Today’s REI Classroom Lesson

Michael Blank discusses today the formula you can use to analyze a deal and negotiate with solid calculations.

REI Classroom Summary

By getting back to the broker quickly, it shows you’re serious and can get you more deals. Michael also elaborates on how to adjust value.

Listen to this REI Classroom Lesson

Real Estate Investing Classroom Show Transcripts:

Mike: Welcome back to the REI Classroom where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.

Michael: Hey there, everyone. This is Michael Blank. I am your instructor today for today’s edition of the REI Classroom. And today, we’re talking about how to make an offer on a multifamily deal in 10 minutes or less.

Mike: This REI Classroom real estate lesson is sponsored

Michael: I remember when I first got started with apartment buildings. It took me four hours to analyze a deal. I mean, it was ridiculous. I was spending hours and hours and hours and I didn’t realize that number one, this was not the smartest way to do it and it was completely unnecessary. I wish I would have told my previous self what I’m about to tell you now because we can do the same thing in about 10 minutes, which is crazy, but hear me out.

Here’s the thing. Here’s a scenario. You are calling up brokers and you’re getting deals, which is great. You’re getting deal flow, but it can very quickly overwhelm you. What happens is when you can’t crack open a deal and you can’t analyze it, obviously you’re not making offers. The more offers you make, the greater your potential of doing a deal. But the problem is that once you get all these packages, it can be so overwhelming that you don’t even bother. You get these things piling up and, in the meantime, the broker doesn’t think you’re very serious because he never hears from you.

All in all, it’s a bad thing to spend a lot of time in doing a deal. Here’s what we’re going to do. Here’s the 10-minute analysis, what I call the 10-minute offer. The first thing you do is you adjust the income. You take the marketing package and you look at the income and you’re going to use some rules of thumb. You basically take the gross income that’s reported in a marketing package. And whatever vacancy or concessions they have in there, you ignore and you use 10%. Unless what is in the package is higher, then you use that. And then you calculate essentially your net income. You’ve adjusted your gross income in that one. That’s step number one.

Step two is you want to adjust the expenses. So normally in these packages the expenses that are reported are grossly underreported because it makes their income look better, which means their property is more valuable. So then you adjust the expenses and you’re going to use 50%. The expenses should be 50% of your income.

If they report more, that’s great. Use that number. Most of the time it’s less than that. You completely disregard it and you use 50%. Now you adjust your income and your expenses. Now your net operating income, which is the difference between your income and your expenses, is now, of course, lower. Which means the value of the property is also lower.

A quick segue into how commercial real estate is valued, it’s all done by a cap rate. A cap rate is really a multiplier or a multiplier of revenue to get a value. Just in simple terms, let’s say you have a cap rate of 10% and you have a property that has $100,000 of net operating income. That property at fair market value is at a 10% cap rate applied to that $100,000 income, which is then $1 million. That’s the cap rate. Don’t get too bogged down about the cap rate at the moment. Just think of it as a multiplier and you apply it to the net operating income to come up with the value of the property.

The reason this is important is because now you’ve adjusted the income and the expenses and you have a new net operating income. Now, you take the advertised cap rate in the marketing package and you apply that to your updated net operating income to come up with a revised fair market value. Okay. What I mean by that is the following. This is how this could work.

Step four, by the way, is that you get back to the broker with your analysis and your informal offer price. For example, if the broker is asking $700,000 for a piece of property and they advertise an 8% cap rate and the income that you’ve adjusted is $50,000. Then the 8% cap rate divided into the $50,000 net operating income is actually a value of 625. They’re asking 700 but you’ve adjusted the income and now it’s actually only worth 625.

So step number four is to get back to the broker with this analysis and something like this. “Hey, Rob, I looked over this package. It looks great. I think your vacancy is a little low so I adjusted the income there. Your expenses seem really low. In my experience, they’re normally around 50% of income and yours are like 33%. Something is missing. I don’t really have the time to look into it in great detail, but something is missing so I’m just going to adjust the expenses. And so that my net operating income is now $50,000. You advertised at an 8% cap rate and so it looks like the property is worth more like 625 and you’re asking 700. Now, it seems to me like it’s a little overpriced. What’s the flexibility there from your seller?”

Now, if this broker doesn’t respond back to you, chances are you’re completely off the mark. But if they respond to you with, “Hey, well, okay, I see your point. But it is what it is. Why don’t you put something in writing?” In other words, there’s some sign of life on the other hand. Now, you have permission to go to the next step of analysis, which means that maybe you actually itemize the expenses. Or maybe you make a few phone calls or whatever, but don’t do that in the beginning.

That is essentially the 10-minute offer. So what have you done? You spend no more than 10 minutes analyzing a deal to come up with an offer price. You got back to the broker quickly with feedback, which is also unusual. I talked to a couple of brokers and they tell me that only 25% of their buyers actually respond back to them with feedback. If you’re one of those 25% of those buyers, you’re all of a sudden on top of the radar even if you’re a complete newbie. And, number three, you’ve really started your negotiation process, which you have. You said, “Hey, this price won’t work. Here’s why, but here’s what would.” That’s a negotiation process.

You’ve actually made your first offer. An offer is not just a contract or letter of intent. You’ve just made an offer. There’s a little bit more to this than that, but that’s the broad-brush strokes on a 10-minute offer. But I do have an eBook and a whole training video on this and this process. And you can get that at And it’s on the homepage there. Scroll down a little bit and you can download that free eBook there.

Anyway, don’t waste your life away analyzing deals. Work smarter, not harder and if you do, you’ll be able to look at more deals and increase your chances of actually doing one. I hope that was helpful. I’ll talk to you next time.

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