Archive for January, 2011
Due diligence in the valuation of a prospective apartment project purchase includes a financial breakdown of leases and rent payments. Far from merely a flat spreadsheet of the monthly rents collected, there are a number of important financial revelations that come from careful analysis of timing of expiration of leases, comparison of rents within the project for similar units, and comparison of project rents to the local market competition.These three major considerations do not stand alone, as all three influence the others. Whether to purchase the apartment project, and a schedule of actions to take after the purchase, are determined by these three analysis items.
Comparison of Internal Rents
Just because there are multiple identical 2 bedroom units in a project being considered for purchase doesn’t mean that they’re all generating the same rent. Not only is this determined by when leases were originated, but can reflect the negotiation between
tenants and management. Knowing which units should be at higher rents is important to valuation and income analysis.
Local Market Due Diligence
Markets are fluid, and no apartment project purchase should be made without thorough local market rent due diligence. Not only should there be a comparison of rents for comparable units, but the buyer should do a careful analysis of population movement and local commercial activity and job stability. This analysis could show that a project-wide adjustment of rents is on the horizon, upward or downward.
Lease Expiration Analysis
Charting a time line of lease expiration dates, including the rents for each unit, yields a lot of information Important to the decision to purchase, but also a schedule of the actions to take after purchase. If a spreadsheet is set up to show current rents along a time line, as well as proposed rents at lease expiration dates, a projection of first year ownership revenues can be created. Especially when there is opportunity to increase rents, this process can show increases in return on investment from rent adjustments that can change the valuation of the project as a whole.
Likewise, if there is a softening of rents in the market area, there may need to be extra marketing costs for Incentives, and possibly even lower rents as leases expire. This could rule out the project for purchase, or change the purchase price to reflect a lower value due to lower future rents or cash flow.
Karen Hanover, CCIM Candidate Apartment Education Institute, President
I’m seriously ticked off. Here’s why: I had a conversation yesterday with a fellow named Anthony. He explained to me how he really wanted to get into the real estate business now because the opportunity is so ripe. In particular he wants to get into foreclosures. Who wouldn’t? He told me about a conversation he had with an agent who, in a very short period of time, utterly convinced him that there was NO WAY he could make money on foreclosures.
Sadly, he took her word for it because after all, she has “been in the business for 15 years” and therefore and expert. If you think about it, that agent did herself, Anthony, the local community, and the real estate market as a whole, a real disservice because there is always a fortune to be made in foreclosures–especially now, whether she knows it or not. The proof is overwhelming. The agent was wrong, BUT was able to convince Anthony. Why do you think that is? Here’s what I’ve noticed over the years: When you and I are in a position where we are looking for guidance or advice, unfortunately we often ask a person who, when given the opportunity, finds some perverse pleasure in imposing their will on us. Like when someone tells you, “You can’t do that” even when they’re dead wrong. Have you ever noticed that?
What I’ve discovered is when you’re asking for guidance or advice from someone who doesn’t know or isn’t sure of what your asking, they’ll say, “You can’t do that” because it allows them to maintain their position of authority over you. Think about it. If this person were to say, “Gee, I’m not sure” or “I don’t know anything about it” or “I’ve never done it, so I’m not sure,” they would give up their position of authority over you. In fact, they’d come down to “your level” and really be more like a peer than an authority.So why do they feed you BS? It’s because their ego is so fragile that the mere thought of you knowing they don’t know the answer and maybe aren’t as smart or experienced as you thought, is overwhelming to them.
Their desire to be seen as the brilliant authority overrides their desire to be honest and humble. You know what I mean? I see this as a low brow form of manipulation and trickery. Is it dishonest? Yes. Is it pathetic? Abso-danglutely! Look out! They are everywhere… There are people all around you who are like this, to the core, and who will happily ruin your day or worse–steal your dream, if you let them. They come in all shapes and sizes with all sorts of backgrounds and professions. They’re all around you, all the time–family, and friends included! Your ability to succeed in anything will come, in large part, from your ability to take this in stride and tune it out! So, anytime you hear the word “No” or “You can’t do that” or “That’s illegal” or “I tried that, and it doesn’t work,” I strongly suggest you doubt what you’re hearing and insist on drawing your own conclusions.
Otherwise, you’re doomed! There has never been a better time! I’ve been in the business of buying and selling real estate for more than 16 years now, and I’ve seen up, down, and sideways markets. I’ve bought and sold all kinds of properties. Heck, I have four under contract now. I’ve made (and continue to make) a killing doing it in spite of the dream stealers in my world. You can too! I say there has never been a better time to make a fortune in real estate than right now, and YOU deserve to be part of it and to get your share. You are worthy of wealth, happiness, and what every your definition of success may be! Anyone who tells you otherwise simply wants to steal your dream. Don’t let the dream stealers get you!
This article is reprinted here with permission from Creative Real Estate Online at http://www.creonline.com/articles/art-385.html
About the author:
Cameron Dunlap has been a full-time real estate investor since 1993 and a nationally known real estate trainer since 1995. Within his first two years in the business he amassed millions of dollars of residential and apartment complex properties in addition to buying and selling real estate, particularly foreclosures, for quick cash profits. Cam is known as the Transaction Technician because of his skill in using almost every creative technique in purchasing & selling real estate which has made him a fortune. He continues to invest in full time, teach his techniques all over the US, and run several other very successful companies. He defines the entrepreneurial spirit every day and truly enjoys the fruits of his success.
W hile this is not strictly a legislative issue, I was asked during a REAPS function an interesting question about short sales. The question was whether an investor who proposes a short sale to a lender, having ?in pocket? an end buyer who will pay higher than
the short sale price has a claim for damages for tortuous interference against that end buyer if the buyer himself approaches the bank and offers to buy for more than the investor has proposed to the lender but less than the investor proposed to the end buyer. At the time I said I believed that whether such a claim exists would involve the nature of the contract that the investor had with the
seller, and would recognize the very contingent nature of that contract. That is, whether the sale ever will occur depends on the bank agrees that the proposed short sale price is the best available on the market with the property in its current condition.
I have looked into this to determine whether courts have considered this question, and the answer that in Washington at least, no reported court decision has dealt with this issue. However several cases have discussed the subject of intentional interference with a business expectancy and these can be helpful in evaluating what the court would likely do with a case that raised this issue. The courts have generally said that someone who has a business expectancy can sue for damages if someone else intentionally interferes with that expectancy and causes damages as a result of that interference, unless the interference is ?privileged.? So simply having a contract with a seller and showing that the end buyer has interfered with that contract is not enough to result in a damage award. The investor must also show that the interference actually caused the damage and that the interference was not ?privileged.
The causation part of the case may be a problem for the investor because it depends on proving that but for the interference, the bank would have agreed to the short sale and that the same end buyer would then have paid the investor the resale price the investor had demanded. There are most certainly going to be proof problems on these points.
In addition the end buyer defendant will probably be able to show that the interference was ?privileged. Privilege in this sense means that the law has some policy that actually allows or encourages the type of interference involved in a particular case. Here, the investor is trying to make a profit by buying at a low price that he has claimed to the bank is the fair market value of the property, while knowing that he will be able to sell to a specific end buyer at a higher price. The end buyer will probably argue that it is a social benefit that banks not be misled on the question of the fair market value of properties they accept for short sales. The end buyer will also point out that the interference actually resulted or could result in a smaller loss to society in terms of the
amount of the loan of the seller that is not repaid. This type of argument would likely be considered favorably by the court. I think it is likely that the court would also take into consideration the fact that the contract between the investor and seller will result in exactly the same result for the seller as having the bank agree to accept the proposal of the end buyer, namely that the seller receives nothing of value except release from the obligation to the lender. In this article I specifically do not consider whether the
investor in this case is under the requirements of the distressed home consultant law.
Article by: Doug Owens
One of the cardinal rules of Power Negotiating is that you should ask the other side for more than you expect to get. Henry Kissinger went so far as to say, “effectiveness at the conference table depends upon overstating one’s demands.”
Think of some reasons why you should do this:
- Why should you ask the store for a bigger discount than you think you have a chance of getting?
- Why should you ask your boss for an executive suite although you think you’ll be lucky to get a private office?
- If you’re applying for a job, why should you ask for more money and benefits than you think they’ll give you?
- If you’re dissatisfied with a meal in a restaurant, why should you ask the captain to cancel the entire bill, even though you think they will take off only the charge for the offending item?
- If you’re a salesperson: Why, if you are convinced that the buyer wants to spread the business around should you still ask for it all?
- Why should you ask for full list price even if you know it’s higher than the buyer is paying now?
- Why should you ask the other person to invest in the top of the line even when you’re convinced they’re so budget conscious that they’ll never spend that much?
- Why should you assume that they’d want to buy your extended service warranty even though you know they’ve never done that in the past?
If you thought about this, you probably came up with a few good reasons to ask for more than you expect to get. The obvious answer is that it gives you some negotiating room. If you’re selling, you can always come down, but you can never go up on price. If you’re buying, you can always go up, but you can never come down. What you should be asking for is your MPP-your maximum plausible position. This is the most that you can ask for and still have the other side see some plausibility in your position.
The less you know about the other side, the higher your initial position should be, for two reasons:
1. You may be off in your assumptions. If you don’t know the other person or his needs well, he may be willing to pay more than you think. If he’s selling, he may be willing to take far less than you think.
2. If this is a new relationship, you will appear much more cooperative if you’re able to make larger concessions. The better you know the other person and his needs, the more you can modify your position. Conversely, if the other side doesn’t know you, their initial demands may be more outrageous.
If you’re asking for far more than your maximum plausible position, imply some flexibility. If your initial position seems outrageous to the other person and your attitude is “take it or leave it,” you may not even get the negotiations started. The other person’s response may simply be, “Then we don’t have anything to talk about.” You can get away with an outrageous opening position if you imply some flexibility.
If you’re buying real estate directly from the seller, you might say, “I realize that you’re asking $200,000 for the property and based on everything you know that may seem like a fair price to you. So perhaps you know something that I don’t know, but based on all the research that I’ve done, it seems to me that we should be talking something closer to $160,000.” At that the seller may be thinking, “That’s ridiculous. I’ll never sell it for that, but he does seem to be sincere, so what do I have to lose if I spend some time negotiating with him, just to see how high I can get him to go?”
If you’re a salesperson you might say to the buyer, “We may be able to modify this position once we know your needs more precisely, but based on what we know so far about the quantities you’d be ordering, the quality of the packaging and not needing just-in-time inventory, our best price would be in the region of $2.25 per widget.” At that the other person will probably be thinking, “That’s outrageous, but there does seem to be some flexibility there, so I think I’ll invest some time negotiating with her and see how low I can get her to go.”
Unless you’re already an experienced negotiator, here’s the problem you will have with this. Your real MPP is probably much higher than you think it is. We all fear being ridiculed by the other. So, we’re all reluctant to take a position that will cause the other person to laugh at us or put us down. Because of this intimidation, you will probably feel like modifying your MPP to the point where you’re asking for less than the maximum amount that the other person would think is plausible.
Another reason for asking for more than you expect to get will be obvious to you if you’re a positive thinker: You might just get it. You don’t know how the universe is aligned that day. Perhaps your patron saint is leaning over a cloud looking down at you and thinking, “Wow, look at that nice person. She’s been working so hard for so long now, let’s just give her a break.” So you might just get what you ask for and the only way you’ll find out is to ask for it.
In addition, asking for more than you expect to get increases the perceived value of what you are offering. If you’re applying for a job and asking for more money than you expect to get, you implant in the personnel director’s mind the thought that you are worth that much. If you’re selling a car and asking for more than you expect to get, it positions the buyer into believing that the car is worth more. Another advantage of asking for more than you expect to get is that it prevents the negotiation from deadlocking. Take a look at the Persian Gulf War. What were we asking Saddam Hussein to do? (Perhaps asking is not exactly the right word.)
President George Bush, in his state of the Union address used a beautiful piece of alliteration, probably written by Peggy Noonan, to describe our opening negotiating position. He said, “I’m not bragging, I’m not bluffing and I’m not bullying. There are three things this man has to do. He has to get out of Kuwait. He has to restore the legitimate government of Kuwait (don’t do what the Soviets did in Afghanistan and install a puppet government). And he has to make reparations for the damage that he’s done.” That was a very clear and precise opening negotiating position. The problem was that this was also our bottom line. It was also the least for which we were prepared to settle. No wonder the situation deadlocked. It had to deadlock because we didn’t give Saddam Hussein room to have a win.
If we’d have said, “Okay. We want you and all your cronies exiled. We want a non-Arab neutral government installed in Baghdad. We want United Nations supervision of the removal of all military equipment. In addition, we want you out of Kuwait, the legitimate
Kuwaiti government restored and reparation for the damages that you did.” Then we could have gotten what we wanted and still given Saddam Hussein a win. I know what you’re thinking. You’re thinking, “Roger, Saddam Hussein was not on my Christmas card list last year. He’s not the kind of guy I want to give a win to.” I agree with that. However, it creates a problem in negotiation. It creates deadlocks.
From the Persian Gulf scenario, you could draw one of two conclusions. The first (and this is what Ross Perot
might say) is that our State Department negotiators are complete, blithering idiots. What’s the second possibility? Right. That this was a situation where we wanted to create a deadlock, because it served our purpose. We had absolutely no intention of settling for just the three things that George Bush demanded in his state of the Union address.
General Schwarzkopf in his biography It Doesn’t Take a Hero said, “The minute we got there, we understood that anything less than a military victory was a defeat for the United States.” We couldn’t let Saddam Hussein pull 600,000 troops back across the border, leaving us wondering when he would choose to do it again. We had to have a reason to go in and take care of him militarily.
So, that was a situation where it served our purpose to create a deadlock. What concerns me is that when you’re involved in a negotiation, you are inadvertently creating deadlocks, because you don’t have the courage to ask for more than you expect to get.
A final reason – and it’s the reason Power Negotiators say that you should ask for more than you expect to get – is that it’s the only way you can create a climate where the other person feels that he or she won. If you go in with your best offer up front, there’s no way that you can negotiate with the other side and leave them feeling that they won. These are the inexperienced negotiators always wanting to start with their best offer. This is the job applicant who is thinking, “This is a tight job market and if I ask for too much money, they won’t even consider me.” This is the person who’s selling a house or a car and thinking, “If I ask too much, they’ll just laugh at me.”
This is the salesperson who is saying to her sales manager, “I’m going out on this big proposal today, and I know that it’s going to be competitive. I know that they’re getting bids from people all over town. Let me cut the price up front or we won’t stand a chance of getting the order.”
Power Negotiators know the value of asking for more than you expect to get. It’s the only way that you can create
a climate in which the other side feels that he or she won. Let’s recap the five reasons for asking for more than you expect to get:
1. You might just get it.
2. It gives you some negotiating room.
3. It raises the perceived value of what you’re offering.
4. It prevents the negotiation from deadlocking.
5. It creates a climate in which the other side feels that he or she won.
In highly publicized negotiations, such as when the football players or airline pilots go on strike, the initial demands that both sides make are absolutely outlandish. I remember being involved in a union negotiation where the initial demands were unbelievably outrageous. The union’s demand was to triple the employees’ wages. The company’s opening was to make it an open shop-in other
words, a voluntary union that would effectively destroy the union’s power at that location.
Power Negotiators know that the initial demands in these types of negotiations are always extreme, however, so they don’t let it bother them. Power Negotiators know that as the negotiations progress, they will work their way toward the middle where they will find a solution that both sides can accept. Then they can both call a press conference and announce that they won in the negotiations.
An attorney friend of mine, John Broadfoot from Amarillo, Texas, tested this theory for me. He was representing a buyer of a piece of real estate, and even though he had a good deal worked out, he thought, “I’ll see how Roger’s rule of ‘Asking for More Than You Expect to Get,’ works.” So, he dreamt up 23 paragraphs of requests to make of the seller. Some of them were absolutely ridiculous. He felt sure that at least half of them would be thrown out right away. To his amazement, he found that the seller of the property took strong objection to only one of the sentences in one of the paragraphs.
Even then John, as I had taught him, didn’t give in right away. He held out for a couple of days before he finally and reluctantly conceded. Although he had given away only one sentence in 23 paragraphs of requests, the seller still felt that he had won in the negotiation. So always leave some room to let the other person have a win. Power Negotiators always ask for more than they expect to get.
About the author:
Roger Dawson is a professional speaker and the author of two of best selling books on negotiating: Secrets of Power Negotiating and Secrets of Power Negotiating for Salespeople, both published by Career Press. Roger Dawson was inducted into the Speaker Hall of Fame in 1991.