Posted 07-28-2008 1:35 pm by

Warning!  Before you buy your next investment property, be sure you have good representation because some sellers (and even agents) inflate the numbers.

As an active investor myself, I look through thousands of deals every year.  I have very high respect for the real estate profession, but sometimes there are sellers (and unfortunately some agents) that inflate the numbers in order to justify a high asking price. 

Today, I will expose some common "tricks" used by some sellers to justify a high asking price.  Do not fall prey to them!

1. Saying the rent is low.  Almost every seller will tell you the rent is on the low side, and that you can raise rents.  Do not be fooled.  If raising rents were so easy, they would have done it already.  Do your own research to find out whether the rents are really on the low side.

2. Giving you projected numbers rather than actual numbers from the previous years.  Some agents love to show you a fancy spreadsheet that reads: "Here's the gross potential income if all units were rented.  Let's subtract 5% for vacancy, then subtract the operating expenses to figure out your net operating income.  Take the net operating income and divide it by the prevailing cap rate, which gives you the seller's asking price."  All right...What's wrong with this picture?  The spreadsheet may be beautiful, and the asking price may seem well justified.  The problem is that it assumes all units are rented, and then subtract an arbitrary 5% for vacancy!  You should ask for the actual vacancy rates for the last 7 years.  You may very well discover that the property has averaged 20% vacancy or more during the last 7 years.

3. Doing the math wrong.  Intentional or not, the seller or the seller's agent may do the math wrong.  Do not trust the math on a beautifully printed spreadsheet!  Do the math yourself.  Do the rents add up?  Do the square footages add up?  Is the rent per square foot reasonable for the area?  Are the NNN expenses reasonable for the area, considering the age and type of building? 

4. Giving you rent roll numbers that are not substantiated by the leases.  People can put whatever numbers they want into a rent roll spreadsheet.  But the lease is the legal contract they have with the tenants.  What do the leases say?  Do the leases support the numbers given in the rent roll?

Making sure you have a competent buyer's agent is important, so you don't fall prey to some of the "tricks" used by sellers and their agents to justify a high asking price.  What's more, there is typically no cost to the buyer in using a buyer's agent.  The buyer's agent usually splits the commission with the seller's agent, whose commission is paid by the seller.

---Written by Oliver Wu

Oliver Wu | Advantage Commercial Brokers
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Small Business Owners in Puget Sound
Direct:  (425) 785-6608
Office:  (425) 651-4242 ext. 103
Fax:      (425) 882-2547
E-mail:  oliver@acbrokersinc.com
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