As a real estate investor, you can’t shy away from negotiations. Finding a great investment opportunity is good, but it’s the negotiations that determine if the overall deal is worth it or not. A property bought at a price higher than its market value would become a thorn in your side for sure. You won’t be able to sell it for a decent profit nor make enough off it in monthly rents. That’s the worst thing that can happen to you.
That’s why it’s important to negotiate through facts and figures.
Some sellers might get offended by your offer, but it’s up to you to show them that your offer is sincere and based on how much profit the property can generate. You cannot be emotional during negotiations and attack neither the property nor seller’s ego. Some sellers will be offended by your offer, and in that case, you can’t force it.
Investing in property is a numbers game. It’s not about your or seller’s emotions.
However, there are a few factors which can help turn price negotiations in your favor and convince the seller that you are not trying to swindle him or her but offering what the property is worth in the market.
Here are eight factors which you need to do your homework on before you step into negotiations with a property owner:
1. Vacancy Rate
The information provided by seller might not actually depict how many units are rented. Once you or someone from your team physically visits the property, you can determine how many vacant units are actually listed as occupied in rent roll.
2. Residential Profiles
One of the most important factors that determine the desirability of living in a property is what kind of people live in it. Do they pay their rents on time? Do they have any criminal records? What’s the crime rate in the area? If they are undesirables, then you will need to terminate contracts, vacate units and then find new tenants. That’s rent loss and requires quite some effort.
3. Pending Maintenance
You get all kind of tenants in this business and sometimes they do a lot more damage to property than you think they have. Some units in the building might need extensive repairs before they can be rented again. This can be anything from broken tiles, electrical work, floor coverings, or even cracks in walls. You will need to invest in these units before you can rent them again.
4. Appliance Repair or Replacements
Remember the laundry room that was listed in the information sent by the seller? What if you can’t find any working machines in that room? That means dirty laundry which nobody wants. Appliances in the building might be ending their life and would need to be repaired or replaced. That’s another expense for you which would be necessary to keep tenants happy.
5. Pending Renovations
There is always something which requires ongoing maintenance and legally, has to be taken care of by landlord. This includes electrical work, plumbing or heating systems, carpets, walls, roof and ceilings to name a few. Most of the times, the landlord wouldn’t even know how much that pending maintenance is going to cost.
6. Pest Control Problems
Nobody wants to live in a building infested with rats, cockroaches, fleas, ants, etc. This is one problem which when spirals out of hand can cause everybody in the building to vacate. Therefore, this needs to be handled very carefully. If the property you are buying has a unit or units infested with vermin, tell the seller that you factored that expense in your offering.
7. Uncancellable Service Agreements
There might be tenants who have already given their notices for vacating property. That means you won’t be getting rents from those units until you advertise and fill those units. Seller might not have factored this in the numbers that were provided to you in which case you can adjust the offering or use it as a leverage when negotiating with seller.
8. Notices of Intention to Leave
The current owner of the property might have a few uncancellable service agreements which you can’t do anything about. These will add expense to your operating budget and therefore your profits. If you have a less costly alternative, you might be able to use this argument to justify your offering as well.
In addition to the above-mentioned points, you also have to see if there are any future tax raises, prior insurance loss, security and environmental violations as well.
Remember, take a stance, not a stand during negotiations.
It’s not about you or the seller; it’s about the actual value of property.
If you feel that you can make another reasonable offer without compromising too much, then do give it a thought. However, if numbers don’t work out or don’t match your real estate goals, then move on to next opportunity. Whatever you do, do not become emotionally attached to a property just because you put a lot of effort in doing your homework on it. ROI on your gut feelings isn’t that high in the property investment business.