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Getting the Right Price! | International Residential Real Estate Investors Association
Saturday September 23rd 2017

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Getting the Right Price!

Sellers always want the highest price.  Buyers always want the lowest price.  But what we all want is a sexy deal that delivers for all of us!  At least that is generally how the process is viewed.  However, is this correct?  I’d argue that the discussion of price is much more complex than this.  As investors, understanding this can make you millions and can put cash in your pocket right now!

How should we view price?  First, there is no single answer.  In fact, the answer depends on:

  1. What you as the buyer may bring to the table because of skills and resources available to you.
  2. The  opportunities and issues that exist with a specific project.
  3. What the seller brings to the table because of flexibility in the final payout, availability of seller financing, etc.
  4. What your loan options may cause to be possible.
  5. Finally, understand your own cash sources from your personal resources and outside investors.

Since these issues can mix in an endless array of potential solutions, there possibilities are infinite.  So, how do we narrow the considerations and approach the purchase:

  • First, well developed lender  relationships including access to lines of credit, hard money sources of capital, agency financing options, and likely (based on the current market) lender solutions provide a firm answer based on this component.
  • Second, your own resources are likely  to be very clear, but may vary based on the circumstances surrounding a particular deal.
  • Third, find out the current debt position on the project itself and attempt to learn as much as you can about the seller’s financial position and financial appetite.
  • Fourth, what can you specifically do for  the property that may be unique to your own capacity.

Once these are determined, the options on the deal begin to  narrow very quickly.  This then, brings us to the next step.  Your financial goals upon closing the project.

  • Are you seeking immediate cash flow?
  • Are you seeking a large increase in cash flow potential based on renovations or other changes?
  • Will you plan to divest a part of the project after closing?
  • Will you change use for some or all of the project?
  • Are expected to create a large equity value increase?
  • Do you have other expectations that will impact how this project will develop?

This then creates an endless array of options.  Some might include:

  • Seller financing at a somewhat higher rate but a protracted period of deferred payments.
  • High leverage through an agency financing source.
  • A construction bridge allowing improvements and perhaps divestiture of  some part of the project.
  • A largely cash or all cash purchase designed to secure the project against any potential risk and to lock in long term cash flow for the investor.

In my own case on one property, we negotiated a large seller rebate to complete improvements that at the time allowed us to meet lender leverage requirements that we were unprepared to meet without this  change.

Or in the case of another investor, I was aware of they consistently sought conservative financing and drove all free cash flow back into the property to secure their asset and provide for long term cash flow in the distant future.

In the case of another project, the objective was to separate assets and sell one asset as high value rental properties to military families moving in and out of the area by converting a 110 unit property into a series of duplex and triplex rentals.

In another potential alternative, the buyer might by the entity instead of the project in order  to  keep a very strong debt instrument in place and avoid a change of ownership liquidation.

Literally, as investors the possible solutions are strictly limited by imagination, constraints of the participants, and needs of the deal.  Combining this with a strong understanding of the sellers motivation can open many possible and very profitable solutions for both parties than might otherwise exist.

So, get out there… find your deals… and figure out how to make the deals work.  Remember that simply dragging out the  process and trying to take advantage of the seller or dealing with sellers who are trying to take advantage of you offers no value to either party.  The best situation is to seek solutions aligning interests  as the best results come from these situations.

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