 year balloon for more cash flow, the idea of seller financing and staying off the books is also appealing.  6% interest on 20 years is pretty strong for a commercial property isn't it?

Lastly, they said they have several other properties.  Ideally, if I treat them right, this could be a good source for other deals.  Transition them off the direct rent receipts into essentially being a private lender to me.  Be great to pick up an additional 12 properties below FMV that never hit the open market.

Nathan Emmert · Answer

No, I didn't mention it... on purpose, never know who's lurking where :)

Honestly, I didn't really need help analyzing the deal.  I can make the numbers.  I wanted to keep this more focused on negotiating tactics.  With a 10% down payment the CoC would be above 25% with opportunity to go above that.

Joel Owens · Answer

What is important to them and important to you might be one in the same or very different things.

You have to find out what they will not budge on and what they will.

I wouldn't care about the loan length as much.

Why can't you just do a 30 year amortization and then a balloon in 5 years and cash him out??

If they did all the work to the property themselves I would make sure it is up to code and done properly.Sounds like they are worried about taxes more than anything.

Potential Property - How would you approach it?

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