Negotiating The Offer - First Development
The Offer
We received our first offer. Finally! The person found out about our property through one of our metropolitan area newspaper advertisements. The property was originally listed for $2.375 million. The offer came in at $2.1 million. This was an 11.6% discount from list. What would you do?
This was where the negotiating gets interesting. The property was costing us $11,000 per month in interest costs. The previous post went through the math where we calculated a potential buyer who actually understood all the costs would have to spend approximately $2,192,000 to build it themselves ignoring the aggravation of going through the actual building process. However, it took us a long time to get this first offer and we didn’t want to let them get away.
After a long debate with my partner, we countered with $2.3 million and included a long list of costs and upgrades for which the buyer may not have been aware. It was a tense day waiting to hear back from the buyer. When we did, they had upped their offer to $2.2 million. This number would cover our costs, pay us back our equity and allow us to make some profit. My partner and I had one heck of a debate on whether to take this offer or counter and risk losing the only buyer we had seen to date.
These were real dollars. Sometimes you can get lost in the big numbers, but the difference between $2.2 million and $2.1 million is a $100,000! That is a lot of money either in or out of your pocket. We went back with a $2.275 million counter. The wait for the potential buyer’s response was killing us. A day later they came back with a $2.25 million best and final. As a condition of this offer, they also wanted a number of items changed or added. We estimated the actual cost to us of that work as under $10,000. We had a deal at $2.25 million! This was 94.7% of asking price. At the time, this was the highest selling house ever built on speculation on that lake.
Financial Results
So how did we do with this first development? After all the costs were calculated and the corporation dissolved and our equity paid back, we made a total before tax profit of $260,143.89 on the property that was split between the two partners. This was on an investment of $67,000 in equity. Was it worth the risk? I’ll let you decide. I would actually be interested in hearing your comments.
My next series of posts will discuss my second investment, which was in a triple-net commercial property.
Just stumbled across your blog. You’re to be commended for your openness and honesty. Not only that, but the style and prose are easy to read and the story is truly interesting.
As a broker who negotiates at this level on most of our deals, you hit the number that logically would have been reached given their starting offer. The questions I have are : is it cash? if not, will you be able to comp the property, since it’s the biggest sale on the lake and given the nature of today’s market?
And was the offering party represented by a broker? Just curious.
Tim,
Appreciate the comments and hope you come back. I will be starting on my second development storyline shortly. To answer your questions:
The offer was cash to us. The buyer took out a $1 million mortgage with a bank and paid the balance in cash.
This was done just prior to the bubble and we didn’t have a problem with the comps, although at the time all were adjusted up for various factors. Since then, there have been a couple of bigger speculative deals done. The appraised value was quite a bit higher than the selling price despite not needing that high of an appraisal to make the mortgage work.
The offering party was represented by a broker.