An effective tactic we just can’t use

|

Yesterday, I noted that pricing for apartment buildings in LA has become detached from the underlying cashflows the buildings can generate.

But some deals are still getting done at (semi-)reasonable prices and I want to discuss how, and why it’s a problem for me.

Right now, listing brokers and sellers are pricing properties very aggressively. But that doesn’t mean that everything is selling at list price.

Often, we see transactions closing at meaningful discounts to list. By meaningful, I don’t mean $10-20k off. I mean off by hundreds of thousands of dollars, enough to materially improve the deal for the buyer.

In general, the way this happens is that someone jumps on the initial listing, offering to pay full price. Then, he gets into contract, inspects, and tries to renegotiate the deal. Often, the seller tells the buyer to take a hike. But, sometimes, the seller is so worn down by the process that he agrees to accept a huge price chip.

So, this tactic definitely works. But I can’t use it.

Why?

We participate in auctions all the time. We want the brokers who run those auctions to know, with 100% certainty, that the price we offer is the price at which we’ll close. That way, when they’re looking at a bunch of offers in the same range, they can in good conscience push their clients to accept ours.

So, we can’t chip price, ever.

This strategy definitely hurts us in this part of the market cycle. But (i) I prefer to conduct my business in an honorable way; and (ii) even if I didn’t care about honor, I’d still be 100% confident that, over an entire career, behaving honorably will mean we’ll get to do more and better deals than if we acted like jerks.

Share