Re: I don’t agree… - Posted by Ed Garcia
Posted by Ed Garcia on March 10, 2000 at 11:22:09:
Let me tell you why VALUE is important.
I’ve had this argument with an old friend of mine on many occasion. My friend say’s
what difference does the Cap Rate in the area mean when buying a deal.
By the way a Cap Rate is a indicator of the properties income. When purchasing
Commercial property, you’re buying an income steam, and the value of that property is
based on that income stream.
My friend say’s that he doesn’t care what anybody else is doing because it doesn’t
effect him, and his concern is if he is making what he wants, or if it’s the desired
Cap rate that he feels he needs when doing his deal, that’s really all that matters.
Let me tell you why.
(1) Today, I’m buying, tomorrow, I may be selling.
Going from the old cliché (You Make Your Money On the Buy) I can’t lose site
that the day is going to come that I may be selling. And you never know when that
day may come. The only way your going to make that money on the buy, “is when you sell”.
A divorce, another deal that has come up that you would like to do that might be even
better than the one you’ve got, A cash flow problem you may have, any number of reasons
may cause you to sell unexpectedly.
(2) If need be, I can always borrower against it? Not if the VALUE isn’t there.
That’s the second part of the deal. I may want to re- finance it or sell it to someone else.
Now I’m limited to my moves. If the value isn’t there, not only can I not re-finance it, but may
have problems selling it, because my buyer may not be able to finance it.
I know, you’re going to say you can carry paper, " weak answer", It’s always better to consider
all circumstances when doing a deal. Besides, as I said before, you may need the cash, for what
By me knowing the Cap Rates being enjoyed in the area, that’s an indicator of the value a lender
will allow me or a buyer if I should sell, to borrow on it.
I asked my friend, What would you consider a Cap Rate that you would do a deal at?
My friend said, I wouldn’t do a deal less than a 12 Cap.
I said, what if you found a property that you really liked at a 12 Cap, and found out other similar
property in the area was at a 14 Cap, how would you feel? I saw my friend stop in his tracks, that
said it all.
Nobody, wants to buy above market, and that’s my point. If your not aware of the market, then
how will your deal stand up, if your deal has to compete in that market.
Joe, I could go on and tell you some personal experiences that I am currently having, to even prove
my point even more, but what’s the use. Believe me when I tell you Joe, VALUE mean everything.
So when you make the statement, Do we really care what it’s worth? What does “worth” have to do
with anything at this point?
Worth or Value has everything to do with it, with out knowing that, how would you know if it’s a
good deal or not?
How do I know what price I should be negotiating my deal to?
If it’s based on Cash Flow? The market can change, in this case the building of new low cost housing
could effect this park. A newer better Mobile home park could effect this park, by either preventing
you from filling the park, or increasing rents for cash flow.
So when buying a deal, I need an edge on the market.
Ray Alcorn states, …and that was my thinking behind asking the questions about the debt and lienholders.
I didn’t say it, but I figured we had to know how much was owed to who in order to figure out if it was even worth fooling with.
I agree with Ray, that’s important, because you know where the seller is coming from, and how much
room he may have in a deal.
But no matter what the seller owes, it still comes down to determining what it’s worth on today’s
market under it’s current condition. And the only way you can determine that is to go to the market it self.
The seller can own the property free and clear, but believe me if we can’t come to terms we don’t have
a deal. Now what do you think the seller is going to base his price on? I’ll tell you, his perception of the
market, and I promise you, it’s going to be on the high side.
If were going to negotiate a deal, we need to know the market and have that information at our beckon call.
That’s the only way we can disarm the seller, is to know the info and be on top of it, where we create doubt
as to the creditability of his own thinking.
Joe when you say, I guess what I’m saying is I’d be more concerned about making the best possible deal at this point and less concerned about what the thing may be worth. They’ll be plenty of time to figure that out once the dust settles.
I know where your coming from, except, that’s the move you make when you know you have a deal. Tie it
up and then worry about it later.
In this deal David is trying to make chicken salad out of chicken Sh*t, so why should he go through mental
masturbation, when he can cut to the chase and corner the guy now making a deal out of it going in.
If not, next case.
In closing Joe, I’d like to say, I enjoy your posts, and have heard nothing but good things about you,
so keep up the good work.