I’ve spent the past month working on a 60 unit deal. As is typical for multifamily sales, the seller would only allow us to view a few units prior to making an offer. We looked at three units. One that was fully rehabbed, one that needed the most work of any unit according to the seller, and one in the middle.
After working the numbers, I estimated that the property would need $300,000 in renovations. The asking price was right for this and I made an asking price offer. I planned to pay for the rehabs out of my end. We went under contract and we were all very excited to close.
It is typical to make an offer after only seeing a few units. The seller doesn’t want multiple buyers clomping through every unit. You have to make an assumption on what the seller is telling you about the others. But you always must have a contingency in place. Trust but verify, and do your inspection. After a full inspection, we found the property needing a lot of work. The seller wasn’t lying about the worst unit being the worst. But, what we found was heartbreaking: almost half of the remaining units were in a similar state.
Due diligence means renegotiating when necessary, so I got three contractors into the building and got three quotes, which came back predictably more expensive than initially predicted. Three quotes came back with an average cost of $650,000.
My Mistake
I had initially planned to pay the 300k in rehab costs out of my end and stuck to that. We found an overage of 350k that needed to be paid to get the place up to rentable condition, to get the place rented for market rent, to get the NOI where it needed to be, and to pay back the investors. I asked the seller to come down 350k to cover for this unknown expense.
What I failed to do was to realize that this part of the diligence was also a negotiation. The seller didn’t want to feel like he was being told to come down. He said he would credit me 250k which was a long way to 350k, but that 100k killed the numbers. I tried to look at it multiple ways, but the deal got soft in all of them. I was looking at it like an accountant – here’s what we need to make it work. The seller wanted to negotiate. I should never have given 350k as my final ask, rather, should have started higher, then worked down.
Not every negotiation goes this way, but most people want to feel like they are getting something, not being told how it is. The seller was probably coming from the perspective that we should split the cost and that he was going up to 250k out of kindness or something. Me not budging looked obstinate and if I had built in wiggle room to come down to 350k I might have a new apartment building right now.
Remember, everything is a negotiation. It’s not always about meeting in the middle, but it is about giving and taking and (almost) never lead with your best offer.
