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Property Invest Operating Budget Confrontation
By eric | November 14, 2007
This doesn’t have to be difficult, but you do eventually have to reveal to the seller your findings on the property. And you’ll need to do this before the end of clue diligence or the property is yours, warts and all, as the saying goes.
It’s all in the presentation. You can ram your findings down the seller’s throat, plant your feet in the sand, and say, “Take it or leave it.” Better yet, take a tactful, matter-of fact approach that attacks neither the property nor the seller’s ego. It is a discussion about the numbers, not about the seller’s or the buyer’s honesty and integrity. It’s a direct conversation about the numbers where everything is out on the table and there are no underlying motives.
There are times, yes, when there can be blatant seller cover-ups. But in most instances, as was my experience with our Portland project, the seller has no idea how much money is needed for repairs or maintenance, for instance. You are the bearer of that news, so it is in your best interest to do it professionally, truthfully, and with documentation.
The property plan process and your professionalism can help you avoid the swift kick out the door, and best of all, help you create a win-win final property negotiation. After all, you should not be trying for the win-lose scenario. You never want to burn bridges in this business. Your seller today could be your buyer tomorrow or even lead you to your next deal. I’ve had plenty of instances where a seller on one deal has turned into an investor on another deal or a seller on another building. I never lose sight of the fact that this is a relationship business.
Here is a short reference list of findings I’ve had to confront sellers with in the past; you may find yourself in the same position:
- Vacant units listed as occupied on the rent roll.
- Notices to vacate or unreported future vacancies.
- Poor resident profiles with high credit risk that could create future vacancy.
- Missing appliances, carpet, and so forth-somebody has to pay for this.
- High maintenance expenses required to get the units in rent-ready condition.
- Pest control issues, including termites, scorpions, roaches, and pigeons.
- Non-cancelable service contracts that add expense to your operating budget and affect your cash flow.
- Utility costs much higher than the previous year.
- Prior insurance loss at the property that affects the cost of future insurance.
- Property tax higher than disclosed.
- Violation notices from the city.
- Fire code violations.
- Environmental problems.
Moving Forward
The operating budget is the last big test of a property’s worthiness. If the operating budget calculations look good for the first year and you project that you will make enough money to achieve your goal, you are ready to move forward and take ownership of the property. Remember, you will likely be adjusting the offer price slightly to account for any repairs, upkeep, improvements, or other costs you may have discovered during due diligence. Present your numbers and your rationale to the seller and finish the deal.
It was a long time coming, from initial market evaluation, to property search, to selection, to property evaluation, and finally to developing an operating budget. You will soon be the proud owner of investment rental property. Now the thrill of ownership begins. It’s time to execute your plan to improve the property and maximize its cash flow. That is the subject of our next chapter.
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