I was looking at a deal recently where the numbers just didn't add up. For me it was time to move on and keep looking.
However, there was good upside on this property and could still be worth looking at depending on whether you could get the vendor's head out of the clouds and back into reality.
The problem is that those who do not have a good understanding of commercial property will think that they bought the property for price x and they automatically think that they can get x plus standard growth back when they sell it.
Sometimes this is just not the case.
My feeling was that the vendor had had paid too much for the property, and now was trying to get his money back.
When you look at the cap rates in the area, the agents stated yield of around 4% was way below what it should have been.
I see this all the time, and there are two ways to deal with it as an investor.
1 – You can simply walk away. Or…
2 – You can make them an offer that on the actual value of the property based on the cap rates in the area and what you are prepared to spend.
This is not the same thing as just making a low-ball offer. This is doing your due diligence and taking these figures to the vendor so you can show him what his property is worth.
If the cap rates in the area are around 8% then you can see that his valuation of a 4% yield is seriously over valuing the property.
In the words of that bloke in The Castle – “Tell Him He's Dreamin'”
But knowing the cap rates in the area means that you can go to the vendor and say, look here's what I think the property is really worth in today's market and here's why. You can prove the current market value.
Of course, he can stay in fantasy land and reject the offer, but the chances are, in the case of this property at least, that he's going to be waiting a long time to sell it.
Or he can accept your valuation and your offer.
One of my students was looking at a strip of 5 shops in Hobart a while back. The property was listed at $750k, and she was told that there was no way on “God's green earth” that the vendor would accept a single cent less.
It was, like the property above, overvalued for the area.
I was able to help her get the numbers straight and because you can't argue with the numbers, the vendor, who wanted the property sold, accepted around $90k less than the listed price.
He won't accept a single cent less, but he will accept $90,000 less!
That's the power of knowing your numbers and having some negotiation skills.
Some vendors are always going to stay in fantasy land and see the value of their property with some rose coloured glasses but most will see the numbers are the cold hard facts that they are.
Going back to the property I was looking at, there was certainly scope for this type of negotiation and given that there was some possible upside in the property it may have been worth it if you could get it for the right price.
If you can't get it for a price that's going to make your numbers work then, you need to revert to strategy 1 and walk away.
Good deals come up all the time if you know what to look for so, as I often say, “you've got to have ice water in your veins”.
You're not a Mum and Dad Investor, you're not getting emotionally attached to some house you wish you could live in. It's not a prize or a trophy house for your portfolio… it's just a numbers driven asset.
They either work or they don't. It's black and white. It's cut and dry… and therein lies the beauty of Commercial.