You walk into a new listing appointment excited because you think this property has a lot of potential. The location is perfect, the property is in great shape, and you think there are plenty of potential buyers for the property.
You have your pitch ready and even have a possible buyer for the property which was the reason for your cold call in the first place. Now you dive in and start giving the owner comparable sales and what you think the property would list/sell near.
The Buyer says… I turned down an offer for… My appraisal I got said it was worth… I paid $X for the property when I bought it… I need to get $X from the property… I put $X into the building!
Sound familiar? Anyone that has been in the business for more than 3 months has probably run across this situation. Overcoming these obstacles is the difference between listing a property and selling a property.
Let’s examine each of these obstacles:
I turned down an offer for…… Ever hear this and your first instinct is to say “well you should have taken it?” I do all the time! Sometimes jokingly I do say it depending on the mood/attitude of the Seller. If I have good rapport they can usually lightly laugh it off but still understand my meaning behind it. What you want to do is pry a little as to why they didn’t accept the offer. Was the Buyer asking for seller’s financing? Where they trying to tie up the property for 6 months, 12 months, etc in order to try to find a tenant for the building? How long ago was the offer made? An offer made at or towards the peak of the market has absolutely no validity to today’s market. Usually this is one of the easier obstacles to overcome since the seller usually talks themselves out of the reasoning if you are digging into the root of why they did not accept.
My appraisal I got said it was worth…. It used to be the general rule of thumb was appraisals older than 6 months weren’t worth the paper they were printed on. Now a days with foreclosures still happening fairly often I wouldn’t consider something older than 3 months. There are also situations in which they are completely useless the day after they were printed. I would ask what the reason for the appraisal was. Estate sale? Divorces? Tax appeals? Refinancing? Do you think ownership of property would want the same value for his refinance as they would for a tax appeal? No. Now I know that appraisers are supposed to base this on market value but it’s very easy to be subjective about the selection of comparable properties and how you the adjustments to value. I would review the appraisal and see what comparables the appraiser used and how old. Also check out the cap rates used for income producing properties. This can have a big impact if the appraiser is using a capitalization (cap) rate that is not in line with the true selling price of assets you are reviewing. The more experienced appraisers know what they are doing but some of them may use the same cap rate for a Walgreens as they would the local strip mall.
I paid xxxx for the property when I bought it….. This is always one of the hardest things for sellers to overcome. I know it’s hard to believe but pricing was rather high a few years ago compared to now. I think only in real estate does this argument actually make sense to the person that is suggested it! Imagine you could walk onto the New York Stock Exchange trading floor and sell stock you had in a company. Do you think you would have much luck selling your stock by making the argument you paid $100/share for it last year even though it’s trading for $50/share? Try using that rationale with your seller. The best advice I ever had was in a CCIM class. Below is a cliff notes version of the question the instructor had for the class:
Assuming the exact same asset for each investor,
Investor A – Paid $1.0M for the property
Investor B – Paid $500,000 for the property
Investor C – Paid $250,000 for the property
Which one of the investors does it make the most sense to sell the property for $600,000? The answer was it depends. What is their opportunity cost of taking the money out of the asset and putting it into something else? The property is worth $600,000 today so you need to look at today forward and not dwell on the past. This is where really understanding your client and their goals comes into play. What if land in the area is only appreciating at around 3% per year? Can he take that $600,000 and buy a Dollar General that may bring in a 10% Internal Rate of Return or more? The main goal is to try to help the Seller realize that the price they paid has no effect on the value today.
I need to get $X from the property… By far the worst statement I want to hear because 99 times out of 100 it’s because they are underwater (mortgage is greater than the value)on their property. This kind most likely coincides with the previous statement and the arguments used against that. This usually has to do with the Seller having a mortgage on the property. In the example given above, if Investor A has a mortgage for $700,000 and he says he needs to get at least that to cover his mortgage and the costs, then he could be in trouble. Usually these guys are looking for a Hail Mary from someone and they list with the one agent that tells them they can get them the price they need only to be foreclosed upon a short time later. This client is not completely without hope. Maybe you can interject yourself into the situation and help do a short sale with the bank. Every bank and situation is different so make sure you know what you are doing as you could do more harm than good. Most times a bank is aware when a borrower is underwater, but you certainly don’t want to start a situation without having ideas on solutions to it prior to contacting the bank.
I put $X into the building… In basic grade school math $100,000 + $500,000 = $600,000, in Commercial Real Estate $100,000 + $500,000 may equal $500,000. Let’s say your seller gave a restaurant a check for $100,000 to put towards their tenant improvements. Now that the tenant is gone, do those improvements matter to the buyer that sees that building value as $500,000 and wants to turn it into a gym? You need to find out what was that $100,000 went towards? Was it $100,000 that just made the building functional by replacing the leaking roof, the HVAC that was busted, or the parking lot holes? That would go a lot further than improvements related to a specific use that the next owner has no use for. The point is just because someone put $100,000 towards the $500,000 building doesn’t always mean that the property value went up by that much. Those same improvements may not mean as much or anything to the next purchaser.