My Method of Madness When Making Offers on Real Estate

25

Making an offer: it’s hard to be a real estate investor without doing this.

There are a multitude of articles, blogs, videos, guru courses, etc. available about strategies of making offers.

While I like some of the strategies, and find others just ridiculous, I have my own method of madness when I buckle up my seat-belt and make an offer. If you’re in the adventurous mood or looking for some reading excitement, I hate to say it, but my strategy will not be catering to you. Quite frankly, it’s boring and very anti-climatic.

My offer making strategy: giving my ‘highest and best’ in my 1st offer.

Are you sitting there thinking, “that makes no sense!” , “what is the rationale behind that?”, or maybe, “that is pure madness!!!”

Let me explain the method to my madness. In order to do this, I’m going to use a ‘real life’ example that I just recently experience a couple weeks ago (as of the writing of this article).

The Real Estate Property

Doing my daily scans I found the house below. It was literally the first day it was posted on the MLS. A foreclosure, but not a government property so there was no 15-day period where investors could not bid. It was listed for $21,780.

Good Real Estate Deal

I’m not going to do a run-down of my numerical analysis since that is not the point of this article, but I will say that the house a few doors down (fixed up) sold a few weeks prior for $71,000. It was a very good comparable house, so right off the bat I knew this property had potential. After doing other bits of due diligence, I determined I liked it a lot.

Key Learning Point: Always do your comparables upfront. Gas money doesn’t grow on trees, so stay seated at your real estate command station as long as you can and do research. Work smarter, not harder. In today’s age of the internet and technology, you should be able to accomplish the majority of your research without needing to stand up from your office chair.

The Context of the Real Estate Market

Context is king. Without knowing your local real estate market, you are never going to know what type of strategy to use. For me here in Grand Rapids, MI, the market is smokin’ hot. There are still deals to be found, but because the supply of them has gone down, every investor and their brother’s sister’s neighbor’s cousin’s babysitter’s uncle will know about them within a short amount of time.

Case in point, for me on this deal, given the market and the fact that the house was just listed (and was a good one), I knew it would more then likely be a multi-bid situation.

For you though, what is the market like? What is the property like? Meaning, has it been sitting on the market for 2 months, or was it just listed 6 hours ago? If you find yourself in a slower market and/or are bidding on a property that has been sitting on the market for multiple weeks, then the “low-ball” strategy may work still.

Key Learning Point: Always know the context of your market. Read the headlines, look at the data, but most importantly, if you haven’t done any deals yet, get out there and talk with people. Heck, I’m not ashamed to admit it, I remember ease-dropping on other’s conversations when I heard anything involving ‘real estate’ come up. You also need to know the context of the individual deal. The days on market, the type of property (government foreclosure vs. non-government), and of course the comparables.

The Importance of Trusting the Real Estate Numbers

This is the big key in my method of madness (and any investor who actually wants to land deals): I trust the numbers.

There is a reason why you do the comparables. There is a reason why you need to understand the context of the situation. If you don’t trust the numbers, you will be hesitant, and when you are hesitant while others are not, you lose the deal.

On this deal, I trust the numbers so much that I made an offer of $25,000 without seeing the property. I don’t recommend this if you are just getting started, but after you have been around a while, you start to get “the feel” for things. I can’t explain “the feel”, but it just comes with experience.

Key Learning Point: There is zero sense in spending time researching and analyzing things only to not trust in the numbers. If you want to get your real estate business rolling, you will need to master this psychological battle.

My Rationale and Weighing External Risks

Some may disagree with throwing out your ‘highest and best’ offer right away, but to me, the following points have lead me to believe this is the most efficient/regret-proof strategy…

  1. ASSuming Incorrectly -  I will admit, the odds of bidding on a great deal will more than likely produce an initial response of “highest and best”; however, what if it never comes? What if it never comes and because you were trying to save a few bucks you didn’t originally offer what would be your best offer? For me, I’d rather just get my highest and best out there right away, so in the instance where the bank/seller never asks for ‘highest and best’, I can be regret-free knowing I put forth my best effort.
  2. “I’m Not Here to Play” – I do not have any scientific data to support this claim, but to me it makes sense, so I roll with it. I want the bank/seller to know that I’m not here to fool around. When they come back with “highest and best”, I love being able to say, “I already gave you my highest and best”. In my mind, that lets the seller know you are serious. Whereas, if you then inch up your offer some, that’s a sign to them that you “want to play”, so what are they going to do? Slightly drop their offer a tad.
  3. Discipline. Discipline. Sleep. - I have found that doing my highest and best upfront helps mitigate the desire to become undisciplined and up my offer price higher than it should be. In the past, when I would not bid my best offer, and then hear back, “highest and best”, my adrenaline would get pumping along with my competitive juices and I’d go over what I should have. By throwing out my best upfront, it makes it so much easier to just respond: no change in my offer. Then I can go home and have no worries about sleeping since I know was disciplined.
  4. A Good Deal is a Good Deal. - At the end of the day, if your best offer ($25,000 in this case) still makes things a good deal for you, then why risk getting overbid by someone who beat you with a number that you would still have been okay with. When you do highest and best, odds are, you are beat by someone who was willing to pay more than you. In this case (again, allowing for you to be regret-free),  you can be honest with yourself and say, “Someone paid more than what my best offer was. Good luck to them in turning it into a good deal.”

The Outcome and Other Details

As mentioned above, I did make the offer before seeing the property, but a few hours later I did make it over to the property. In that span of time (give or take 8 hours from time of listing), there was my offer and two others that were put in on the property. The bank then came back and said they will be accepting “highest and best” from us and anyone else until 3 pm the next day. I have no idea how many additional offers came in, but I know with certainty there were at least three (including mine) in the first few hours.

I got the property! And while I maybe could have gotten it cheaper (this I will never know!), I didn’t pay more then I wanted to and was disciplined.

An interesting sidenote, a wholesaler I do lots of business with (who also helps me sell them on land contract) was one of the bidders. He bid $22,000 since he couldn’t get over to the house in time to check it out. We of course gave each other a hard time about me stealing it from him, but I’m using his company to sell it, so it is still a ‘Win-Win.’

What are your thoughts on this? Do you think I’m crazy for showing my full hand of cards right from the get-go? I’d love to hear your strategies for making offers. Please leave your thoughts and comments below!

Subscribe to our mailing list

* indicates required Email Address * First Name Last Name
Share.

About Author

Clay (G+) is a licensed real estate agent and the owner of Huber Property Group, LLC, a real estate investment company located in Grand Rapids, MI. His company purchases distressed properties with the main exit strategy of fixing them up and reselling with owner financing, particularly, land contracts.

25 Comments

  1. How interesting that you take the highest-and-best approach. Maybe your area is more conducive to this strategy? It seems that in my market, in order for both buyers and sellers to be able to walk away feeling like they got a fair deal, there has to be negotiating. Cudos to you for holding your ground!

    • Thanks for the comments Lee.

      While there is definitely lots of negotiating going on in my market, I just prefer to figure out my best offer and give it. At that point, there is no negotiation on price, since that would imply I’d have to ‘up’ my offer, which would cause me to violate my spreadsheet which is NOT what I want to do.

  2. You have no idea if there was also someone else who bid $24,900 and your $25,000 bid got the house. I once visited a house that was listed at $19,000 and it did need a bunch of work and was small, so I bid $12,000. The winning bidder got it for $15,000. I saw them advertise it for rent the next month and saw that when they rehabbed it, they did the absolute bare minimum — less than I would have done, and the place really didn’t “shine”. So now I see how they made the $15,000 work. I agree with you in trusting your numbers.

    • Dawn – exactly! And boy oh boy would I have kicked myself if I had seen that it sold for $24,900, but because I was trying to save a few bucks, I only bid $23,000 when I knew $25,000 would still have been okay!

      Nice example on your part too. You’re right, it’s all a matter of “how you want to make it work”. The people in your example clearly had a different model than you do, so they were able to offer cheaper. Onto the next one!

  3. Michael Dorovich on

    It makes so much sense to calculate your maximum offer up front when you are in a calm and rational state and then submit it, refusing to change during the emotional frenzy of the deal.

    You avoid ‘the ebay effect’ of bidding just a little bit higher because you psychologically want to get the deal. Brilliant!

    • Michael, I absolutely love “the eBay effect”. I might have to steal that line from you! It’s a great way to nutshell all the emotions that can occur during a bidding battle, and as you noted, can end up causing you to do something (bid higher) that isn’t beneficial to you.

      Thanks for the comment!

  4. Melodee Lucido on

    Another great article Clay.

    I like how you put in the Key Learning Points. There was humor and awesome wisdom in this writing.

    I learned pretty early on to make my highest and best from the get. You are completely right: I sleep better. I look at the different scenarios of execution, decide which best fits for me, do the numbers, make the offer and let it go.

    We all win some and lose some but peace of mind along the way is priceless.

    Thanks!!

    • Thanks for the comment Melodee.

      You are absolutely correct and sum it up nicely, “win some and lose some but peace of mind along the way is priceless”. There’s no point in building a business/hobby/passion if you can’t do it with a peace of mind. That pretty much goes against the whole idea of things.

      Great comment!

  5. On my first major income property purchase – a fiveplex -, I offered the asking price in spite of my realtor’s protests. I was tired of being outbid! My reasoning was simple: they’ll have to accept my offer unless someone offers more, which was a possibility.

    I got the property, and made $83,000 profit on it two years later.

    • Thanks for the comment Gina. That’s a great real life example there!

      I’m guessing you didn’t give your Realtor any of that $83,000 profit? ;-)

  6. Clay – very interesting article and thanks for the food for thought. I have been under the mind-set to offer lower than my highest & best so that I can allow room for negotiation, but I absolutely see the value in offering your highest & best upfront. I’m trying to buy houses directly from homeowners via direct mail and my website so this strategy won’t be the best to employ every time, but in more competitive situations I can absolutely see the value. Always good to have lots of different tactics in your bag!

    • Brandon, one thing you should keep in mind though is if someone “is” interested in working with you to sell their house, odds are, they have also contacted other real estate investors. So while it may not be a home listed on the MLS as a foreclosure or whatever, I’m sure there will still be other investors the seller has reached out to.

      Thanks for the comment!

  7. Hey Clay, I like your section on Trusting the numbers. So true, once you prove to yourself it will work, sit back and let them work! I know that was not the main theme of the article, but I really liked that part. Thanks!

  8. I’d sell my grandmother’s soul to the Devil to be able to buy a property in my neighborhood for $25,000. Where I live I couldn’t buy that strip of grass between the sidewalk and street for that price.

    • Hahaha Jeff! No need to sell anyone’s sole.

      You could always do some out-of-state investing! Although the deals are getting harder to come by, they still do exist here in West Michigan.

      Where do you live? CA?

      • I was just outbid after offering my “highest and best” offer in San Diego. It’s so competitive here, my agent said there were 13 offers on the place.

        I backed out when they were asking for 30,000 more than the asking price.

        Maybe I should think about out of state investing!

        • $30,000 more? Wow! That’s more than the total I bought the property talked about in this article! CA home prices… gotta love em’!

          If you ever decide to invest out of state, West Michigan is a great place to consider!

  9. I always, i mean always start LOW with my ceiling price in mind.I write a note to the listing agent that goes like this :”See attached initial offer on the property in the subject line.
    Please, do not feel offended by the lower offer as its a starting point of negotiation.
    Kindly submit this proposal to the Seller and, if possible, get a counter offer.
    Do not hesitate to contact us back for any question or clarification.We appreciate your understanding and cooperation.”
    Must of time, the Agent will tell me verbally the minimum the seller will entertain.This way , you end up building relationship with the Agent.This is very important if you want to keep clean record in your market.

    • Thanks for the comment Charly.

      Interesting approach and I can certainly see the logic behind it.

      In my area though, the majority of the foreclosures go through a small amount of brokers who have streamlined processes’, so they’re not into the negotiation thing much (assuming of course it is a good deal priced right (or too low) to begin with) at the beginning.

      To me, I don’t want to risk losing a good deal in the spirit of building a relationship, because as I’ve found it, there is no better way to build a relationship than to simply BUY a property from a Realtor.

      Sounds like your method works though, so more power to ya!

  10. Shawn Holsaple on

    I have been using this approach for the past 2 years since our [Indianapolis] market is very competitive and most “good” deals always go Highest & Best.
    In addition, I always us slightly higher number over my limit to ensure that I beat someone out that just does an even number. For example in the deal above, I would bid $25,510.
    I also never ask for any contingencies & I offer to pay all closing costs. This will get me a high net amount to the seller.

    I’ve won several bids like this.

  11. Clay, thanks for the article. I just now read it as Mark Ferguson linked it in his article The Real Estate Agent Nightmare, apparently I am not good at linking. For the first time I bought a property for more than listing price. I am glad I offered highest and best first as there were no counteroffers they just took the best offer.

Leave A Reply

css.php