I can't tell you how many times I have done a careful analysis of the market value of a property only to be second guessed by my client. The result is usually a failed effort, wasted time and a lost opportunity. Greed kills.
Why the gap?
Buyers are expecting a phenomenal deal! They have heard about the "pain" and the thought of offering anything other than a lowball price seems wrong. Our buyers also don't want to be wrong and dont want to pay too much. There is absolutely nothing wrong with that attitude. Its up to us to prove value and give them the best shot at a great deal rather than get on the train to nowhere, writing deal after deal that doesn't fly.
Our job is to educate our buyers and give them the tools to succeed. We need to help them understand the history and the real value. After properties have been properly adjusted to the current market they usually sell within 4 or 5 % of list price. So property history and comparables are really important tools to create confidence for our buyers. Another excellent tools is cash flow analysis.
Let me give you an example. Multifamily properties are not hurting in Bellingham. In fact, they fared better than almost every segment of the market over the last 3 years and will continue to do so. Why? Cash-flow! Pure and simple.
Quality multifamily projects are cruising along, earning their owners 7% to 10% CAP every month. (based on their original price and current rents) Compare that to Vancouver BC at an average rate of return of 3.5% - (about 1/2 of Bellingham) Is the seller hurting? No. Buyers who want instant 10% returns and a deal are negotiating with sellers who are not suffering at all. The seller of a great building will sell at a 6 or 7 CAP while the buyer wants a 9 or 10 CAP. Hence the gap.
Oh. and what do people who can't afford to buy in this market do? They rent? The fact is that, in Bellingham, getting a great building at 6-7CAP is a steal. Compare that return to all the alternatives for buyers: Banks, bonds, T-bills, stocks etc. and there is little even close with the low level of risk.
Now is the time to reach "up" a little and pick off some quality properties where the income and demographic is strong.
The winning formula is: find a quality property with a great track record, great neighborhood for rental (such as WWU, Sehome or Happy Valley, North Bellingham etc.), develop a 3 year plan for a higher CAP rate objective. (I will talk about this later) buy it at a "good/fair" CAP rate and enjoy the return and security. By the way: that 2 or 3% increase in effective CAP over 3 to 5 year gain will create a 100% return on your capital - nice!
What are the best ways to help buyers understand the real value of a property? If we do that well we make better offers and create more wealth.