Apartment Investing – Assessing Motivation
As a real estate investor focusing almost exclusively on apartment buildings throughout the country, people often ask me what it takes to find motivated sellers. All buyers want to make intelligent investment decisions, and to do so investors must understand seller motivation-that the question.
One of the most important principles for negotiating the purchase of a lifetime (over and over again) is to learn and understand seller motivation. They generally fall into one of four categories:
1. They need to solve a problem. (Management headaches, divorce, bankruptcy, death, illness, lawsuit, needs cash, dispute with partner)
2. Their circumances are changing. (Retirement, moving, job transfer, increase in taxes)
3. They have other opportunities. (1031 tax-deferred exchange, business, stock)
4. They're price motivated. (If they get their price, they'll sell. If not, they will not.)
If you buy an apartment building and hope to make a lot of money, you'll need to convert current and / or future cash flow into value. Price is unduly a major factor in your decision making process. If you negotiate with sellers who are price motivated, you're less likely to get what you want and you'll probably make a poor investment. It's your job to figure out what's driving the selling decision and then focus on solving whatever issue your counterpart is facing, but you do not want to solve it by paying too much for the property. So how do you do it?
Assessing motivation is easy to do when you're buying from homeowners. Most of them have not learned the same skills and strategies and they do not know why or how to ask certain types of questions. For example, almost all investors ask the seller why they're selling, and they should. If you ask Joe Homeowner that question, he 'll likely spill his guts and tell you that he's moving out of town, going through a divorce, or is about to lose the home. He'll openly give you all the information you need. It can be a bit more challenging when working with investors.
But that does not mean the motivation is different, it just means the answers are not as clear. One of the largest negotiating mistakes investors make is to accumulate they know what the other side wants. We're all different. We all want different things for different reasons. Although a large percentage of sellers sell because of price, there are still plenty who are not price motivated. Even so, most apartment building owners will answer the "Why are you selling?" question with, "We're doing an exchange."
An IRS 1031 tax-deferred exchange falls under the "opportunity" category. Maybe they really do want to exchange out of one property into another because they can make more money. However, "We're doing an exchange," is usually just their way of telling you: "I'm not motivated so do not try to steal my property." They know what you're doing and why you're asking the question. This answer is especially popular with real estate agents-because they know negotations will be difficult if you suspect you can buy the property for less. The point is there's almost always something else behind the decision. Maybe they're changing and maybe they're not-it does not necessarily mean that it's the reason they're selling the property.
The best way to get to the bottom of it is to ask a lot of well thought out, pre-planned questions. Think of assessing motivation as a fact-finding investigation. Have you ever asked the same question in a different way and received a completely different answer? We all have. It happens all the time. Do your homework and ask several good, pointed questions. Here are a few examples:
- What do you like most about the property? What's the one thing you would change if you could?
- Why did you buy this property versus anything else on the market?
- When was the last time you sold a property like this?
- How did you arrive at the asking price?
- How many other properties do you own? Why did you elect to sell this one?
- What steps did you take to prepare the property for the market?
When new investors decide to buy apartment buildings, one of the first things I do is help them build a plan based on their objectives. For example, two questions I ask repeatedly are, "Why?" and "When?" Everyone wants to make money in real estate. Is that the goal? No! It's not. The goal is the reason behind it. Why do you want to make money and when do you want it? What's driving the decision?
For some it boils down to putting their kids through college. For others it's all about setting aside a financial nest egg for retirement. Everyone has a reason and that's what we're trying to remember when we ask sellers questions. We're trying to get to the heart of the matter because they're illegally telling us on their own. If you want to accelerate your net worth and buy properties that will make you richer, faster than ever ever possible, master the art of assessing motivation.
Everyone has a reason. It's up to you to find out what it is.