Opinion, by Sam Flowers
RIO DE JANEIRO, BRAZIL – Earlier today I learned about a restaurant in Ipanema that is up for sale. Specifically the property is available for lease and the deal includes all of the capital improvements made by the current tenant. As usual, the asking price is completely absurd.
I spent ten years of my career calculating and negotiating real estate and business values, but none of that experience helps me understand the logic behind commercial real estate prices in Rio.
In the simplest terms, a commercial property is worth what you can earn from it and yet the asking prices for property in Rio are often far too high for a buyer to earn a reasonable return on investment.
This is completely irrational since no buyer wants to invest in a business to lose money. This disconnect between property value and asking price results in many properties sitting on the market for a long, long time.
So, why are sellers asking such high prices? In my experience, the logic behind asking price is driven purely by what the seller wants, regardless of what the property is actually worth. In one case I was negotiating with a seller who had large debts to pay and his asking price was equal to the cash he needed to get out of debt.
In the case of the restaurant I mentioned earlier, the owner set the price to recoup his total investment in the property. The problem with that logic is that the business is losing money, proving that his investment and therefore his asking price, is too high. Why would a rational buyer repeat the same mistake as the current owner?
If you are a rational buyer, how do you negotiate a fair price in this environment? My advice is to be patient and wait until the seller is willing to be flexible. When a property initially comes to the market, sellers are a bit overconfident and unwilling to bend on the price, but as time passes the motivation to sell increases and you’re likely to get a better deal.
In this market, it seems best to be the last person making an offer versus the first.
Sam Flowers is an American living in Rio de Janeiro who created and founded the Gringo Café in Ipanema in 2010. A former executive and consultant with twenty years experience in Corporate Strategy, Brand Marketing and Finance, Sam also offers consulting services to foreign businesses and people entering or adapting to Brazil. Contact Sam at firstname.lastname@example.org.