Couch your lowball offer with a cover letter
Saturday, January 24th, 2009
In the residential real estate world, you often hear stories about the couple that gets the house even though they didn’t have the highest offer. Typically accompanying that successful offer was a letter pleading the couples case, telling their personal story and how the house is a perfect match, and how much they want it despite their limited means.
In your pursuit of commercial real estate acquisitions, it’s time to incorporate a variation of this strategy. Sellers are proving slow to adjust to the new pricing reality (i.e. prices are down 20 to 30 percent from their 2007 highs!). Accompany your letters of intent with a letter of explanation. Explain your underwriting carefully. Share comparables that are relevant. Highlight specific data on ailing market leasing fundamentals, the cost of financing, and the “cost” of equity (for instance, clearly equity can find double digit returns from REIT stocks or by investing in CMBS debt).
A seller might be fixated on getting to “his” capitalization rate. You need to show him or her that the return over time (the internal rate of return) is potentially very boring because of impending vacancy risk and associated re-tenanting costs.
Highlight your ability to perform and execute. If you have seller references to offer up and have performed as promised in the past without renegotiating terms midstream, highlight that too.
This kind of effort can help sell an offer that might otherwise be “tossed’ by a prospective seller as a lowball. Put the seller in your shoes and you might just make a deal.
