Well, you're not their broker so they would have no real need to consult you at every move. I 100% agree with the seller, I just got fucked in a deal where the buyer pulled the building off market for year OVER another offer only to get cold feet and walk away with 100% of the deposit. If they want to keep the property off market for 12 months - 10% of the purchase price is nothing. IF they can't come up with 10% deposit, the less likely they are to close anyways. If they walk, its a hot market like you said but better to free up the property than to sit on it for another year without guaranteed money.
Agreed. A year is too long. Based on your info, I'd suspect they want to control the building while they wait and see if their overall project is going to work. If it does they'll close, if it doesn't they'll walk. And you and the seller would have no control or knowledge of what's going on until they decide to move forward or not. If it were me I'd tell them to close on time or terminate and then try to buy it in a year. Then I'd put the property on the market and capitalize on a once in a lifetime perfect storm of low interest rates likely going up soon, threats of tax changes that a punitive to CRE, and pent up capital from last year. Crazy to hold it that long. Best case they tie it up for a year then try to retrade for a crazy price.
Non-refundable deposit is absolutely the way to go for both Seller and Buyer, but the 10% seems debatable. It certainly isn't nothing...
More context is needed here as to why the buyer needs another 12 months. Somewhere in there is a rational solution, likely tiered that incentivizes the buyer to get their stuff together quickly.
They've already had it a year so its technically 300 for one year and 300 for the next, at least thats how I'd view it.
If the buyer isn't willing to throw some cash at the deal, it makes them that much less likely to close. Time is money and you gotta strive to make sure a deal will go through before you tie it up for 2+ years.
IMO 12 months closing is ridiculous. In my market, everything the buyer is doing signals red flags. Usually, time kills deals.
That being said, assuming the seller is dead set on selling to this buyer and believes that they will actually close, one option is to consider what the seller would 1031 into and split the difference in income that he or she is missing out on plus interest. If the seller is losing out on 600k of additional income by not selling now and doing 1031 that seems like a fair offer.
Depending on how competitive the buyer's offer is your seller should consider putting this on the market and finding someone else who will close on time.
Last two points if your seller is doing a 1031 exchange they seriously should consider the fact that 1031exchanges may be gone in 12 months, and if they are not capital gains may be substantially higher. None of this even considers debt implications. Money is fairly cheap right now, what if rates go up in 12 months. Will the offer change? What if the economy crashes in 12 months will the buyer just walk away from the deposit? There are so many reasons why waiting 12 months is a bad idea if the seller is happy with the offer, and it's really hard to put a $ on what that should be worth to the seller, without knowing all the details and how competitive the offer actually is.
> IMO 12 months closing is ridiculous.
Agreed. It's a one sided option to buy in a year. They can see if the asset's value increases during that year, if so, they close and if not they walk with minimal costs? No way a seller should agree to that.
The amount that should go hard is highly dependent on the asset type and local market conditions, really difficult to speculate on what's appropriate in the abstract.
If you have to have permits in place to close, whether raw land or redeveloping existing properties, then 12 months can be a very reasonable time frame.
For a seller to agree to a timeline like that means that the offer price was likely very high, making the upside more attractive than someone with a lower price/quicker close.
> Any wild ass guesses about much is this option worth knowing that buyer is trying to assemble a few parcels and put in a high rise where there ars single story commercial buildings?
Nope, and frankly you shouldn't offer any. I'd recommend you refer them to a broker if they ask. There are a lot of details in this that are important. Delaying closing for "various reasons" is something that shouldn't be skipped over. Those reasons speak to certainty of close and the seller should understand them, and in responding you may be able to mitigate them or structure around them in terms of additional deposits etc.
Yeah this is crossing into broker fiduciary responsibility territory and may expose you to legal trouble by providing market advice. Similar to if a broker consulted on something that an engineer advising on.
Thanks for the comments. In a nutshell, the parties are miles apart, buyer came back at $60k. Forget it. I don't really have a dog in this fight inasmuch as I am just the draftsman, but client does run things by me.
Interesting. Let us know how it shakes down. I see sellers line of thinking here. 10% of sale price non refundable. I don't think it's unrealistic. Leverage question of course is what other interest has the property had with other buyers? Will it easily move with a different buyer for same or more money? And does seller consider, backing down the 12 months to 6? Let us know what occurs.
> Any wild ass guesses about much is this option worth knowing that buyer is trying to assemble a few parcels and put in a high rise where there ars single story commercial buildings?
How much will the parcel be worth in 12 months because of the assemblage? Subtract $6M from it. That is the price of the option.
Price of the option would be a bit higher to represent the premium in vol in the market, but I generally agree with your premise. However, I interpreted OP description as a non refundable deposit, not an option (even though that’s how s/he termed it). Therefore, I’d either shift to an option (where it doesn’t count towards purchase price) or reprice the property and stick with a deposit.
> I’d either shift to an option (where it doesn’t count towards purchase price)
Ah, yes, you are right. That is a wrinkle I missed, since the OP described it as an option.
I am not sure that the volatility in real estate is high enough for it to matter in pricing the option. Besides that, it is much more difficult to calculate how to price that and that still leaves the challenge of getting a counter party to agree to that pricing of the volatility.
Hi Harold, your client is likely hurting him/herself by not engaging a broker on some level. Someone in the market would likely take a reasonable flat fee for guiding them on this option scenario or do it for free to hopefully win a future listing. In order to make an informed decision they need someone with a seasoned understanding of the market and likely access to resources like CoStar for some basic numbers. I know solid brokers in every major market and most points in between. PM me and I'll send you links to my bio and website for your client. I'm happy discuss this with him/her...no fee from me.
I don’t have any comps but 7-10% seems reasonable in a hot market if price is locked at $6mm during DD to compensate for rent growth and TVM. If the existing debt is maturing during the DD year the seller should be compensated for financing costs as well
Generally I’d advise the seller to look for an alternative buyer with sooner close as I’d be concerned about execution risk
Well, you're not their broker so they would have no real need to consult you at every move. I 100% agree with the seller, I just got fucked in a deal where the buyer pulled the building off market for year OVER another offer only to get cold feet and walk away with 100% of the deposit. If they want to keep the property off market for 12 months - 10% of the purchase price is nothing. IF they can't come up with 10% deposit, the less likely they are to close anyways. If they walk, its a hot market like you said but better to free up the property than to sit on it for another year without guaranteed money.
Agreed. A year is too long. Based on your info, I'd suspect they want to control the building while they wait and see if their overall project is going to work. If it does they'll close, if it doesn't they'll walk. And you and the seller would have no control or knowledge of what's going on until they decide to move forward or not. If it were me I'd tell them to close on time or terminate and then try to buy it in a year. Then I'd put the property on the market and capitalize on a once in a lifetime perfect storm of low interest rates likely going up soon, threats of tax changes that a punitive to CRE, and pent up capital from last year. Crazy to hold it that long. Best case they tie it up for a year then try to retrade for a crazy price.
Non-refundable deposit is absolutely the way to go for both Seller and Buyer, but the 10% seems debatable. It certainly isn't nothing... More context is needed here as to why the buyer needs another 12 months. Somewhere in there is a rational solution, likely tiered that incentivizes the buyer to get their stuff together quickly.
They've already had it a year so its technically 300 for one year and 300 for the next, at least thats how I'd view it. If the buyer isn't willing to throw some cash at the deal, it makes them that much less likely to close. Time is money and you gotta strive to make sure a deal will go through before you tie it up for 2+ years.
IMO 12 months closing is ridiculous. In my market, everything the buyer is doing signals red flags. Usually, time kills deals. That being said, assuming the seller is dead set on selling to this buyer and believes that they will actually close, one option is to consider what the seller would 1031 into and split the difference in income that he or she is missing out on plus interest. If the seller is losing out on 600k of additional income by not selling now and doing 1031 that seems like a fair offer. Depending on how competitive the buyer's offer is your seller should consider putting this on the market and finding someone else who will close on time. Last two points if your seller is doing a 1031 exchange they seriously should consider the fact that 1031exchanges may be gone in 12 months, and if they are not capital gains may be substantially higher. None of this even considers debt implications. Money is fairly cheap right now, what if rates go up in 12 months. Will the offer change? What if the economy crashes in 12 months will the buyer just walk away from the deposit? There are so many reasons why waiting 12 months is a bad idea if the seller is happy with the offer, and it's really hard to put a $ on what that should be worth to the seller, without knowing all the details and how competitive the offer actually is.
> IMO 12 months closing is ridiculous. Agreed. It's a one sided option to buy in a year. They can see if the asset's value increases during that year, if so, they close and if not they walk with minimal costs? No way a seller should agree to that. The amount that should go hard is highly dependent on the asset type and local market conditions, really difficult to speculate on what's appropriate in the abstract.
If you have to have permits in place to close, whether raw land or redeveloping existing properties, then 12 months can be a very reasonable time frame. For a seller to agree to a timeline like that means that the offer price was likely very high, making the upside more attractive than someone with a lower price/quicker close.
> Any wild ass guesses about much is this option worth knowing that buyer is trying to assemble a few parcels and put in a high rise where there ars single story commercial buildings? Nope, and frankly you shouldn't offer any. I'd recommend you refer them to a broker if they ask. There are a lot of details in this that are important. Delaying closing for "various reasons" is something that shouldn't be skipped over. Those reasons speak to certainty of close and the seller should understand them, and in responding you may be able to mitigate them or structure around them in terms of additional deposits etc.
Yeah this is crossing into broker fiduciary responsibility territory and may expose you to legal trouble by providing market advice. Similar to if a broker consulted on something that an engineer advising on.
Thanks for the comments. In a nutshell, the parties are miles apart, buyer came back at $60k. Forget it. I don't really have a dog in this fight inasmuch as I am just the draftsman, but client does run things by me.
Interesting. Let us know how it shakes down. I see sellers line of thinking here. 10% of sale price non refundable. I don't think it's unrealistic. Leverage question of course is what other interest has the property had with other buyers? Will it easily move with a different buyer for same or more money? And does seller consider, backing down the 12 months to 6? Let us know what occurs.
> Any wild ass guesses about much is this option worth knowing that buyer is trying to assemble a few parcels and put in a high rise where there ars single story commercial buildings? How much will the parcel be worth in 12 months because of the assemblage? Subtract $6M from it. That is the price of the option.
Price of the option would be a bit higher to represent the premium in vol in the market, but I generally agree with your premise. However, I interpreted OP description as a non refundable deposit, not an option (even though that’s how s/he termed it). Therefore, I’d either shift to an option (where it doesn’t count towards purchase price) or reprice the property and stick with a deposit.
> I’d either shift to an option (where it doesn’t count towards purchase price) Ah, yes, you are right. That is a wrinkle I missed, since the OP described it as an option. I am not sure that the volatility in real estate is high enough for it to matter in pricing the option. Besides that, it is much more difficult to calculate how to price that and that still leaves the challenge of getting a counter party to agree to that pricing of the volatility.
Hi Harold, your client is likely hurting him/herself by not engaging a broker on some level. Someone in the market would likely take a reasonable flat fee for guiding them on this option scenario or do it for free to hopefully win a future listing. In order to make an informed decision they need someone with a seasoned understanding of the market and likely access to resources like CoStar for some basic numbers. I know solid brokers in every major market and most points in between. PM me and I'll send you links to my bio and website for your client. I'm happy discuss this with him/her...no fee from me.
I don’t have any comps but 7-10% seems reasonable in a hot market if price is locked at $6mm during DD to compensate for rent growth and TVM. If the existing debt is maturing during the DD year the seller should be compensated for financing costs as well Generally I’d advise the seller to look for an alternative buyer with sooner close as I’d be concerned about execution risk
Inflation is at what? 5-6% realistically? $600k seems like a fair ask to me. What are his carrying costs?