Frank from Portugal asks: “I’ve had my eye on a 6 plex that has been on the market for 5 years. The original owner who built them went into bankruptcy 8 years ago and only completed 60% of the project. I’ve spoken with the local bank manager that owns the property and I explained my reasoning for a low offer and we agreed on a reasonable figure for the property. The property is listed at 855,000. And 4 different builders have quoted around 600,000 to complete the project giving a total of 1.45m.
I’ve had 3 different local agents value the completed properties and the valuations on the low side are 225,000 per unit. Which is a total sale value of 1.35m. We made several offers our highest being 400,000 but the bank won’t budge.
The opportunity is in short term rentals where you can possibly get 1000€ a week for about 12 weeks as the area is a hot tourism local. Perhaps the property could also be reconfigured into a larger number of smaller units in the same footprint.
It’s important to know that the decision on the sale of the property is being made at the Banks head office 70 miles away. We are not sure what is driving the valuation but it’s out of context with the local property market. How would you proceed in this case or would you just move on?”
Frank that is a great question.
I don’t have an exact answer to your question because there are a number of additional questions that need to be answered before you make a decision.
Whenever you consider a business opportunity you need to examine 3 aspects:
- The market opportunity
- The team who will operate it
- The specific deal
1) Let’s start with the market opportunity. You identified seasonal short term rentals as the market opportunity. There is no question that the region of Portugal you are located in attracts a lot of visitors from all over the world. It’s considered one of the top retirement destinations for people in the UK. I believe the demand is strong. But it is seasonal. You need to do a detailed study of the local market where you understand the seasonal aspect and the revenue potential by month.
2) Let’s look at the team. Short term rentals are a service business, not that different from a hotel. The way we operate short term rentals results in 5 star reviews across the board. That doesn’t just happen by accident. We took the time to define the systems and processes that would deliver that result and we hired the team that we could rely upon to consistently deliver that result. If you want to travel, if you want to have a life, you need to hire the team that can deliver. That means that the project needs to be large enough to generate sufficient cash to afford the staff and pay suitable profits to you as the property owner. If not, then you just spent a lot of money to buy yourself a job as a cleaner.
3) The deal. It sounds like you have worked backwards from the rental income to determine the maximum you can afford to pay for the property.
If the bank has been holding onto the property for that long, And they have a skewed view of its value, then there must be something funny going on behind the scenes. Banks are not usually in the business of owning property. If they are carrying the property on the box at an inflated value maybe they are keeping it intentionally to make their balance sheet appear stronger than it is in reality. I don’t really know. I’m just speculating on the reason why they might be behaving in this way.
This isn’t a direct answer to your question, but rather it’s what I would examine to make a decision on whether to get into that business in that location, with that specific property.
