Is this realtor BS'n me?

Question

Well here's the info for the property I'm working on:

http://www.biggerpockets.com/forums/88/topics/35152-can-someone-analyze-this-please-

The owner bought it for $37 million in 2007. They are aware that they are going to take a hit.

There is a loan of $19.4MM that MUST be assumed (there's a pre-pay penalty).

The realtor is saying that there is no other options but to assume the loan....so the down payment will be whatever the amount is over $19.4MM.

My goal was to work on getting funding to purchase this property at $22MM, or $25MM maximum.

We called today to confirm that the Freddie Mac $19.4MM has to be assumed, and he said yes.

He told us that right now they have received 11 offers on the property...and ALL of these offers range from $27MM-$31MM. This property has been on the market for 6-8 weeks.

NOI on the 2008 and pro forma numbers states $2.3MM.

I'd say that most invesors will use an NOI of $2.0MM on this property to be safe.

Debt service on the Freddit Mac will be $1.45MM yearly.

That leaves a net income of $550,000.

So here's my questions:

1) How is it possible that there's already 11 offers?

2) How is it possible that ALL of these offers are over $27MM?

We all know that anybody with funds right now is going to buy something at rock-bottom price, so I have a hard time believing that there's 11 idiots out there (with money) who are offering $27MM-$31MM on this property.

Remember, at a $27MM purchase price, the investor is to put down $7.6MM. With that down payment, the cash-on-cash return is (550,000/7,600,000) 7.2%. This is somewhat believable, but I still think that any smart investor in this market (and there's only smart investors out there right now, because the stupid ones don't have money) will put a max price tag of $25MM for this property (same view as me).

At $31MM, the new owner is paying $11.6 as the down payment. That brings their return to (550,000/11,600,000) 4.7%. I don't believe this at all.

Basically....I called the agent. I said "let's say I offer $22MM on the property, 20% would be $4.4MM. The 80% would be $17.6MM. Does that mean that I would have to pay down the Freddie Mac loan (currently at $19.4MM) down to $17.6MM through escrow, to bring it down to 80%?"

He said "the down payment will be cash anything over $19.4MM, but if you're looking to offer $22MM, you're wasting your time. There's already 11 offers, and they all range from $27MM-$31MM."

I'm sure this agent is BS'n me. But what do you guys think?

Scott Hubbard · Answer

First, value is subjective to say the least.  I believe you need to put yourself in the shoes of all possible suitors.  So, I will attempt to play devils advocate for the benefit of this thread.
                                        
                                        Mainly, commercial properties (multi-unit) where the financing is to be assumed will usually have a lot interest since it is very difficult to get new financing these days.  
                                        
                                        Secondly, where conservative investment strategies are in the forefront of the minds of most individual investors, this is not always the case for larger entities.  Where my philosophy is Safety before Liquidity before Profit, many large REITs and large privately held RE investment firms look at profit before liquidity before safety as their guide posts.
                                        
                                        Look no further than wall street for evidence to this fact. The demise of Lehman brothers, the bailout of AIG, as well as other lending institutions failures can all have been averted if they had exercised one premise above all, safety before profits.
                                        
                                        My take on this scenario:  These are not "idiots" who have out bid you, rather they are big fish who have a longer time line, more money, a higher threshold for low ROI, and do not want their competition to get this prize!!  We cannot compete against that!

Jeffrey K. · Answer

I often loose deals to people who are willing to pay much more than I would ever dream.  I often wonder if I am too conservative, or if I do not know how to crunch my numbers.  The truth is, there are still people out there that do not know or care about the numbers and continue to make poor financial decisions.  I keep telling myself that in another few months only the serious investors will be left, but I know this is not true (especially with small properties under four units, my investment area).  I cannot compete with retail buyers, but at the end of the day, you should not beat yourself up too badly as I am sure you would be beating youself even harder if you got the deal at the price these guys are willing to pay.  Good luck.

Aly W. · Answer

This is so true, especially in the owner occupied market. My fiance and I are making offers on properties we want to live in, and it's hard to keep emotions out of it.

Luckily, we've been outbid/turned down on our offers, which were based on comps and other properties listed at similar prices. We've been disappointed, but like Jeffrey says, we'd feel much worse by overpaying.

Herm M. · Answer

Thanks for the responses....

I spoke to my cousin who is a leasing consultant working at this complex. I've told him to keep up with the internal gossip, if there is any, regarding the sale of this property.

Yesterday his manager went to a corporate meeting, and she told him she was told that "there are a few offers, but nothing close enough for the seller to consider."

The broker is said "there are 11 offers, all ranging from 27-31MM. The buyers will be starting on their due diligence in the next two weeks."

So wow....2 very contradicting stories.

Also, all parties are aware (broker has said this, as has the manager) that the seller is going to take a hit on this property.

So if they do really have offers at $31MM, and they bought it at $37MM...how can the manager say that "there are a few offers, but none are high enough for the seller to even consider" ? What type of "hit" are they expecting? Are they expecting to only take a $2MM hit by selling it at $35MM?

Answer: There are no offers that high, the realtor is bullshittin' me.

James Hiddle · Answer

It doesn't matter what they bid on you only pay attention on what you think is a good price and go with that and if they won't except it move on.

Let others get screwed not yourself.

Mark Brian · Answer

Quite possible there are other offers. Just put your offer in based on what you know & want, not based on what you are told but cannot confirm.

Herm M. · Answer

I understand that it only takes 1 idiot to outbid me.

But I don't understand how there's 11 people bidding on this property, and none of those offers are under $27MM. All 11 bidders can't be idiots.

Adam Anderson · Answer

It could well be that there are other offers. The question to ask is what you are willing to pay. If you get into a competition with the other offers it is easy to over pay. Also it doesnâ€™t take 11 idiots to out bid you it only takes 1.

Is this realtor BS'n me?

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