We’ve had an uptick in people reaching out to us to make an offer on our properties. The first question we’re asked is the purchase price. Then if we’d seller finance, what down payment we’d need, how long we’d finance for, and at what rate. Also, how long we’d allow for closing, how much earnest money is needed (and what % of that EM is non refundable and when).

I had been trying to explain how when you’re making an offer on a property, pulling one lever in your favor may result in another lever moving out of your favor. I tried to think of a good analogy to explain this and I think I found one: Role Playing Games.

In most Role Playing Games, you have a few main stats you get to pick from. More of one = less of another. In old school RPGs, there were three main classes, each with their points put into mostly one of 3 categories.

Wizard: Mostly intelligence
Rouge: Mostly dexterity
Warrior: Mostly strength

Or you could build your own class. You could try to spread your points evenly and be okay at everything, but great at nothing. Or go all in on one item, and be terrible at the other two. Or maybe split between two of them and be pretty good at those, but terrible at the 3rd.

Buying properties is really no different. Roughly speaking there are really two main items to spend your points in: Price and non-price terms. However, for the sake of this post, let’s try to split the non price terms up a bit more. Something like:

Price
Closing speed & Earnest Money
Loan terms (assuming seller financing)

Now obviously these could be broken up much more. For example, on earnest money: You have the total amount, but how much of that is non refundable? And how long before the non refundable portion becomes non refundable. Do you have 60 days to close with 30 being your due diligence period (aka feasibility period) where EM is typically refundable, then 30 days after to close? Or is it 15 days DD + 45 days after to close? or 45+15?

When it comes to loan terms, those could be broken down into many different sub parts: How much down? What’s the rate? How long? Is it I/O? can there be an extension? Does the rate go up with the length of time?

Now let’s say you give someone 100 points to assign wherever they want, based on what’s most important to them. Almost everyone is going to say “Price. Price is what’s most important“. Okay, so what does assigning 100 points to price look like:

You get the best price possible (Sweet!). But that also means you go to the seller, tell them you need no information, no due diligence period, buying as-is/where-is, and you’re sending a wire to the title company for the full purchase amount and are ready to close as soon as title is ready.

okay, whoa whoa whoa… Maybe we don’t put all our points into price. I’d like some time to check things out, and if things are not what I expected, I want to be able to bail on the deal with as little earnest money as possible. Sure, no problem. But that price won’t be the same as if you put all the points into price.

So what’s the “Best” way to distribute your points? There is no right or wrong answer. It all depends on what’s most important to you. It’s like asking what’s the best way to distribute your points into your RPG character.

So why am I writing this (or better question: Why are you reading it? :). Well, we’ve had some people reach out to us asking to buy some of our properties via seller financing. During the process, I’ve had a lot of conversations about what the price could look like if some other changes were made. I’ve tried to explain that every change in one direction, changes another. So to save my voice (and fingers), I’m going to write down some of the main things someone can spend points on, assuming a seller finance deal (then I can just link this page). If you’re making an offer (to us, or anyone), take a look at this list, and try to decide where you want your points when you make an offer:

Price
Earnest money amount
Earnest money hard day 1
Due diligence period
Total time needed to close
Amount being put down
Length of loan term
Other loan terms (rate, I/O, etc)
Amount of documentation / DD needed

“Well Mr. Fat Property Smarty Pants, what do YOU do? Where do YOU spend your points?”
First, thank you for calling me smart. I appreciate it. Since you’re using flattery, I’ll tell you what I do (as a part time crazy person): Since we focus on one submarket (Houston Texas), and within that submarket an even narrower niche (multifamily, mostly inside the loop), we can very easily value deals without needing a lot of due diligence from the seller. We can proforma and come up with what we’ll expect to see, and know that after 12 months of operations, our proforma will be more accurate than whatever T12 (backwards looking by nature) we get from the seller. Why is this? Well we know my own management cost, so what his costs to manage is not important to us. We know what my insurance cost will be, so what he was paying isn’t important to us. We know what our average utility bills will be. Property tax is online. General maintenance is pretty predictable given the asset type on a per unit/year basis. Having a current Rent Roll is the one thing that can be helpful, but even without it, understanding what a 1 bed would rent for in a particular building can be estimated to within a single digit of accuracy (though having a rent roll will often tell you quite a bit about how upgraded the units are by seeing what the rents are vs. what they ‘should’ be in the area. If we have building near by in “B” condition and it rents for $1k/month/unit and they’re getting $800/month, we assume theirs is a bit worse than ours… And the opposite if they are getting $1,200/month). Also what if the NOI is low due to low occupancy due to a burnt out owner. We don’t need to carry those same historals with us.. I could go on and on but you get the point.

Okay, so where do we put our points when looking to buy? Almost all price. That means we give up the option for due diligence time. Give up the option to get financing (due to aggressive closing timing). And basically approach a seller (or their broker) and just say “let’s close”. When making an offer, we’re typically not the highest in price, but may get picked due to speed and assurity of close.

Once we close I’ll wrap my arms around the property, get things running smoothly and integrated into our system. Then, we’ll finance the deal with our bank without the pressure of needing them to be done in time for a closing date (bonus: Often times a bank will do a refinance based on the VALUE, and not the PURCHASE PRICE. Where as when financing a purchase, they’ll almost always finance x% of the value or purchase price — whatever is less. So there has been times we’ll buy a property for $x, it appraises for $x+y, we get a z% LTV based on $x+y and my loan amount has a far higher leverage than if we were to have financed the purchase. Putting us in a better cash position to rince-wash-repeat for the next deal)

FYI, legal disclosure, etc. etc. This isn’t something we advise for everyone, but it’s worked for us. And obviously we can’t do it on every deal. Some deals are just too big to get without financing. So on those deals we have to take away some price points and spend time on getting more time to close. But we keep most of our points in price by not spending them on having refundable earnest money.

“Have you ever been burned by doing this?” Eh, not really (maybe scalded). Though there are times we’ve bought property and saw that a few units were down, and needed more work than estimated. But that doesn’t significantly change the deal. And the cost to fix was easily baked into the lower price achieved. So on the whole this has worked for us. It’s allowed us to have a portfolio at a lower cost basis than others. It’s allowed us to keep leverage low as a % of value, while having it be higher as a % of purchase. Which is important given we don’t take outside investor money or partners.

Hope this helps! Now if you’ll excuse me I’m going to fire up my xbox, load up Microsoft Multifamily Simulator, go into Tavern Title and finish grinding this quest.