Real estate investors are constantly up against the challenge of making good offers. There are so many opportunities available, you don’t want to be faced with making bids that you will ultimately regret. So, how do you make an offer that you are guaranteed to win? You want to make the offers that get to deals. You hope to get a good price, while also not losing money. I’ve had these questions myself and have been faced with figuring out the ultimate offer in real estate. I even published a case study on my first experience buying an investment property; sight-unseen. That worked for my partner and me, and although that wasn’t our original plan, we ended up making the right type of offer (in this case).
A crucial factor in making a great offer is knowing your market inside and out. That means knowing the details of your property values; as well as the current rents and the costs involved to rehab a property. By knowing this specific information, it can guarantee that you don’t make an offer that is too high. Having a vast knowledge of the market will also protect you from losing out on a deal because you offered too little. If you have a better grasp on the area than the competition does, you will have a better chance to score the winning bid. By understanding the local trends and how much you will be able to rent a property for, you will be able to complete the job for less than the competition.
A common mistake that new investors make is throwing out a deluge of low-ball offers. Investors will make these offers based on only the asking price or on unreliable online comp tools. To me, that just sounds so crazy, and it is! For example, if a property is overpriced by $150,000 and you offer $100,000 less than asking price, you STILL are not getting a good deal. If you comp tools are faulty, then it will also affect your ability to find great deals!
What some investors also fail to consider is that low-balled, ridiculous offers are taken poorly by agents and sellers. These individuals will feel insulted and offended. You end up tying up their time and looking like you don’t know what you are doing. If a deal does appear that you want, these important assets— the agents and sellers— may not even consider you.
Worst Case Scenario
Informed offers are based on numbers. These can look like a low-ball bid, but it’s an educated proposal. It’s possible to prove our offers with math, along with justification as to why it is a great option for a seller and their agent. These type of offers are completely different than throwing blind numbers into the market. Numbers can be discovered by figuring out your worst case scenario. This is the way that we can guarantee that we don’t lose. When we skirt the worst case possibility, we actually make more money than planned. This can happen often. For example, if we buy an auction property, but don’t have a chance to inspect it, we can assume that it a job that is a total “rehab.” We will set our price based on that assumption. If we can see the property, we will run the numbers based on what we find out; doing an involved scope of work. Sometimes, there will be things that we can’t inspect for some reason. You may notice possible problems, but don’t have access to investigate the unit to see what is truly going on. That’s why pricing at the worst case scenario is where you should start.
Get Accepted. Stay Protected
It’s important to protect your interests with contract contingencies. Depending on the way that a property is sold or the market that you are in, you may not get all of the contingencies you are hoping for, but you will have negotiating points. This could be things like the amount of days you have to look at a place, title reports, appraisal documents, and financing contingencies. Research what is typical in your area and create an offer that you believe has a good chance of being accepted. Make this an offer that still protects your interests.