A common question I get asked- who does the buyout negations during a pending sale?
The answer- it depends.
Prior to listing a property an owner typically has a real estate agent that presents their opinion of value. The opinion of value is based on several factors, including if the property is tenant occupied.
For single family residences and smaller multifamily buildings, the more vacancies it has the more valuable it typically is. Vacancies help increase the buyer pool which is typically owner users- those that want to live in the property and in the case of multifamily, live in one or two units and use the rest of the units to help offset the mortgage.
If all the units are occupied it is less likely a buyer can move in after close. And if the units are rented at below market, the harder it is to cash flow the property. Both scenarios the buyer pool gets smaller along with the sales price.
A common way to add value to a property is tenant buyouts. I will also plug my video on Value Add deals, if you want to learn more on what that means and some things to consider.
Seller Negotiates Buyouts
A seller typically negotiates buyouts with tenants if they want to increase the value and appeal of the property. There are a few considerations a seller should weigh before deciding to try and buyout tenants:
How much will a buyout cost?
How much more money will the vacancy add to the sales price?
Does the seller have cash on hand to pay for the buyouts?
Does the seller have a back up plan in the event they get a vacancy but still not the sales price they want? Such as rehabbing and re-renting the vacant unit.
Seller may have an upper hand in negotiations from having a long term relationship with tenants. Sellers may also have a harder time if the relationship between them and tenants doesn't exist or isn't particularly good.
Buyer Negotiates Buyouts
A buyer often times negotiates a buyout with tenants during a pending sale. There are a few considerations a buyer should weigh before deciding to try and buyout tenants:
Has the seller already tried and been unsuccessful? Why?
Does the buyer have a contingency based on securing buyouts?
Does the buyer have cash on hand to pay for the buyouts?
What is the buyer's plan for the property? Owner occupy, remodel, get market rent?
Does the buyer require at least one vacancy in order to purchase/ close?
Buyers may have the upper hand in buyouts because the tenants are unfamiliar with them and don't want to deal with a new regime. Buyers are also motivated to do buyouts and tenants get a sense that any offer being presented is more genuine. Buyers are at a disadvantages because they have no previous relationship with the tenants and have less to gauge if a tenant is sincere in their willingness to see a buyout through.
If you are a seller or buyer it may help to have a real estate agent or attorney who has experience and understanding of buyouts and just cause evictions do the negotiations. Tenants may respond better and be willing to engage in negotiation with someone in the middle, rather than directly with the seller or buyer. It is important that during a sale it is decided between buyer and seller who will negotiate buyouts. If both attempt to do negotiations with tenants at the same time, it not only overwhelms the tenants, it leads to conflicts between buyer and seller. You can also check out my playlist here on tenant buyouts.
The information in this post is for general information purposes only. Nothing on this post should be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or viewing does not constitute, an attorney-client relationship.