This was a great plan and could pay off tremendous dividends. Leverage allowed percentage returns into the 3 digit number ranges. Life was good.

Unfortunately things tend to change. Somewhere in the early 2000s prices started to escalate so much that our perfect investor with the perfect plan had trouble finding a property to buy that was priced in a distressed range whether it was distressed or not. So the investor started moving farther and farther from home base.

Suddenly Orange County investors started to find themselves in the middle of San Bernardino. Maybe even the High Desert or worse. Not only that but soon even these returns were in full retreat. Pretty soon the investment with all of it’s risks started paying off like a certificate of deposit. In other words, lousy.

Now the business plan needed to change. Now the cowboy investor had to start figuring that he would need to live with this investment for awhile. Maybe even 5 years. If that was the case, property management became more and more important. Operations were where the money was going to be made.

Admittedly this was pretty tame stuff. Returns could be better than certificate of deposits but they were not going to be like hitting the slot machine bonanaza either.

Today the investor may need to plan on a 6 or 7 year hold and he probably needs to pay attention to tenant retention and deferred maintenance. He needs to become a property manager or hire a good one to keep the cash flow coming and eventually to make that big pop on sale that came so frequently in the good old days. 

In today’s world blind luck has been replaced, once again with good management.  True, blind luck is much more fun to talk about at cocktail parties, but usually management triumphs.  This marketplace has driven us back to the mundane.

I hadn’t been thinking about buying this building as I didn’t even know the owner wanted to sell. It wasn’t on the market but the other Broker told me he heard that I had purchased 3 other larger properties in the park and the owner was anxious to sell.

The property was 5,000 s.f.. I ordinarily don’t like to insult people with offers but as I really didn’t plan on buying another building and as I would need to find a tenant I made what may have been construed as a low ball offer. I didn’t really care if he took it or not so I said will I would pay $180,000 with 1% downpayment and the owner would need to carry a note for the balance for 10 years.

I should state that the property is on a ground lease so the price would always be lower than a property on fee land, or land that comes with the property. On the other hand the property is in Irvine which is ordinarily pretty pricey. This definitely could have been considered a low ball offer.

Interestingly enough the owner accepted my offer. $1,800 down payment and the balance would be carried in a note.

The year was 1998 and although the press and government said that the great real estate depression of the 1990′s was over, it really wasn’t to be over for another 2 years. Things may have been getting better but it was slow and we all had memories of not being able to sell properties at any price much less lease them. We sort of thought the worst was behind us but there was no exact way of knowing.

The question is: Was my offer low ball or was it reasonable?

One might remark that it was reasonable because the owner, who was not under duress and was very successful actually took the offer and never even countered. He was actually happy not to have to carry an empty building and not to have to worry about finding tenants in a slow marketplace. He was also happy to have an income stream on the property rather than a negative. In addition he didn’t have a tax consequence so he was happy.

I don’t advocate low ball offers. Buyers who spend their time doing that often wind up wasting everybodys time. However, usually the market dictates what a low ball offer really is. If the market is booming it serves no purpose to offer prices that are very much off market rates. Some markets demand going higher than market prices in order to win the property.

Down markets obscure the definition of a low ball offer. If prices continue to decline who knows what low means. If an offer has some reasoning behind it then I encourage clients to submit it. If it is just low with no particular reasoning or thought then it is probably a waste of time. That is, some buyers insist on taking 20% or 30% off of any price no matter if it is well priced or not. That tactic seldom works.

Of course in a down market one tends not to hear the words “low ball” uttered by the seller or the broker. Unlike booming times, they may even say thank you for the offer no matter the price offered. In good times there is a good chance your heritage will be questioned in no uncertain terms.

Did you ever make or get a potentially low ball offer? Did it work? Was it really as low ball as originally thought? Leave your answer in the comments below.