Don't pay a premium for an uncooked steak.

Let me ask a question. Would you pay more for a corvette that was ready to drive or one that you had to assemble? How about a dinner that you had to prepare or one that was already prepared? Simple right? You’d pay more for the assembled corvette and the prepared dinner. This principal applies in real estate investing as well though we regularly encounter sellers who believe that the buyer should pay for the value that they (the buyer) will add. For example, the buyer bringing in a tenant or selling out unsold condominium units. The value to be created should not be paid to the seller, period. We recently looked at an office building that was for sale. The building was (and is) vacant. One hundred percent vacant! The asking price is equal to the value as leased (and leased at market rents from two years ago and capped at rates from two years ago). Now, we’ll make an offer on the building but we will have to explain that their assumption of the lease rate is too high, their cap rate is too low, AND the building is vacant. Any value based on income is only any assumption since the current income is zero and the building currently throws off negative cash flow after expenses. The real value will need to be added by the buyer who will take the time, energy, and expense to find and put a tenant in place. Then the buyer could sell the building to an investor who is more risk adverse (and would not have purchased a vacant building) at the market cap rate for a leased building. It would seem that this is common sense but I am growing weary of explaining and arguing this to sellers but nevertheless we will continue to explain and fight on behalf of our investors…just takes patience.