By Augie Jones.
In a market environment where the lack of sufficient inventory for affordable workforce housing spurs buying competition, investors need to be thoughtful on how to best position themselves to win these bids and negotiations.
For one, knowing the local market dynamics and seller motivations puts you in a good position to negotiate and close a real estate transaction. Investing in the winter, for example, can be a wise time for colder markets as rents tend to drop during these months and there are usually fewer buyers in the market, especially in multifamily. What other areas should investors focus on in their quest to win deals and increase leverage?
Understand the Properties You’re Targeting
While many investors imagine buying more expensive assets as they build their business, they sometimes forget where their expertise lies. Any time you invest in properties outside your core understanding, you are at greater risk of making a mistake and losing money. This applies to expanding to markets that you are unfamiliar with since the factors that alter each market are slightly different.
Local government and real estate laws play a large role in residential real estate values, so you should have a feeling on the pulse of the community before investing. You are at your strongest negotiating position with assets that you are comfortable with as you can better assess the risk-reward of the transaction.
Always Have Questions Prepared
While deferred maintenance for a single-family home can be relatively obvious when inspecting a property, the worst-case scenario is the building has no tenant while you complete the repairs. Shutting down a multifamily property for repairs can cost much more and affect your bottom line. All investors should enter negotiations with questions prepared for the specific asset to mitigate unwanted post-closing surprises.
Find Out Your Seller’s Motivation
There are many reasons why an individual may be offloading properties; some have deadlines they need to meet while others are just exploring the market for a sale. By using your broker or asking the right questions, you can determine what is driving the seller to better position your offer.
Many times, sellers will present the deal as something they are considering as opposed to committed to. However, asking about their existing financing or understanding the scope of their investments can provide insight into their thought process.
Address Their Needs
Targeting your bid to match the needs of the seller can give you an edge when competing with other bids. Similar to most negotiations, there will be an element of compromise, so prioritize your needs to determine where you might be willing to concede. Also, make it obvious to the seller that you are trying to curtail the offer to accommodate them. This goodwill can positively factor into their decision.
Getting the Opening Bid Right
You need to make sure your opening bid will act as a starting point for negotiating as opposed to offending the seller and stalling talks. Everyone obviously wants to get the best deal possible, especially when considering these properties as investments as opposed to personal residences. However, sellers generally understand the value of their properties and will price accordingly.
Appraisals are important to consider as most lenders will use those values in loan packages. That being said, in portfolio sales, sellers are more likely to value their portfolios off cash flows as opposed to local sales comparisons. Always discuss your options with your lender to determine what financing you have and what purchase price will generate desirable returns.
Show Proof of Funds
Whether it’s an all cash bid or having financing in place, sellers want to know that they can get to the sale with as few issues as possible. All cash bids typically hold more weight because, in some instances, lenders decide at the closing table that they are unwilling to lend on the assets.
CoreVest avoids this by preliminarily underwriting assets prior to issuing a term sheet and providing proof of funds to pre-approved sponsors.
Having confidence that your lender will be able to close the transaction can benefit you in negotiations with motivated sellers who are time conscious. While rates and points are obviously important factors to consider when choosing a lender, certainty of closing is much tougher to value but is of critical importance.
Combine Them All Together
There are a number of different ways to make your offer more desirable than competitors, and these considerations will often be the difference maker in the negotiation process. Trying to understand the seller and their goals can help you gain an advantage when compared to similar offers. Focusing on properties where you have knowledge and experience will allow you to more accurately underwrite the deal to determine what returns you will realize.
After calculating what your desired investment returns are, you must carefully position your opening bid to pique the seller’s interest while having some space for concessions. Sellers have many things to consider, so offering proof of funds gives them a confidence boost in the buyer – that he or she will have the financing or cash secured – and limit the potential question marks and headaches surrounding a transaction.
Are you looking for capital for your next investment property? Our creative financing options have helped thousands of investors finance more than 35,000 properties and close over $5 billion in loans. Are you looking to explore your options? CoreVest is the leading lender to residential and multifamily real estate investors. We provide attractive long-term debt products for stabilized rental portfolios as well as credit lines for new acquisitions.