As we progress deeper into the current real estate cycle, most Jake and Gino members I interact with are asking the question: “When (not if) will we have a market correction? We stress in our education that buying right is critical to an investor’s success and one of the goals in buying right is to limit your downside risk. This article will focus on five crucial questions to ask a seller when analyzing a deal for buying multifamily real estate, why these questions need to be asked, and how to use these questions during the negotiation process.
As a life coach, I have spent hours asking my clients empowering questions to help them learn more about themselves and to ultimately answer their own questions. An empowering question is a thought provoking, open ended, challenging question that allows a person to look for answers and new opportunities. Please click here to read how to utilize empowering questions: Empowering Questions.
Your mission is to collect as much information as possible when asking these empowering questions and then formulating a solid plan for buying multifamily based on the information. Most investors make assumptions when entering a negotiation for buying multifamily real estate and fail to discover important details pertaining to the investment. Your job is to seek out the seller’s problem and then create a solution to his problem with your offer. An investor who can solve bigger problems will potentially earn bigger returns.
Why are you selling?
It seems like a rather obvious question, but how many investors don’t even consider the other side’s motivation for jettisoning the asset? If you find out why the seller has put up the property for sale, then you can begin to understand how you can solve their problem. “Why” will lead you to the seller’s motivation. For example, if the seller is burned out, the seller will be more amenable to negotiating on the price. If the seller is performing a 1031 exchange, this bit of information sheds other important details. The seller will be under a time constraint and he will have a different type of motivation.
We always focus on the reason why a seller is willing to part with his asset. If there is no motivation, then I can guarantee you that your ability to solve a problem is greatly diminished, and your chance of finding a “deal” has just plummeted. Here are several examples of motivated sellers:
- Burned out
- Poor operations
- Partner acrimony
- Family in-fighting
- Health issues
- Inherited property
- Code violations that need to be addressed
- New opportunity
- 1031 exchange
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What are you going to do with the proceeds?
Why would you care what the seller does with his money once the deal closes? Well, if the seller is going to dump his money into the bank earning a paltry 1% interest, you may have a better solution for his money (AKA creating value). Begin by asking the seller if he would like to earn 4 or 5 % on their money. Most of the time, you will receive a puzzled look on their faces. Now is the time to introduce seller financing. It is your job to educate the seller on the benefits of seller financing. Click here to learn about seller financing: Creative Financing.
I mentioned earlier a 1031 exchange and the effect it has on the seller’s motivation. If you discover the seller is attempting a 1031 exchange, they will be up against the clock to complete the sale and roll over the proceeds into another chosen property. The seller may be looking for a safe bet to close the deal, and you may be able to negotiate a discount if you can convince the seller that you are the party to get the deal closed in time. On the flip side, never tell a buyer you are attempting a 1031 exchange, or you will come across the identical problem.
Could you tell me the story of the property?
Every property has a story, and they are all unique. Our first deal used to be a short-term motel infested with unsavory individuals (nice way of saying crappy tenants). Another one of our deals was built, owned and operated by a family. And yet another was owned and operated by an out of state owner who decided to meet Jake at a Ruby Tuesday’s the weekend before the closing to receive a concession on the price. Thankfully, Jake refused the beers offered to him.
Each story led us to a conclusion on why the property was being sold and what problems we would be presented with. Our first deal was on the market for over two years, and we were able to negotiate a substantial discount on the price, as well as secure 10% owner financing as part of the down payment.
The second deal presented us with different challenges. The seller was motivated to sell this asset, but the pool of buyers was limited and he had already tried to sell the asset to his family unsuccessfully. We were able to purchase this asset with no money down because we displayed our credibility in closing and managing this type of asset.
The third deal was interesting. We knew the seller was motivated because he was in arrears on his property taxes, and the property was performing poorly. He did have us up against the wall due to the fact that our due diligence time period was about to expire, but he was truly motivated to sell. In the end, we only conceded two days of prepaid rents in order to purchase the property. Our concession would have been significantly larger if we were unfamiliar with the story of the property.
How long have you owned the property and do you have other assets?
Isn’t it nice to find out that a seller has additional units in his portfolio? If you can create a rapport with the seller, he may come directly to you to sell his remaining assets. Talk about creating your own off-market deal. You can also try to convince the seller to bundle his entire portfolio and possibly sell to you at a discount. You never know until you ask.
We like to ask sellers about how long they have owned the property because it may shed some light on why they are selling? Have they depreciated the property fully and looking to move their capital? Are they frustrated with the property and looking to sell? In one of our negotiations, we noticed that the sellers had owned the property for only eighteen months. We found out that the sellers massively overspent on re-positioning the property and the note was about to reset to principal and interest. The clock was ticking on how much longer they would be able to operate the property profitably.
What type of financing does the property currently have?
Finance right is the third leg of our framework, and many deals perish due to poor financing. Ask the seller if the financing is assumable. The terms on the assumable financing may be more favorable than current market conditions, and closing costs will generally be lower. Don’t expect the process to be any quicker or any less painless!
You may also find out that the term on the mortgage is coming due, or the property is resetting from interest only to principal and interest, and the owner can’t refinance the property. Both situations present a problem for the seller and an opportunity for the buyer.
Download our Bank Term Sheet to help you with negotiate financing with the banks:
The theme throughout this article has been “Ask, ask, ask”. Don’t be afraid to ask questions when buying multifamily real estate, don’t assume that you know the answers, and always approach the deal with solving a problem. Leave a comment below and let me know your favorite questions to ask a broker!
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