On today’s show we’re talking about one of the most important questions when evaluating a potential project.
You’ve received the executive summary. The glossy pictures are great. The pro forma looks enticing.
If the project is so amazing, then why would the seller be selling? If it’s so great, why would you ever let go of such an amazing asset? Or maybe its not an amazing story and the seller clearly has a problem that they need help solving. Whatever the reason, the answer to this question affects two things.
- Your potential interest in the project at all.
- You approach in negotiation
So why are they selling?
Are they selling because the owner is in their 80’s and the kids don’t want to own it, and the owner is tired of being an active business owner?
Are they selling because the property is distressed and the owner doesn’t have the financial resources or resourcefulness to solve the problem on their own?
Are they simply trying to take some profit off the table to reposition their portfolio for the next downturn?
How motivated are they as a seller? Do they need to sell, or do they merely want to sell if the market delivers their price?
Now of course the seller might not be 100% truthful in the reason they give for selling. But it gives a clue as to how you might negotiate the purchase.
For example, if the seller is aging out of the market, but they still want the income from the property, there might be a case to be made for seller financing a portion of the asset. Seller financing, if properly structured can result in some tax deferral for the seller, and a continuing source of passive income for the seller without the hassle and responsibility of ownership. The seller may simply be tired of the active side of managing a business and want to spend some time on the beach with their grandchildren without having to check in on the property on a periodic basis.
If the seller is in a distressed situation, you can be helping the seller solve a problem. Often times, the property can be a good asset, but the seller is dealing with a problem elsewhere in their business. The sale of a performing asset can bring much needed cash to strengthen the balance sheet of a seller and solve a problem they may be facing elsewhere.
The seller may be on a fishing expedition and looking to see if they can get someone to offer them too much money. Maybe they’ve heard that properties are selling for high prices and want to use the opportunity to take some profit off the table on an opportunistic basis. If that’s the case, I can tell you that I won’t be the buyer, unless I see something in the property that the seller doesn’t. That would mean changing the property substantially to add significant value to it. Maybe it means demolishing what’s there and building something new. Perhaps it’s a land assembly with a property next door. There are so many different ways to add value to a property.
I make sure to ask the broker for the seller why the seller is selling. I then ask the same question directly of the seller. It’s amazing that sometimes that fundamental question gets answered two different ways, by the broker and by the seller.
There are so many answers to that simple question. Knowing the answer guides your interest in the property, and certainly guides the approach you’re going to take in the negotiation.