Dean Dretske » Commercial

D3TV – Reluctant Negotiating

Dean Dretske — Wed, 30 Jun 2010 19:30:39 +0000

Negotiating as the more reluctant party is a powerful strategy for getting what you want.

As real estate investors, it is easy to be chasing the other party. They are reluctant and this puts us to a disadvantage.

I talk to a lot of people who want to sell their houses. Some of them are motivated to sell and some are curious about what they can get. I only have so much time and money available, so I need to focus my efforts on those that are truly motivated.

I realize now that putting myself in the reluctant position is way to filter out the simply curious. If I take a moment in our conversation to explain a bit about my business model and then ask the seller how their house will fit in that model, then the sellers filter themselves. The motivated will work with me to make it work. The curious will not play.

In my case, I buy houses to rehab/flip or rent. I explain to the seller that I can’t buy at retail prices – I need to fix the house and then sell it and still make money. I also tell them that if I have to give them cash up front, then my costs are higher and I will not be able to pay them as much. I can pay more if I get to make payments over time – either seller financing or delayed payment. Then I ask them how they can adjust to make this work for both of us.

They need to convince me. The simply curious do not care about any of this. They just want their price or they want me to just make an offer. The motivated understand that solving their problem is going to require them to work with me to come up with a solution.

Have you had a similar experience?

Updated Properties

Dean Dretske — Tue, 22 Jun 2010 23:23:15 +0000

Just wanted to let you know that the active properties page over at RealEstateForFunAndProfit.com got updated. There are some great deals there!

Commercial Lenders Troubles Can Be Your Gain

Dean Dretske — Mon, 29 Mar 2010 22:47:42 +0000

The March 28 issue of BusinessWeek had a story reports

“You’re going to continue to see smaller institutions fail because they have no access to capital and they have too much concentration in residential construction and commercial real estate,” said Paul J. Miller, an analyst at FBR Capital Markets in Arlington, Virginia.

U.S. lenders are collapsing at the fastest pace in 17 years amid losses on loans made at the height of the market. The number of banks on the FDIC’s “problem” list climbed to the highest level since 1992 in the fourth quarter. FDIC Chairman Sheila Bair said on Feb. 23 that the pace of failures will exceed last year’s total of 140.

The latest closings will drain $320.3 million from the FDIC’s deposit insurance fund, the agency said. The FDIC and the four banks acquiring the shut-down lenders agreed to share losses on $870.9 million of assets

I recently had a discussion with a commercial loan broker about this. He indicated that the bank examiners are ‘reclassifying’ existing commercial loans and causing the banks to ‘get rid’ of some of their performing loans. They are ‘encouraged’ to not issue new commercial loans until after they have ‘cleaned up their books’. It sounded like this was happening at every commercial bank.

I am not sure how anybody expects every bank to force some of their customers to refinance when no bank is allowed to issue new loans. Duh!

Now the good news here, for investors, is that there are and will be some great properties that need to be sold. Some of these sellers are going to be very motivated to clear their debt. This will take some creativity by the investor (and possibly some access to private lenders).

Parable of the Chrome-Plated Printing Press

Dean Dretske — Sat, 17 Oct 2009 08:02:55 +0000

There once was a kindly seller who wanted to sell his nice printing press. The printing press was chrome plated and everything, so it must be worth a LOT – let’s say $1,000,000 (why am I picking my teeth with my pinky :>).

One day, a cold hearted buyer came around and offered the kindly seller a measly $500,000. Oh, the insult! The outrage! The seller stomped his foot and rejected the offer. He even refused to talk to that buyer ever again.

When the buyer walked away, he was asked by the seller’s neighbor why he would insult the seller so. The buyer replied that although the printing press was very pretty, if he was going to spend $1M, he would rather buy the printing press in the next town. After all, that printing press could print twice as fast.

Okay, as a parable, it stinks. As a lesson in real estate, it is spot on. Let me explain in two arenas.

1. Residential real estate. Many agents can tell you that they have lived with this parable when they try to get a listing (or a price reduction). The market is loudly saying that the price of the house is X, but the seller wants more. Often for the reasons that they just spent $30K on new furniture, or their bold paint colors were the height of fashion 5 years ago, or they need $50K in profit so that they can buy a new car. None of these things matter to a buyer who can find another similar house for less. So what that it is ‘chrome plated’ – why is that a benefit to the buyer and why would they pay more for that?

2. Commercial real estate. In many ways, commercial real estate is just like a printing press. The buyer is looking to buy a cash flow that will take no more work than a similar investment. Sellers in the commercial arena often talk about potential rents or ability to expand as reasons to pay them more for their properties. Why is the buyer going to pay the seller for work that the buyer will need to perform? If the buyer needs to raise the rents, and suffer the turnover that may happen, then why should the seller get more money? Likewise, if the buyer is going to have to build new buildings to expand, or change the zoning to allow expansion, then why should the seller receive more money? This would only make sense if this property is unique in its ability to expand or receive more rent. How often is that the case?

Say you have the ability to pay up to $1M for a commercial property. You look around and find 2 that appeal to you. One of these properties has a cash flow of $10,000 per month and the other property has a cash flow of $5000. Which one would you buy? If the second property owner told you that you could increase the rents or that there is room to expand the buildings (you will need to spend more money to do this) and that you should be able to get the cash flow up to the $10,000/month range, then would you change your mind about which one to buy?

Dean Dretske » Commercial

D3TV – Reluctant Negotiating

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Parable of the Chrome-Plated Printing Press