Need pricing advice... - Posted by Mike

Posted by GL(ON) on March 11, 2002 at 21:39:16:

If you want to cut through to bottom line, if you can buy for nothing down and get a positive cash flow, and the place doesn’t have any serious flaws, then it’s pretty hard to go wrong.

With positive cash flow there is no reason you can’t hold it forever. After all it will be paid off free and clear in 20 years, then look at the nice income you will have. Who cares if it never goes up a single dollar?

But it will go up. Inflation is like a train leaving the station, at first you can’t see it move but once it gets going nothing can stop it.

The trouble is, if it is a negative cash flow taking money out of your pocket every month, you will soon get sick of it and want out. Then when you get the chance you will sell quick if you can break even or get a small profit. My father once bought an apartment house like that, going a little behind every month,eventually breaking even. After 8 long years he sold for an $80,000 profit. Two years after that it sold for $500,000 more. So once prices start to take off don’t be too quick to sell. When prices start to go up you want to stick with it. This is easy if you have positive cash flow, but not if you hate the place and are dying to get out.

Need pricing advice… - Posted by Mike

Posted by Mike on March 09, 2002 at 11:35:52:

I have been contacted by an older couple that are getting out of the rental business. They have 2 quadplexes that bring in $500 per unit, total gross of $4000. Both quadplexes are roughly 30 years old and could use some updating. The combined property taxes for both units is $7000 for the year. The owner is also responsible for water which is roughly $2500 per year. I am guessing insurance will total $2000 for both units. I have snow and lawn care at about $1200 per year. And I have total maintenance per year at $3000. They want me to make an offer but I am struggling on what my initial offer should be. Any analysis on what I should offer them would be greatly appreciated. Thanks.

Re: Need pricing advice… - Posted by Shawn

Posted by Shawn on March 09, 2002 at 18:42:12:

What are the comps like on these properties?
It may be the deal of your life or not?!?!?!
Based on my calculations you have $48,000.00 gross.
a lot of times especially w/ older owners these may be under market, but for god’s sake don’t toss out a long term good paying renter!
Vacancy rate of 10% or more = $4800.00
taxes $7000.00
water $2500.00
insurance $2000.00
Lawn $1200.00
Maintenance $3000.00
Cashflow $12000.00
Advertising $1200.00
Balance for debt service $15500.00 or $1200 per month
15 yr amortization @7% = approx $133,507.15
1st and 2nd different figures, 30 yr amortization more money. when dealing w/ these family friends you and they need to decide what is fair. You don’t want to pay too much and they don’t want to GIVE away all that they have worked for. I am not so greedy as to push the old ones around , but I want it to be fair and if there are any doubts for it to be more fair for me. How are these people? Are they known as tightwads, skinflints, or the sweet generous people that everyone loves? Each circumstance takes a different type of negotiation.
Hope this helps,

No, you need negotiating skills . . . - Posted by JoeKaiser

Posted by JoeKaiser on March 09, 2002 at 14:29:09:

While not completely irrevelant, “pricing” is the least of your concerns here. I think it’s silly to “submit an offer” in private sales such as this, and “silly” isn’t the word I’d really like to use here.

You will never know what the sellers will take until you sit down with them and sort things out. With two fourplexes, I know I could keep the conversation going for a couple hours, no problem. You see, my initial goal when meeting with sellers has little to do with nailing down numbers. Instead, I’m going for the “simpatico factor” . . . also known as “like me and trust me.”

If you’ve never done this before, you’ve missed the opportunity to put together deals that truly make sense for everyone involved. Blindly mailing a “fill in the blank” type purchase and sale agreement could never approach that.

There are things that make you money in this business (getting belly to belly with sellers), and things the get in the way (hammers and nails to name a couple), but nothing comes close as far as return on investment as does sitting down with the seller and just letting things develop.

That won’t happen if you show up and start talking about the darn four plexes.

Talk about the weather, talk about the RV in the driveway, talk about the price of tea in China, whatever, and at some point along the way the convesation will naturally drift back to the four plexes and by then, as long as you don’t say something really “silly,” . . . simpatico happens? (bumper sticker to follow - all rights reserved ;-).

Now, here’s the cool part. People like to do business with people they like to do business with.

Go talk to the seller. Leave the paperwork in the car for now and go see what makes them tick. Pay attention, spend more time listening than talking (and try to spend your talking moments focused on something other than you), and soon enough the guard comes down and deals can be made strictly on merit (once they’ve checked off the “this guy can be trusted” box, the fear factor goes away).

Of course, it’s not always this way. Every now and then sellers don’t want to play along. But the majority, by far, would feel good knowing their property is going into the hands of someone who, like themselves, understands the business and will take good care of the place while it’s under his domain. They’ll feel so good about it, in fact, that they may even go out of their way to make it happen. They get to the point where they WANT you to own it, and will bend over backwards to help you pull it off.

How cool would that be?


That’s how 6% long term owner financing gets accepted (Bronchicks 0% financing terms not withstanding . . . I should buy his course I guess ;-). That’s how deferred payment terms, graduated payments, balloon free notes, portable mortgages, etc., get written down on paper and actually signed off in practice.

Meet the seller. Do it on their turf (forget the nonsense that good negotiators need to be in such a degree of control that all negotations must be on their own turf . . . and while your at it, you probably don’need to measure the chairs to make sure yours is at least 3" higher). Give them a legitimate opportunity to sincerely like you and trust you . . . and good things will happen.

Simpatico . . . THE key to your success as a whiz bang real estate negotiator.

You asked about pricing . . . me, I’d be looking for the “family rate.” That’s the number they’d sell it to their favorite kid at. It might take longer than a couple hours to be on equal footing with the favorite kid, but in my experience, not much longer.


Re: Need pricing advice… - Posted by mike

Posted by mike on March 11, 2002 at 20:17:12:

Shawn, thanks for responding to my post. I am not sure I follow you completely. Based on the information, what is the most you would pay for both 4-plexes? What does the $133,507.15 represent? Is this what you would pay for the property? I followed your analysis until right up until the amoritization portion and then I got lost. It certainly sounds like you know what you are talking about so any clarification would be greatly appreciated. Thanks!

Re: No, you need negotiating skills . . . - Posted by mike

Posted by mike on March 09, 2002 at 15:10:34:

Believe me, I have done more than enough smoozing with the older couple- three years worth! The older gentelmen went to college with my Grandfather where they both majored in chemistry. And he bought the 4-plexes way back when to help put his 4 children through college- just as I hope to do with my 4 children. On top of that I work at the same company that he retired from, and we are both chemists. I have certainly worked the angles.

I am more interested in knowing what a good price would be. I have a feeling I know but thought I would get some feedback from the pros. Even though I have developed a good rapport with the couple I don’t want to completely offend them. Additionally, I am planning on financing this through a bank (I have some connections and will be buying with no money down). Based on the information I gave I wanted to know what the highest price people would pay so I stay below that level. Thanks.

Re: Need pricing advice… - Posted by GL(ON)

Posted by GL(ON) on March 12, 2002 at 24:36:43:

Shawn is telling you basically the same thing I did, about figuring out the value of the property by the income method and the comparable method.

I think his expense estimates are too high. He seems to have come up with a price of $133,507.15 for both properties while my estimate was $140,000 apiece.

You will have to find out the actual expenses and work out your own estimate. If you get the figures from the seller you should double check with the tax assessor, utility companies etc. A small error can result in a large overpayment. For example if you use a cap rate of 10, overlooking a $100 expense overstates the income $100 which equals a $1000 increase in price.

Also the mortgage at 7% for 15 years is too high. I use a 20 year mortgage amortisation period, though I will stretch it to 25 if I have to, to make a deal work. And you may be able to get a better rate, around 5%.

His estimate of value is less than half mine. This shows the problem of trying to figure value by long distance, without the facts. Once you get the facts and figures re expenses and also the comparable properties you will be in a better position to make an accurate estimate of value.

Re: Need pricing advice… - Posted by Shawn

Posted by Shawn on March 11, 2002 at 20:50:00:

15 yr amortization @7% = approx $133,507.15
1st and 2nd different figures, 30 yr amortization more money. when dealing w/ these family friends you and they need to decide what is fair. You don’t want to pay too much and they don’t want to GIVE away all that they have worked for. I am not so greedy as to push the old ones around , but I want it to be fair and if there are any doubts for it to be more fair for me. How are these people? Are they known as tightwads, skinflints, or the sweet generous people that everyone loves? Each circumstance takes a different type of negotiation.
Hope this helps,

What I mean, is based on zero knowledge of your area market, this is the most I would pay (not offer) for these 2 Quads. Now if Quads are going for $40,000.00 in your area, I certainly wouldn’t offer $66,500.00 for them. However, if in your area, or if your sellers need and you have a willingness to pay, you could offer up to 154,779.01 if you were willing to pay 1200 for 20 yrs or 169784.28 for a 25 yr amortization, even 180,369.08 for a 30 yr 1200 mo. amort. What I meant following was if you use a 20% 2nd mortgage in conjunction with an 80% first you need to figure those to come up with a sales figure. Creativity is yours, but you should come up with a basis for your offer. One way to quickly alienate a longtime family relationship is over money. I see a lot of people saying try to steal it from them! My ethics won’t allow me to treat others this way (golden rule). That doesn’t mean that I want or will pay in the upper or average range for a property. I want to buy where I know I’m safe if I need to bail quickly. Can you tell me what the average price of a multi family prop is in your area? Are these 1 BR units, 2, or 3? I get 4 times as many calls for my 3BR as I do for my 1BR.
Sorry to go so long on this post.

Good Luck,

Re: No, you need negotiating skills . . . - Posted by GL(ON)

Posted by GL(ON) on March 11, 2002 at 14:07:37:

How to know what a rental property is worth.

The quick rule of thumb method. The price X income method. Take the total income and divide it into the price. Take the result to one decimal place. If the result is around 6, the property will probably carry. Is that the right price? It depends on where you are and when. There are times and places where a typical income ratio is in the 4 to 6 range (bargain time) and I have seen them as high as 16 (sucker time, the height of a boom). To know what your market is like you would have to collect the info on a bunch of properties and figure out what is typical. But 6 times income is a good rule. By that rule, your properties would look like this: 4X $500 X 12 months = $24,000 annual income. 6X $24,000 = $144,000. If they want $144,000 or less it’s definitely worth looking at. If they want $240,000 they are dreaming (unless the market is hot and everything is going for over 10Xincome.)

Next is The capilalization rate method. This is more detailed, if it passes the first rule of thumb test.

Take the gross income. Subtract the expenses. Result,net income. Figure out how much you want to make on your investment. Take the reciprocal and multiply by the net income. Example, gross income $24,000 expenses $10,000 (actual) net income $14,000. If you capitalize that at 10% you get a value of $140,000.

Most detailed final calculation. TAke the net income (gross income - expenses, including vacancy and management). That is the amount you have for debt service. Figure out what it will cost in mortgage payments per year. Subtract. The result will be your net.

Obviously if you get a cheap interest rate on the mortgage you can afford a higher purchase price. You will have to play around with different figures to get a feel for this. But if they want say $175,000 and not a penny less, at what interest rate will the mortgage payment be the same as if you bought for $140,000 with a 6% mortgage?

If they are hip they will be able to give you income statements for every year since they bought the place. Most owners are not hip but in his case, maybe. If they do not have income statements you will have to ask for the figures for taxes, insurance, electric, gas, taxes etc. Make sure you check up on them before the deal closes. I have never gotten accurate figures yet, and the mistakes always seem to be in the seller’s favor.

Ultimately, it comes down to cashflow . . . - Posted by JoeKaiser

Posted by JoeKaiser on March 09, 2002 at 15:33:01:

If you can finance with nothing out of pocket, it all comes down to cashflow. Eight units is not a small matter. It will consume your time and mental energies. What’s that worth to you?

The question isn’t “what’s a good price?” The question is “what will it take?” I’d go in without having a solid number in mind, negotiating the very best deal I could, and then determine if it’s a number that makes sense.

Eight units, I’d want to pocket a thousand bucks a month. That’s tough, even in my area, but knowing that’s where I need to end up makes it much easier to determine what numbers work and what numbers don’t. Without even considering the price, I know that to pull that off I’ll need more than my fair share of concessions along the way.

Once the dust settles and we’ve reached what I know to be his absolute bottom dollar, determing my cashflow at that point and seeing if we’re in the ballpark will make my decision whether or not to proceed abundantly clear.

I think you need to do more than schmooze, I think now it’s time to talk turkey. It’s not a matter of offending, it a matter or looking at it this way or that way, and writing down all the things that they agree to (at least the ones that benefit you) and forgetting about all the other stuff. Once that’s complete, you’ve got your price and terms all sketched out and you’re ready to formalize the thing with a written contract.

What’s it worth? It’s worth whatever the two of you decide it’s worth.


Re: No, you need negotiating skills . . . - Posted by mike

Posted by mike on March 11, 2002 at 20:10:23:

Thanks a bunch for your analysis. I like the variations of determining the value of a piece of property. I am going to try and get both 4-plexes for $220,000. I’m not sure they will except this but it certainly gives me some wiggle room. The devil is always in the details and I am going to try like hell to work them in my favor. Thanks again!

Re: Ultimately, it comes down to cashflow . . . - Posted by phil fernandez

Posted by phil fernandez on March 09, 2002 at 16:29:58:


I like Joe’s idea of building trust with your seller. And it sounds like you have done much of this. Now it’s time to go to the kitchen table with them. I own an 8 plex and mine sounds alot like yours. Of course I’m in a different area than you hence a different market.

Keep in mind that you will either have to run the place yourself or hire it out to a property mismanagement company. I do not recommend tha later. So you will want to get paid for your efforts. After vacancy factors, operating expenses, reserves for replacement and mortgage payments I to would want to clear at least $1,000 per month.

Now why do you want to clear that much per month. For the same reason you are interested in owning the 8plex as the seller was. You want to create some cashflow to sock away to put your 4 kids through college. This would be a point where your seller will be able to relate to you.

Sounds like you have some similar interests with your seller. Build on that.

Also what are the seller’s needs. Not wants. Those could be two entirely different things. But focus on their actual needs. Probably a monthly income stream would be nice for them . That gets you in the owner financing door. Ask them if they had much money when they started out. They’ll tell you they didn’t, so you like them will need someone to carry you with no money down. And at what interest rate. Well I can’t give you interest cause I’ll need the cashflow to improve the property so you will have better collateral. Why don’t we just divide the agreed upon sale price by 180 months and that’s what I’ll pay you as my monthly mortgage payment. I recently bought a small mobile home park with the sellers taking back the note at 0% interest, so it can be done.

In closing I’m with Joe 100%. My best negotiated deals were when the seller and I were eye ball to eye ball at their kitchen table. OK sometimes we were stting in their living room.

You missed the entire point . . . - Posted by JoeKaiser

Posted by JoeKaiser on March 11, 2002 at 23:53:20:

Sellers never “accept” my offers. I don’t “make offers.” We sit, we talk, and eventually, we come to terms. By the time we draw it up, it’s preaccepted.

Again, it’s silly to put a number in the “purchase price” spot and hope the seller finds it acceptable. DON’T DO IT. That’s not negotiating, that’s wasting your opportunity to make a good deal happen, (more often than not).

I signed off on a purchase and sale agreement today (seller has already called to cancel . . . long story), but the $250k house, in foreclosure, was for a moment or two heading my way at $165k. It never occurred to me the house was worth that much. I’m a little out of my element at the moment and simply negotiated the best deal possible. My target was not a fixed price, but rather, getting it at the seller’s absolute rock bottom price. It’s only after the dust has settled that I’m interested in learning what it’s worth, (and sometimes pleasantly surprised when it turns out the thing was actually worth a bit more . . . I was guessing $210K).

First do the schmooze thing, but then talk numbers. Whatever you do, don’t just plug a number in. And by the way, $165k was my idea . . . that thing about never being the first to mention a number . . . not always true. Sometimes I hear sellers mentioning sky high prices and a low ball right between the eyes can get them back to reality in an instant.


Re: No, you need negotiating skills . . . - Posted by GL(ON)

Posted by GL(ON) on March 11, 2002 at 21:25:05:

Glad to be of help. Sometimes I wonder if anyone reads my stuff. I hope it was clear, sometimes I go too fast and get a little mixed up.

There is another way of putting a value on real estate and that is the comparable method. You look up similar properties that have sold within the last year and find out what they sold for. Then adjust for any differences between the comparable and the subject property.

This is most commonly used on homes but will work for rentals as well. After all if they want $120,000 and there is one down the street that sold for $80,000 it should raise a warning flag.

If it is too hard to find out the comparable info, you can use properties that are advertised for sale but remember that these are only asking prices and selling prices will be lower, in some cases a lot lower.

This is where it pays to check out some ads for rental property and apply the gross rent multiplier (GRM) method to get a handle on what the local market is like.

By the way you should NEVER make the first offer, always get the seller to name his price first. You have nothing to lose and everything to gain by doing this.