Last week I wrote an article discussing the dynamic that is created when distressed inventory is low in a particular market and demand is high. In these markets, you’ll often see increased competition for REO and HUD properties. For some investors, the thought of offering anything but a lowball offer is completely unheard of. However, if competition from numerous investors in an area is fierce, this strategy may limit an investors ability to acquire property.
I have learned over the years to use the asking price as a guide, but ultimately submit offers based on the way I’ve calculated my numbers. In using my own formula, I typically make offers below asking price and as one would expect, I often get outbid by other investors. However, there are times when a new listing hits the MLS and my numbers actually allow me to bid above the asking price. Knowing that the property will be highly competitive, I have no problem submitting an offer over asking price in an effort to lock up the property before I get stuck in a bidding war. To me, it’s not a game of “how far below the asking price can I negotiate” …. it’s about locking up good investment properties where the numbers make sense.
On the flipside, I have found that it’s also easy to get stuck on an asking price when looking at “pre-approved” short sale listings. In my experience, short sales that have been listed in the MLS are somewhat arbitrarily priced. Often, it’s simply the listing agent’s opinion of what the bank may or may not approve. Again, I try not to get stuck on the asking price, but submit offers based on the way I calculate my numbers. If the asking price works, then by all means submit a full price offer, but don’t get stuck by the fact that the listing indicates it’s been “pre-approved” by the lender.
It’s so important for investors to have a clearly defined strategy when investing in real estate. Whether it’s to buy and hold, wholesale, retail, etc., it’s important to outline and stick to the formula that works for your particular strategy. Once you’ve structured a strategy that makes sense, it’s much easier to make offers without the emotion and gamesmanship so many investors get sucked into. Ultimately, if you are consistent and disciplined in your approach to investing you should be in a position to maximize profitability and minimize losses.
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Article Author: Ken CorsiniKen has written 44 articles for us.
Visit Ken's Website: http://gainvesting.com
Ken Corsini is the founder of Georgia Residential Partners, LLC - a real estate investing firm based in Atlanta, Ga focused on creating turn-key investments for investors all over the country. He has a business degree from the University of Georgia, a Masters degree in Building Construction from Georgia Tech and is a licensed contractor in the state of Georgia.. He has been investing in real estate since 2005 and has been involved in hundreds of investment related real estate transactions since this time.
Joshua Dorkin
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Ken,
How much weight, if any, do you give comparables in your process?
Kelly
Great Article!!! I’ve thoughts this through a lot. I feel its a internal battle between maximizing your investment & avoiding opportunity costs. I think its important for every investor to set themselves a number that they need to meet & aspire to consistently meet that number. If they occasionally beet it then that’s just a bonus. Just my opinion of course
Thanks, Ken! Are you willing to share what your particular formula is when crunching your numbers to determine offer price? My business partner and I are students of several REI mentors and it is interesting how their formulas for calculating the numbers vary.
Good article. I like that you point out that what matters is what you figure out when you run your numbers. Any other factor is just a additonal information that can hold only minor sway.
In my area I do not have fierce competition so I never make above full price offers. I actually can’t think of any that even justified it. Only a few that deserved close to asking. Generally I see thing massively overpriced.
Which actually is a good point to bring up on the other side of the getting hung up on the asking price. You ALWAYS need to figure out what the value of the property is and bid accordingly. If a house is more than 100% overpriced then getting it at 50% of list still isn’t a deal, even for a retail buyer forget an investor!