When it comes to selling multifamily real estate, there are many important factors to consider, but pricing may arguably be at the top of the list. Unlike residential real estate, the multifamily market is driven by the income a property makes and the potential return it offers investors. Buyers have investment strategies and guidelines that allow them to quickly determine how much they can pay for a property based on how much rent the property brings in and/or how much it could potentially make. So, why is it so important to price your apartment building correctly?
By not pricing a property correctly, owners are opening themselves up to a number of disastrous headaches. In Los Angeles, the multifamily market is hot! Everyone wants a piece of the action. Rents keep on going up, vacancy levels are almost non-existent, and the LA market seems to be indestructible. Owners are aware of all the eager buyers out there and if they decide to sell, want to get every last dollar they can. No one blames an owner for wanting to maximize the sale price of their building, but we also have to remind ourselves that these buildings are investments and at some point, the returns for the investor just don't make sense.
The condition of the market has made it difficult for real estate agents to present owners with honest valuations that the owner is satisfied with. Many times agents will overprice properties, get the listing and throw it on the market to see what happens. This is where the trouble starts!
Investors are out there to make deals happen so when most properties seem to be overpriced they come up with ways to work around it. One of the most common techniques we see today is when investors make "full price" offers and get the deal under contract. Now, that they have "control" of the deal, meaning they are in escrow and the seller is not allowed to accept any other offers, they can really figure out how much the property is worth to them. The seller gets excited that they are in escrow at full price, but little do they know, the investor has 0 intention on closing at that price. So how does that happen you ask? It comes in the form of a "Price Credit". Buyers will run their due diligence, inspect the property, and when it comes time to remove their contingencies they will hit the seller with a request for a huge price reduction. Usually, they justify it by saying they the building has many more needed repairs than anticipated.
At this point, the seller has a decision to make. Either deny the request and put the property back on the market, counter back with a more reasonable credit, or accept the full price reduction. Any way you look at it this is extremely disappointing to the seller. They have wasted valuable time, lost out on other interested investors, disturbed their tenants with inspections, and had to provide all their personal due diligence items about the property. All to come back down to a price that makes sense for the investor.
This is why pricing the property correctly, in the beginning, is so paramount to a successful transaction. At the end of the day, investment properties sell at a price that investors can make sense of them. Pricing needs to be logical and fact driven. Expectations need to be real and laid out from the beginning. By pricing properties correctly everyone wins. Deals get done quicker and with much higher success rates. Sellers do not need to go down the torments of unsuccessful escrows which result in them selling at lower prices than if it was done correctly from the beginning.