called a "for rent" 4Plex...interested...What would you offer?

[Anthony Cosgrove]

Well, I picked up this tip in the podcast. I was driving around about an hour outside of Omaha, NE and saw a very nice 4Plex with a for rent sign in one window.  I thought, what the heck and called... I introduced myself and asked if they would ever consider selling. I was expecting to be told no but....they are interested. The owner gave me tons of information in our first conversation and said we could get together sometime soon to look over details or see the property. Here are the details

Units are 2 stories side by side brick construction

units a,b &c are 2 bed 1.5 bath

unit d is a massive 3 bed 1.5 bath with attached 2 car garage

unit a & d have been recently remodeled and updated

rents:

unit a $650 (newer tenant)

unit b $450 (25 yr tenant)

unit c $450 (25yr tenant)

Unit d currently vacant but usually rents for $1025 or $950(tenant did snow removal)

newer roof

3 newer ac/furnace

Tenants pay gas and electric 

Water is about $200 per quarter

Lawn is $25 a week

Taxes about $2500

On the assessor site it was recently appraised for a little over 150k and another 4plex in this city sold for about 170k and was on the assessor site at 176k

So if I make an offer, what should it be?  I have never made an offer like this before and don't want to offend them.  The place looks very well taken care of.  They are not interested in seller financing, but I don't think I would need that.  They are getting older which is why they might consider selling.  I would not consider them in a hurry or "motivated".  Any opinions of what you would offer or do next would be appreciated!!!

[David Chan]

Without diving into the actual address and area (and possibly spoiling the deal), this is how I'd go about it.

The internal math part: A Class B neighborhood is decent enough thus I would do a modified 1% rule calculation. I use 1% for single family (that's a retail asset, yields shouldn't be as attractive), I'd go to 1.25% since it's a multifamily, or 1.5% if its a B- neighborhood. Current rents total 2500 a month. Apply the rule and you have a 165-200k valuation. You have a comp that sold for 170k, so my gut says this range should have a sound basis to play off of.

The 1% rule or whatever % rule is real estate investor lingo. Your seller may or may not know that kinda stuff. Don't bother running that calculation in front of him. This is just your internal objective.

After assessing the building and making sure there are no unpleasant surprises, I'd start off suggesting to your seller that the building is assessed for 150k, and point out comparable sales are at 170k with a higher assessed value. Offer what you are willing to pay. If you find your offer to be reasonable if you were on the receiving end, then if he gets offended you just move right along. You are willing to pay what you are willing to pay, and you should know what's a fair offer; but so should he.

I think the skill in negotiations is to identify what is "fair", then tamper it slightly to your advantage. Make your case: 2 units are 25 year term tenants, the units needs repairs or updates. Or you are offering all cash with a favorable closing condition. Lay out the terms that may allow you to pivot the fair price to be slightly better than "fair" and close the deal. Don't try to lowball or trash his building, just politely raise issues that are part of the consideration. If you pose fair arguments to a fair seller, 9 out of 10 times you will be able to close a deal.

Worst case scenario, find a thick skinned realtor or broker and have them make an offer if you want to lowball someone. I'm more than happy to use proxies if I want to be an aggressive deal maker, and in certain situations, it may be the better way to go about negotiations. I'm more than happy to pay that commission if I can get a 3rd party of proxy that brings in less emotions to the table to get a deal done at a favorable price.