The Right Amount
Making an offer boils down to one thing: the right amount. It is more important for an investor to make an offer based on their chances of making money off the property, rather than an amount that they think will entice the seller to close the deal. Here are the three steps to making the right offer:
- Review the data
Before making an offer, it is essential to get the right data on which to base the property’s future earning potential. Therefore:
- Examine the broker’s brochure, which is meant to attract potential buyers and contain most of the information they would need.
- Obtain at least three years of financial data from the seller as a basis to predict and project future earnings.
A real estate pro-forma analysis helps buyers and investors not only avoid overpaying for the property, but also assures them that they are making a good investment. It’s a basic “go / no go” tool to help buyers decide whether or not to proceed with the purchase. Therefore, the proforma compiles current and/or estimated income and expense data to help project the NOI (net operating income) and cash flow of a property.
Although the broker and seller may present a pro forma of their own, it is best for a buyer to come up with their own – just to make sure the property’s NOI isn’t artificially boosted by inflated income and reduced operating expenses to make it more attractive to buyers.
You can compare the figures on the broker’s brochure with that on the seller’s financial data but you should also rely on your own due diligence to track the real numbers.
Investors can visit the property and speak with the current lessee or the tenants of comparable properties. If maintenance costs are high, buyers can consider finding other maintenance service providers at better prices. Buyers can also avoid unwanted capital expenditures by inspecting the property to see if it needs to be renovated or furnished in order to attract new tenants.
All these will be instrumental in gauging the property’s investment potential.
In an ideal scenario, the property should have:
- Positive cash flow
- Double-digit cash-on-cash return, which is the cash you earn based on the cash you invested
- Upside potential, or the ability of the investor to raise rent or reduce expenses in the future (for example, an upcoming development in the vicinity that will result in greater foot traffic)
- A stable and growing neighborhood
The goal of any offer is to close a sale, and the best and most common way of doing so is through a sales contract or a letter of intent. A sales contract is a legally binding document between buyer and seller once it’s signed. The terms and conditions in the contract are enforceable, with consequences if either party fails to live up to their end of the deal.
On the other hand, a letter of intent is a preliminary agreement reached by buyer and seller. Depending on how the letter is worded, the document can be legally binding or non-binding.
A sales contract or letter of intent contains:
- An introduction stating the purpose of the document
- A detailed description of parties involved in the transaction
- A detailed description of the transaction itself
- Contingencies upon which the transaction proceeds or not
- The terms and length of time needed for due diligence
- Restrictive covenants such as a non-compete agreements, in which the seller is prohibited from competing with the buyer
It is important for buyers to have the document vetted by a legal or real estate expert to make sure the wording protects them from legal liability.
Ultimately, a buyer’s goal is to convert the back-and-forth negotiations into a mutually acceptable set of terms and close the sale. The agreed upon terms, conditions, and price must now be contained in a legally binding contract.
First-time investors can be confident when they invest in Ogden, UT commercial real estate. With the help of Destination Properties, investors can be certain they’ll be guided through the process. We have over 25 years of experience in representing both buyers and sellers as a boutique brokerage in Northern Utah.