Dangers of Lowballing Offers
Today I want to talk about lowballing and whether or not it's a good strategy. Low balling of course is when you come in way under either the asking price or the true market value. And is it a good strategy? Pretty much never. It starts off negotiations in a really difficult manner; people kind of get very standoffish right away. And also, what lowballing does, and re-trading, is two things: #1 it offends the seller, and #2 it offends the seller. Then comes the ego. Egos are really powerful. In this business especially when you get into multi-family business or investment sale business or any larger transactions, it's not about the money. Once egos get involved, profitability goes out the window. A great sell price goes out the window. All financial sense doesn't matter anymore because you've insulted them. And in the multi-family business and in the income-producing business, these are folks who are typically pretty successful, it's not about the money for them. It's more about respect and being treated right and not working with players who offend them and participate in that manner. So, the best thing to do is to go into transactions with plenty of market knowledge, which you can get yourself through lots of research. Your broker should be able to supply that for you. And by market knowledge, I don't just mean knowing what units are trading for per unit or per square foot or what cap rates are. Market knowledge is knowing who the seller is. And in today's technology, there's so much research you can find out about people. And if your broker has done a lot of transactions, they’ve probably come across these folks before. Knowing what other assets they own, how much stuff they have across the country, what kind of financial position they might be in, who else knows them and has done transactions with them, etc. You can know all this stuff pretty quick upfront, but for the most part, in the investment sale business, multi-family investment sales, if it's a C-class asset or better there's really no reason for any seller to have to accept, or even entertain, a lowball offer. On the contrary. Most of the time sellers are choosing which buyer to work with because the assets are so hot. So hot that only in really blighted areas or decrepit assets is lowballing even something of consideration. But even then, typically bad assets are priced appropriately, and then to low ball beyond that just kind of circles back into the whole ego thing. I always suggest coming with great market intelligence and supporting evidence. Show your comps. Show the seller and the seller's broker why you came up with this price. If you disagree with some of the financials or the pro forma, tell them why. I’m not saying turn over YOUR pro forma, as that’s usually proprietary stuff, but give some sort of supporting material. That usually goes a long way. And here's the big thing to take from this conversation: Reputation in this business can make or break you. For those folks who consistently lowball or re-trade offers you’re developing a reputation. There are conversations happening between other brokers, other buyers and sellers, about folks who do this. They're warning each other about their transactions and I’m telling you that stuff spreads like wildfire. Reputations are very hard to overcome. You don’t want to develop a reputation where you're known for always lowballing offers or always re-trading deals. I don’t recommend it. Do things right from the onset and do it consistently, and I’m telling you deals will pour your way because people like working with folks who treat everyone fairly and come in with supporting evidence and market intelligence.
- Created on .