At this point in the negotiations, there is a decision to be made. Do you immediately offer an amount equal to previous sales in the market area, plus or minus some amount to account for economic demand, property size, distance to infrastructure, terrain, zoning or other reasonable factor(s)? Or, do you make a "handshake deal" for one to three weeks time, to study the Property's potential and prepare purchase agreement documents? Thus allowing the best offer possible. Only the contact person will be able to weigh the Seller's intentions and other factors of the purchase, to make that timing determination. In my experience, time can accomplish two things. First; it indicates to the Seller that you are a professional and represent a professional company that will make the effort and incur the expense to thoroughly analyze the Property's value for development. Second; it is critical to avoid returning to the Seller to renegotiate price, because an inadequate valuation approach was initially taken. At that point, the Seller's expections have been set too high. Your professional credibility has been seriously damaged and the long term potential to damage your reputation in the market place is set. If the Seller does state a price, whether high or low, some level of price resistance should be offered. If you are confident the Seller's asking is low, the agreed time for a study can be adjusted, but it is easy to lose a great deal, by an overly enthusiastic, unilateral rush to obtain the Seller's signature.
You have sought a position in a specific market segment for some time. After weeks of prospecting, a handful of potentially willing sellers have been identified and you target the best of the available properties. As typical, your potential Seller will not state the desired selling price, instead noting "make me an offer". It is safe to assume the Seller has a price in mind, his concern is understating the price.
The proper decision format to establish the magnitude of an offer is the financial pro forma, i.e., the discounted cash flows of revenues and costs. This is not necessarily "the offer" presented to the Seller, but can set the maximum price payable, under your market strategy, for the Property and establish the restraints to maximizing the Property's potential, which must be reflected in the Property's cost.
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Conceptual Direct Cost Estimates
The purpose of this article is to outline a methodology to estimate conceptual direct costs, in a typical residential or mixed-use
acquisition scenario.
Generally, having targeted a specific market segment, the market knowledge is current or a market study has been
completed or under way. This will allow product type(s), absorpation(s) and pricing to be established. Given these parameters, plus
a topography map and Property boundary, which is usually obtainable from local governmental agencies, a conceptual lot or layout
study can be quickly generated.