How not to price your building
[Note: I wrote this piece a long time ago but couldn't post it until now, because I didn't want to screw up a potential deal in progress.]
Am helping a couple who are looking to buy an apartment building for roughly $1MM, all cash. Surprisingly, there’s not a lot out there.
I did manage to find one property that looked like it might work, but only if the seller was willing to take an extreme low-ball offer. I explained to my client that there was no harm in trying, sent them the paperwork, and, once they signed, sent in the offer.
The seller came back within a day or so with a counter at a price that was extremely close to our offer. Good news, right?
Not from the seller’s perspective, and here’s why:
- My buyers aren’t stupid. When they low-ball and seller comes back immediately basically willing to take the low-ball price, they start thinking about how to get the price even lower. (Incidentally: This is almost as much of a problem for the brokers as it is for the seller, because once my clients perceive there to be blood in the water, they’re going to want the price lower. If we’re wrong and the seller isn’t desperate, it gets harder to do a deal, because the buyers’ expectations have changed.); and,
- Most buyers don’t low-ball; they just pass on the property all together. So it’s pretty unlikely that we’re competing with any other buyers, making it more likely the sellers will be compelled to accept a further price reduction.
So the seller is now in the position of only having one buyer, a buyer who thinks (accurately or not) that the seller is desperate to sell. Ouch.
What should they have done differently? Well, for starters, they should have priced the property closer to where they’re actually willing to sell. This would likely have had the effect of eliciting more buyer interest. Maybe they could have generated a little competitive tension and used it to drive the price up and/or keep the buyers honest.
Even now, they’re doing the wrong thing. Once they decide they’re willing to take the much lower price, but before going into contract with us, they should immediately communicate the new price to the market. Maybe they get lucky, someone else jumps in, and now things get better for them going forward, instead of worse.