I have been noticing a theme on several of the forums lately.
Some real estate investors are worried about "offending the seller" with their low offer. What? There is only one thing we should be doing and that is making solid offers based on the numbers.
There is a saying that goes something like this; "If you don't feel at least a little bit uncomfortable about your offer, you've just offered too much".
In general, I have found this to be true.
Many real estate investors especially folks that are new get a little "squirmy" when they reach the actual number they should be offering on a property. They will then go back and look at the numbers to see if they can raise that offer a little bit to a number that they think the seller will like a little bit better and doesn't make them squirm when they say it out loud. Getting this new number often involves what I like to call "eraser math".
Eraser math is when you start erasing the numbers that should be on the paper and putting down numbers that ease the "squirmy factor" in your offer. I am here to tell you that is almost always a mistake.
When you are putting together an offer on a property there is only one thing that should be happening; you have to let the numbers do the talking. It's always about the numbers.
Making solid offers is not about falling in love with a property, or trying to find a way to "make it work". Now I am not talking about normal negotiation. What I mean is that you should have an absolute MAO or maximum allowable offer. If you have to start fudging the numbers; raising the anticipated ARV or lowering the repair estimates to make the numbers work that is eraser math, and it is always a bad idea.
Know Your Numbers
Investors all have a little different way or method of doing this, so I'm not really going to go into this part of the equation. The thing you need to know is that you must get really good at nailing your numbers. You need to be completely accurate and this takes a little practice.
I am a wholesaler and my investor buyers are almost always rehabbers or landlords. If I have a house to sell to a rehabber, I have to know what he will need to spend on repairs before I can ever make an offer. The folks on my cash buyer's list always do their own rehab estimates. But I have to know what those costs will be too.
This is also true for the landlord buyers on my list. They may not update the kitchen today or put that roof on today that will be needed in the next 12 months, but the bill will eventually come due. The numbers for my offer are generally the same for both rehabbers and landlord buyers especially since I'm not always sure who that buyer will be.
If you are presenting deals to other investors and you don't have your numbers right, your credibility will go right out the window. This skillset is a must in our business.
Here Are Some Important Numbers
- What is a realistic ARV for this property? Don't look at that oddball high comp. Look at what most properties are selling for, and only compare like properties within a half mile range of your property.
- What will the repairs likely be? Get your number and then add a little more. Things always take longer and cost more than you expect. This brings up another point; learn to expect the unexpected especially for rehabbers. Ask yourself, "What else can come up"? The older the property, generally there will more of the "unexpected" that will show up.
- Know the market conditions in your area. If you are a rehabber or a wholesaler selling to a rehabber, look at the days on the market for properties like yours in that area. If the days on the market are longer, folks will be looking for a little larger spread to cover holding costs. This won't necessarily be true if it is a seller's market where there is a low inventory and properties are moving quickly.
Real estate investing is no different than any other business; knowledge is power. Your knowledge is also what will give you credibility with other investors. Spend whatever time it takes to make you an expert in what you do, and it will pay big dividends down the road.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
More from The Motley Fool
IBM Struggled With the Tax Man in the 4th Quarter
A long-awaited return to actual sales growth was overshadowed by a $5.5 billion one-time tax charge.
1 Big Improvement That Apple Needs to Bring to the New iPhone SE
It's time for a new display.
Sears Holdings' Store Closures: No Problem for Seritage Growth Properties
Seritage Growth Properties gets most of its rent from Sears and Kmart. But the numerous store closures at both chains won't hurt Seritage as it works to increase its rental income and diversify its tenant base.