The FSBO Building

In an attempt to cast my net wide and capture all relevant available apartment buildings that met my purchase criteria, I included buildings being sold “By Owner” in my searches.

What did I learn? That an FSBO is an FSBO is an FSBO. No matter if it’s a $30,000 2 bedroom dump in Melvindale (I SWEAR that it will appraise for $80,000 the owner told me) to a $1,400,000 apartment building on the east side.

The similarities are striking actually. But probably not that notable though if you take a step back and consider basic human nature.

For three out of the last four years I dealt pretty exclusively in homes that were being sold by owner. I had developed some pretty interesting search criteria in the public records that still yields a stream of 25 – 50 leads per month.

So I dealt with a good number of folks in this situation. And to say that they all behaved the same in terms of their sales strategy would be an understatement. A GROSS understatement.

To a person none had any idea of the real value of their home, nor did any really care. They had somehow gotten an idea that the right price for their home was the exact same price as the highest price ever gossiped about on the street. It didn’t matter if the homes were similar. It didn’t matter if they were in the same condition. It didn’t even matter if a single home really ever sold for that price.

That was their price and they were sticking to it.

Well like I said the similarities of residential sellers and commercial sellers has been striking. And to be honest that surprised me, because I had always heard that investors in commercial properties were more “sophisticated” that those of us plebes that bought single family homes as rentals.

But it turns out that the FSBO seller is the same no matter what they’re selling.

I’ve looked at about a half dozen apartment buildings being sold by owner so far, and in each and every case they were overpriced. The interesting thing about this, though, is that while the single family home FSBO seller determines a largely random price out of thin air, the apartment building FSBO seller arrives at a largely random price based on their “interpretation” of the rent and operating expense numbers.

I had initially braced myself against the “pro forma” argument from this crowd. You know, the old “since the rents are SO FAR under market you can raise them, and I have included those higher numbers in my price” approach. And while it did come up, these sellers quickly threw in the towel on it. (Much faster than their colleagues that had listed with a broker, interestingly enough).

In contrast though, the FSBO sellers monkeyed with the operating expenses and in each case adjusted, estimated, or flat out left some out in order to hit their desired cap rate, which coincidently, in just about every case was an 8 or 8.1.

One seller of an nice (and way overpriced) eight unit building told me that he had zero repair and maintenance expense on his building. When I pressed him hard on he admitted that in fact he had spent over $1000 just on plumbing over the previous 12 months, but that the work was so simple that “you could do it yourself”. So he didn’t think that it needed to be included.

This same seller also wanted to argue about the property tax assessment. We called the city and determined what the worst case was, and I agreed to use that number in pricing his building. He initially agreed to use it as well until he heard the result from the assessor – but then changed his mind because he felt that it was “too high” and that I could appeal it if I wanted to. And I could go on and on.

What I found most common, though, after the “pro forma” argument was that pretty much at a minimum every owner either substantially understated repairs and maintenance or just didn’t include any at all.

Whatever it takes to get your selling price I guess.

The funny thing is, each of the FSBO buildings that I looked at are still on the market.

I’m not surprised. Most of the Single Family FSBOs are as well.

 

Check back later for my next installment – A Broker That I Can Work With