Great question! Here are 3 ways to help you decide what price to offer:
Comparable Properties Method
Find 3 or more properties that were sold within the last 12 months, preferably 6 months or sooner that are comparable to your property. Being comparable means that they are similar in year-built, number of units, square footage, within 3-5 miles to each other, and amenities such as laundry room, parking arrangement, and clubhouse, just to name a few.
Now that you’ve found several comparable properties, calculate what each apartment unit costs as a unit. In other words, divide the sold price by the total number of units. You will come up with a $xx,000 per unit figure. Do this on all three sales comparable properties.
Next, compute the average of the three. Now, write down the lowest sales comparison of the three. And get the highest too.
To come up with a sales price, the lowest price you may want to offer is your lowest comparable. The highest you may want to offer is the highest comparable. The average price may be a good starting point.
Note: this method requires that you have completed and understood basic property analysis in Section A.
First of all, obtain the going capitalization rate for the property’s area. Your best bet to get this would be from a local and knowledgeable broker.
Second, calculate the net operating income (NOI) of the property using the “actual” income and expenses, not the proforma income and expense information from the broker.
Third, recall that cap rate is equal to the NOI divided by the offer price. Next, flip that equation to: Offer price is equal to NOI divided by the cap rate. In this formula, you have the NOI and the cap rate (which is the going cap rate you obtained earlier). Viola!
You’re not finished yet, however. What you have computed was your “middle offer price”. The “lower offer price” is to be computed the same way, except that you are to increase the cap rate by 1%. Go ahead and compute that right now. The “higher offer price” is to be computed the same way, but go ahead and reduce the cap rate by 1%. Go ahead and compute that number too.
Now, you have a “low” offer, a “middle” offer, and a “high” offer. Your offer price will be within this range.
Shot Gun Method
Just as the name implies, coming up with an offer this way, is similar to picking up a shotgun and aiming in the general area and hoping you hit something.
The shotgun method is used when you have to make an offer very quickly with very little information. If by any means you can wait to get more information and make a more intelligent offer, please do so. Use this method as a last resort.
Assumption: the sales price is listed (the asking price), but you’re not sure if it’s a good deal or extremely over-priced.
First, make sure you have spoken with your agent, the listing agent, a local property manager, another investor who knows the market, and maybe even the seller for some or any direction.
Second, take 15% off the asking price. That will be your offer price.
Three, before making the offer, call the agent (or seller) first to tell them you have an offer on the way. When making blind offers, sometimes you may offend the seller with a low price, so good communication will be key.
Finally, when making these types of offers, anticipate a counter-offer. After all, this is a blind offer and you are doing your best with the limited information supplied to you.
Now, go make some offers!! No excuses!! Get out there!!
Til next time,