In this informative video, Jeremiah dives into the process of making an offer on a property.
- Valuable tips and strategies for securing great deals quickly
- Exploration of property valuation methods: NOI, comparable approach, and future modeling
- Determining the right price based on desired returns
- Discussion of negotiation tactics and considerations
- Understanding competition and gauging deal quality
- Explanation of key documents: Letter of Intent (LOI) and Purchase and Sales Agreement (PSA)
- LOI outlines basic terms and contingencies
- PSA's role in solidifying the transaction
- Significance of reviewing terms and using an attorney throughout the process
- Gain insights and make informed decisions in property offer-making
How To Make An Offer On A Self-Storage Facility with Jeremiah Boucher - Transcript
00:00 - 00:16
Hey guys. Okay, in this video we're gonna cover the process of making an offer. Great deals don't just come around all the time, so you need to know what to do so you can move on it quickly. When you find one, if the deal's listed with a broker, there's typically a price that the seller expects or the broker is recommending.
00:16 - 00:30
So most of our deals at Patriot, they come from off market opportunities. So sometimes the seller has a number in their mind, uh, sometimes they don't. So what we need to do is get a valuation to decide on what the price is that we're going to offer. So there's quite a few ways to value a property.
00:30 - 00:52
Number one, and the most common way is the NOI method, where you determine the NOI and you apply a cap rate, and that will give you the value based on the cap rate approach or the income approach. The second way to value the asset is another way appraisers do it as well is the comparable approach where they look at other transactions that have sold and they based that on the price per square foot that the comparable sold for.
00:53 - 01:14
And then number three, you can see what the property is going to be worth through your modeling and through your business plan in the next three to five years. And then work your way backwards on the return that you would generate from that asset. And then you can dictate, okay, this is what I'm willing to pay based on the return that I expect to receive in the future. There's really no exact answer to this formula.
01:15 - 01:29
Everyone has a different appetite for how to value properties, but the better you understand it underwriting and the better you understand the asset of storage itself and the markets that you are developing or acquiring in the better decisions you're gonna make when buying these assets.
01:29 - 01:42
So once you have a rough value for the property, I would suggest you start making the offer 10 or 20% or even more lower than your final price. Uh, this leaves a little bit of room to negotiate at the same time.
01:42 - 01:59
If you find a good off market deal and you know it's a great price, don't bicker over it. Just buy it for the price that the seller states, uh, I I'm of both schools. Sometimes you need that room to negotiate. Other times, if you know it's a great deal, don't get greedy and just give them the price.
01:59 - 02:13
It just depends on the competition around the offer. And if the seller doesn't like your number, they might be offended. That's okay. That's part of the business. It's not personal. But once you did your underwriting, you understand, this is why I made that price. And that creates a foundation.
02:13 - 02:36
And then you can get a starting point to see if it's a deal that you actually want to put your time and energy and team on. So the main documents you wanna start out with is that letter of intent. That's the LOI for short. This is the first step in a transaction to like, it means there is you wanna share your intent. What is the price, what is the terms, and what is the timing? Typically, the LOI is only a few pages and the document spells out the basic terms of the
02:36 - 02:50
deal, where the price, the deposit that you need to put down, the due diligence period, the number of days to close, and any other high level deal points. There's many other elements that could be included. Uh, but you do wanna outline any contingencies that you have.
02:50 - 03:03
So if it's contingent upon financing or you getting a loan. And then you also want to probably outline how the closing costs are handled, who's paying the transfer tax? And one thing that always needs to be brought up is how are you prorating rents?
03:03 - 03:23
We'll get into that later, but you need to know who's keeping what rents at the closing, the seller, or you. Typically the letter of intent is not binding, but I would consult with your attorney in the state that you're doing business in. But ideally to have a real transaction that you solidify, you need the purchase agreement signed. So once the LOI is accepted, you're gonna move forward with negotiating that final purchase agreement.
03:24 - 03:38
The purchase and sales agreement is legally binding. So it's very important on reviewing the terms that you agreed to, and I highly suggest you use attorney. These are the deal points that are set in stone, and they're the basic terms of the agreement that should be outlined on the letter of intent.
03:38 - 03:53
But this outlines the due diligence documents required that the seller needs to give you and also the seller's obligations in the sale. It's gonna show any warranties that they keep with the deal and the conditions under which the agreement will be terminated or you can back out of the transaction.
03:53 - 04:08
The LOI covers the largest most important parts of the transaction, but the purchase agreement has all the fine print all the details, and gets the buyer and seller on the same page. The PSA can be long and daunting. Uh, it outlines all the details and it truly makes the agreement legally binding.
04:08 - 04:23
So this could range between 10 and 50 pages. Usually you might spend a day or a few days with the seller and their attorney negotiating the terms before signing it, and then moving on to the due diligence. That's okay though. Be patient in this process. You wanna make sure it's done right.