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I know these are harsh words but hear me out!
I recently had the pleasure to represent a buyer during the negotiation of their new investment property. The property had four residential units which were all occupied by tenants with the longest one, a sweet old lady, there for over 10 years. This information wasn’t disclosed on the listing nor were the rental amounts being charged to the tenants. I had to call and get the information from the listing agent who didn’t have all the expenses which we ended up estimating.
The property while not meticulously maintained was in good condition with average rents. The property hadn’t been upgraded since the late 80’s which meant mostly cosmetic upgrades would be required.
The property is listed at 5% cap rate which is a bit low for the part of downtown it’s located. I did our numbers and came to an agreement with the buyers that we should proceed with an offer at 5.5% cap. There was also consideration to the current condition of the property which would require update and included it in our cap calculations.
When doing any offer, we review what the circumstances surrounding the property are and base the conditions and terms of the offer according to it. I’ve touched a bit about what the circumstances are and prepped an offer as follows:
- Condition of due diligence to cover financing, lease review, inspection and tenant acknowledgement of their leases
- A warranty that the property has been leased in accordance with residential tendencies act
- A warranty that there are no outstanding disputes between the landlord and tenants relating to the maintenance of the property
This is the bare minimum that I would ask for a property that is currently leased and I don’t think it’s unreasonable… Do you?
I sent the offer to the listing agent who is less than thrilled to see a below asking price offer and suggest that we review our price because the sellers were expecting multiple offers at the list price and don’t want anything less than list. It’s important to note that the offer date has come and gone already and they didn’t get any offers! I’m a bit baffled at the statement about multiple offers but discussed it with my clients and get them to improve their offer price and sent in a revised offer. A part of me knew that this is going to be interesting as a story by Mark McLean goes over the different scenarios that usually get played out. The sign back, while not a surprise, did nothing but shock me!
- Full asking price
- No warranty of any sort
- No conditions at all
Needles to say, my client instructed me to not even call the agent back. It’s been 30 days since they listed and the property is still available.
Do sellers have this grand idea about how stupid buyers are that they will throw money at anything? I hope they will become reasonable and come back to the table with some sense.
As a buying agent, there are certain things that I can’t ask my clients to compromise on and due diligence on an investment property is right up there! You have to know who your tenants are going to be and if they are paying what the listing agent is telling you they are. Also, a lot of the lenders now ask for a confirmation of lease to be signed by tenants anytime they are forwarding funds for a new mortgage. Also, for a building that is older, I don’t see what a seller is objecting to having the property inspected. A lot of lenders today are asking for building inspection and engineering reports as well.
I wrote this post for two reasons
- Give you an idea about what to ask for when pursuing an offer
- To give you an idea of what you might be up against.
I haven’t found another property for my buyers yet and will be talking to the listing agent again to see if they want to be reasonable now. It’s a curse of a good market and low listings that we have to deal with; even when it means to sleep with people we hate!
Happy Friday!
Great story. Thanks for the shout out too. Boggles the mind how some agents and owners behave. clients should be grateful to have US on their side. Keep on blogging in the free world!
I agree with you, however, I know there are many property owners in Toronto that do renovations without getting permits (very common) and may not want an inspection done for that reason. Or another situation is where properties have other issues where traditional bank lenders won’t go near them with a ten foot pole. These property owners typicaly have private lenders and the properties are great investments for the sophisticated investor but may appear to be “risky” to the investor who wants to do everything by the book.
I agree and that’s the reason we need to have inspections completed.
Thanks for sharing your thoughts!