On almost every transaction you get to the point where you’re close and both sides start digging their heels in and rationalizing why their last counter offer should be the final price.
Here is some advice to both buyers and sellers of rent stabilized buildings.
Sellers (Including Lenders):
If you put a rent stabilized building on the market with the intention to sell – just sell it. Every day since June of 2019 the price has gone down and there’s nothing in the forecast indicating that help is on the way so bite the bullet and move on – selling next year won’t be better than it is today. If you think I’m wrong just look back at every year prior for the last decade and run the same logic.
If you got to the edge of the diving board but turned around, be prepared to refinance at a higher interest rate with much more stringent underwriting standards including higher debt service coverage ratios, lender deposit requirements, and significant scrutiny on arrears, violations and local law 11. Your current “relationship lender” might not be willing to refinance your existing mortgage without a significant buy down from you.
For those with strong cash flow, low leverage, and no refinance wall staring at you, sticking it out is a real option. Powering through the tough times will eventually pay off – we just don’t know when. If you elected to power through in 2021 and five years later you’re reconsidering… make sure your “power through” timeline is long enough to reach the other side of this policy debacle.
Buyers:
If you found value in 2016 at 15x the rent roll and 3 caps, and/or in 2021 at 10x and 5 caps, you should be able to find value today at 4x the rent roll and 10+ caps. Stop over negotiating. If you like the building and you want to buy it, bridge the gap of the last 5% and just buy it!
It won’t matter in the end. If you think back over your career about the best deals you ever bought and added 5% to that purchase price, it still would have been your best deal. (The same is likely true in reverse – your worst deal 5% cheaper would still be your worst deal.)
I’ve heard several stories recently from large, very wealthy owners about how they got into the business 25+ years ago, and almost all of them said they bought their first building when no one wanted it and their fathers told them they overpaid!
These decisions are entirely personal and every building should be thought of separately. Just because you don’t want to sell doesn’t mean that you shouldn’t sell a building.
Go with your gut – it’s right.
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