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Avoiding Rookie Mistakes When Making Offers on Real Estate

by Sharon Vornholt on February 12, 2014 · 29 comments

  
Making offer real estate

Some weeks are just full of lessons that lead to blog posts, and this past week was one of them.

I had about a half dozen people that sent me an email that involved making offers. They weren’t asking for advice in most cases; they skipped that part. Some of them didn’t have a question (even though they should have).

But there was one thing that stood out in all the emails, and that was in each case they had made rookie mistakes that had to do with their offer.

So today I want to talk about the one thing that will sink your ship faster than anything else; making bad offers. We all know that you make your money the day you buy a house. But you can also lose it all when you sell if you don’t know how to figure repairs accurately.

These are perhaps some of the hardest things about real estate investing to get right. But these are skills that are absolutely essential if you are to succeed.

My Realtor Said…

I had a gal send me an email with a strong visual message in it. I could just see her standing there with her hands on her hips as she demanded to know, “Why in the world would an intelligent seller accept anyone’s low ball offer? My Realtor said, “Houses that are probates that are listed on the MLS never sell for those bargain bin prices”.

Well, I wanted to say, “Good for your Realtor. They are probably right in some cases”. Most of the houses I come across fall into one of two categories; nicer houses that will most likely sell on the MLS, and those houses that need updating, a lot of repairs, or ones have sellers that don’t want to be bothered with anything except collecting the cash as a result of a quick sale with an investor.

Now don’t get me wrong: I love and value Realtors. I have worked with them for many years. However, the fact of the matter is that unless that real estate agent is also a real estate investor, they don’t know what a good deal is (for an investor) in most cases.

And the idea that a real estate investor would come away with a fat 5 figure check on each deal is something many of them think is just wrong. After all, they are used to getting a portion of a 6% commission (in my area) most of the time.

As I tried to explain to this gal this past week that wearing the “investor hat” is a totally different thing than wearing the “Realtor hat”, she just wanted to argue with me. She just didn’t believe that anyone could buy houses at 50 cents on the dollar (or lower).

Lesson #1.

You must learn how to figure out what a good deal looks like and how to present those low-ball offers to sellers with confidence.

The Psychology of Making Offers

My second ah-ha moment came this week when I spoke with an investor that asked, “How I got absentee owners to give me a key to the house before I had it under contract”? She went on to say that she felt pretty confident about her offer and what houses were selling for in that area. But she really wanted to get in to see look at the property and the owner wouldn’t give her a key.

I honestly thought I had read her message wrong at first.

After I read it a second time I said, “So you haven’t done any deals yet, but you have made an offer sight unseen on this house based solely on what some of the houses in the area have sold for at a retail price “? She said that she had. The seller told her the house was in good shape. When I asked her about repairs, she had no idea if it needed repairs much less the scope or the cost of those repairs. I asked her again how in the world she could make an offer under these circumstances. She told me once again, that she was confident about her offer.

This was when the real stunner came.

She said that she would help this lady out even if she didn’t make any money on the deal because “she was so nice” (I think she had forgotten the part about how the seller had refused to let her in the house to see it). She also said that it would just be a learning experience and she was OK with that. I’m pretty sure it had never crossed her mind that she could actually lose a large sum of money in the process. I pointed out that hobbies were something you did without expecting any compensation; not real estate deals.

Lesson #2.

Don’t make stupid offers.

Know your numbers before you make an offer. And get over the feeling that you are doing something wrong. We aren’t in the “house business” we are in the “problem solving business”.

Rookies Shouldn’t Make Offers on Property in Another State

This is another case of “you don’t know what you don’t know”. There are just too many things that can potentially go wrong to list them here. But here are a few things you need to remember:

  • Lining up an agent to help you won’t keep you safe. (Read the first part of the article again).
  • The value posted on the tax assessor’s site has nothing to do with what the real value of the house is. It may or may not even be close. Remember that those folks want your house to have a high value for tax purposes.
  • Not all contractors are created equally. Don’t assume you will get an accurate repair estimate from a guy referred to you by someone you don’t know. Remember the part about using folks that invest in real estate or have a lot of experience working with investors? Your contractor may be great; or maybe not so great. If you haven’t seen the house, you will have no way of knowing before you have made costly mistakes in most cases. Repair mistakes will sink you as quickly as making bad offers.

Lesson #3.

Just because you have boots on the ground in the city where you are investing, don’t assume those boots know what they are doing. Do your due diligence. Take a trip to the city where you plan to invest, and build a solid team that you can trust.

Learning to make good offers takes practice, but anyone can learn to do it. The tough part is staying safe during the learning process.

How do you do that? Get a mentor!

Questions? Comments? Leave your thoughts below!

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{ 29 comments… read them below or add one }

Brian February 12, 2014 at 7:11 am

Thanks for another great article Sharon. I’m a rookie but I don’t make mistakes so I’m good to go ;-)

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Sharon Vornholt February 12, 2014 at 9:20 am

LOL Brian. That’s good to hear.

Sharon

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Karin DiMauro February 12, 2014 at 7:31 am

Great stuff once again, Sharon!

I have a follow-up question for you on Lesson #1, and I’m guessing the answer could be its own blog post. :) You said, “You must learn how to figure out what a good deal looks like and how to present those low-ball offers to sellers with confidence.”

I think I’ve gotten pretty good at the first half of that sentence (and have a good contractor to help me if I have questions about repairs), but I still feel a bit, well, bashful, on the second part. So far I’ve mainly worked off of HUD houses or other REOs on the MLS partly b/c of my hesitancy to negotiate with sellers who may be more emotional or take offense to an offer. But I think we’re going to need to branch out if we want to grow the way I envision. So do you have some tips on the way you couch your offer? I think one of the best ones I’ve heard, from you and from others, is to remember that it’s not always about price – to remember that you’re helping them solve a problem, and to make sure you don’t assume that the $$ is the top priority. What else do you do, or say?

Thanks again for another great post!

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Sharon Vornholt February 12, 2014 at 9:33 am

Karin –

The truth of the matter is that it just takes practice. But if you always speak with confidence and look folks in the eye you when you make your offer you will be way ahead of most investors. This is no time to appear shy or inexperienced; fake it until you make it where this is concerned. Be ready to justify your offer, but don’t ever discuss exact figures or percentages.

I usually give them a verbal offer (then email the offer) so I go over all of the repairs one more time when making the offer, I also remind them that I will clean out the property etc. Get in the habit of asking them if there is “something else” you can do to make this process easier for them. Just ask them. This is especially helpful to folks handling estates.

The other thing to remember and this can be really hard is once you have spoken – when you have given them your offer is to stop talking. No matter how long the silence is, just wait. Make them respond. The natural inclination is for some folks sensing hesitation to jump in and offer to amend their offer. You don’t want to do that.

If they are AO’s, I tell them that they won’t have to come in for the closing and that will save them time and money.

There is a great free tool out there called Oovoo. It is for recording video’s with another person. It has two side by side players so you can actually talk to one another in real time, and it has a built in recording feature. It’s great for role playing or rehearsing something. Give it a try.

Sharon

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Karin DiMauro February 12, 2014 at 8:14 pm

Thank you! I especially like the, “Is there something else I can do?” suggestion. That’s great.

And I totally agree to stop talking and listen – shutting up is an art that more people should look to master. :)

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Martin Cortez February 12, 2014 at 8:20 am

Sharon – I can relate to what you mention in Lesson #2 about “getting over the feeling of doing something wrong.”

It took me a while to overcome my fear of rejection and the feeling that I was “ripping off” people or taking advantage of their situation by offering a low price. After a few successful deals however, it became apparent that the service I was providing was incredibly welcomed by these homeowners who could now go on with their lives without the headache of a problem house.

It’s all about mindset and believing in the fact that you are working for the greater good. It also helps if you tell yourself that you are revitalizing your city or town – one house at a time.

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Sharon Vornholt February 12, 2014 at 9:38 am

Martin -

I think this is a challenge for most people. The only thing we see for a most of our lives are retail sales when it comes to real estate. Making those first few low offers as an investor does make most people feel like they are ripping folks off.

You have to change your mindset completely. We provide a valuable service for folks some of which have very few options. Once you start to look at this as a numbers game which involves service to folks in need it all gets easier.

Sharon

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Sharon Tzib February 12, 2014 at 9:01 am

Just saw a guy in the forum last night who asked for a deal analysis, and three VERY experienced investors told him no go, and one went so far as to say only at “X” price. What did the newbie do? He offered anyway, $10K over the “X” price, and virtually ignored all the incredible advice he had been given.

One has to wonder why you would bother asking at all if you were not going to take the advice? I think too many new investors don’t understand the importance of developing your criteria and then sticking to it, no matter what. You could sense the desperation of this newbie that he was never going to find a better deal if he didn’t act now. He may have a very hard lesson ahead of him.

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Sharon Vornholt February 12, 2014 at 9:46 am

Sharon -

I have been looking at those types of emails all week. They ask you what you think. Then when you say the numbers don’t work, they go ahead and make the offer anyway. I understand the feeling of “needing to get your feet wet” with your first deal or two. We’ve all been there. They don’t know that their only hope of selling that deal is to find another newbie investor that doesn’t know that the house is overpriced to sell it to. And if they decide to rehab the house themselves, they will be lucky to break even.

I say it all the time; this is a numbers game. Let the numbers do the talking and quit doing “eraser math”. It’s either a deal or it’s not.

You asked why they don’t take the advice they are given? The answer is that they aren’t really looking for advice. They think they already know the answer, and they are looking for validation which can be a really expensive lesson. Thanks for your insights.

Sharon

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Frank Iglesias February 12, 2014 at 9:41 am

Great stuff! I like the “Rookies Shouldn’t Make Offers on Property in Another State
This is another case of “you don’t know what you don’t know”. – I couldnt agree more

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Sharon Vornholt February 12, 2014 at 9:50 am

Frank -

Agreed. I know there are a lot of guru’s out there that make it seem drop dead simple. “Push a button and have a million leads”. “Buy property in any state with no experience without ever looking at the property” and on and on.

You must have a certain level of experience to succeed at every level. Every smart investor started small, mastered the what they were doing and then moved on to bigger things. This is kind of like Monopoly. You shouldn’t buy a bunch of hotels until you have mastered single family homes.

Sharon

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Amanda Coleman February 12, 2014 at 11:55 am

Hi Sharon,

This is spot on! I’ve been reading a book by the name of Simple and Sold because I’m thinking about not using an agent; here’s an a bit of an excerpt that has been so helpful…

There could be a lot of anxiety centered around putting in an offer! Most people start to second guess themselves, “ What if it’s too high?” “What if it’s too low?” When putting in an offer, here are some goals that you MUST have in mind:

1) To obtain the property at the lowest possible fair market value price
2) To close within an acceptable time frame that works for both you and the seller
3) To get through the inspection and solve any repair issues fairly
4) To avoid any title or survey or loan problems
5) To have a good relationship with the seller and have no future problems
after closing .

Achieving all of this begins with writing a good contract. That’s right—you write the contract. Read on and I’ll tell you why this isn’t a big deal.

All you need is…

• Your full legal name, the seller’s full legal name, and the legal description of the property. Note: if you know that your lender requires 90 days between loan application and closing, you should already be in touch with them about an application at this point.

• The next part of the contract is earnest money or an escrow fee, depending on the preferred term in your state. Then you will have to choose an escrow officer or title company—again, the wording depends on your state.

• Then you’ll have to get title insurance, which is set by the state. The seller typically pays for the title insurance policy and the policy is issued by the title company or escrow agent. Your lender will require title insurance. The title company will get you a copy of the title commitment which could take no more than 10 days for the title company/escrow agent to deliver to you.

There is an area of the contract for special provisions—whether you want a warranty or residential service contract on the home (more about this later), whether you have received a seller’s disclosure, and if not, how long you will give the seller to get one to you in writing. Finally, you will write down a closing date.

So, you’ve officially made an offer on the house once you’ve signed a contract and submitted it to the seller. When you meet the seller to deliver your contract, be prepared with the following:

• Your contract and cover letter (obviously)
• Your preapproval letter from the lender
• A signed copy of the seller’s disclosure, if you have it
• A copy of your earnest money check
• A copy of your option fee check (we’ll discuss the option fee in a little bit)
If the seller accepts the contract, he or she will sign the contract, and then you’ll take the contract to the title company or escrow agent, along with the earnest money. The option fee will go to the seller. Most likely, you will have to negotiate. But first, let me clarify what the earnest money check and the option fee are all about.
Okay. An option fee (which is also sometimes called a termination fee) is often part of an option clause in some state it is referred to as the RTI-right to inspect in a real estate contract. The option fee, which is usually $100.00 to $500.00 depending on the cost of the house, allows the buyer to cancel the earnest money contract for any reason during a certain period of time—usually seven to ten days. Think of the money as a sunk cost that you pay to look under the hood.
In this period of time, you will be getting the inspection done, and negotiating the repairs in your inspection. During the option period, the buyer has the unrestricted right to terminate the contract for any reason. This essentially means that if the inspector finds out that the roof is about to collapse, you can back out. I would also strongly encourage you to get your lender to order the appraisal immediately after the period. You should also get in contact with a few insurance companies and shop around for the best price. You need homeowners insurance on the home before you close, with no exceptions. Finally, you’ll want to consider a warranty or residential service contract. Home warranties can be a good idea for both the buyer and the seller; they protect the buyer from having to pay for huge repairs on a home they haven’t yet learned how to maintain, and they protect the seller from
Who pays for what, again?
This can all get a little confusing, and just for a review, here’s a list of who should be taking care of what. This is the way the responsibilities are customarily divided—but it’s not written in stone.
The seller’s responsibility:
1) The title policy, which is issued by the title company.
2) Property taxes up until the closing date (this will be on the closing statement)
The buyer’s responsibility:
1) The inspection
2) The appraisal
3) The loan fees—although some buyers will ask the seller to pay a “point” of their loan. A point is an up-front fee that serves as a sort of discount and lowers the interest rate. One point usually equals one percent of the amount borrowed.
4) Insurance
5) Property taxes from the closing date forward
Key Takeaways:
1. Writing a good contract (and a thoughtful cover letter for it) will be key to the rest of your transaction going smoothly.
2. Before you write your contract, you should discuss certain things with your seller: a warranty, a seller’s disclosure, a third-party financing addendum, a survey, and a closing date that works for both of you.
3. In most states, You will have to put up two checks: the option fee or Right to Inspect fee and the earnest money. The option fee?/RTI goes to the seller and allows you to have the option period, which is a 7 to 10 day stretch where you can cancel the contract with no loss other than the option fee. Earnest money is separate: it shows that your intentions are serious, it goes to your title company, and you get it back if you cancel within the option period.

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Kay Khan February 12, 2014 at 2:34 pm

WOW! Amanda Great post,
That should have been a separate post but thanks for info.

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Shaun February 16, 2014 at 10:31 pm

What state are you in?
I can say without hesitation in the 3 states I have worked in none of them have the seller pay title insurance. I wish! Outside of loan costs that is always my biggest closing cost, and on cash deals the biggest.

Also this option thing to do an inspection isn’t anything they do in these states either. I do recall once hearing someone talk about this in the BP forums for I think Texas (though not 100% sure) but that is the only other time I have ever heard of such a thing. Would not be a fan as a buyer (Though I waive inspection most of the time so I guess no harm no foul…) but as a seller I’d LOVE that. They have to give me $100-500 to have the right to do an inspection? That would be frigging awesome!

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Sharon Vornholt February 12, 2014 at 2:14 pm

Amanda -

Most of these procedures apply to retail sales.

Sharon

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Kay Khan February 12, 2014 at 2:37 pm

Sharon, I always enjoy your posts.
How do you find good mentor? (are you going to write about it)
Thanks

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Sharon Vornholt February 12, 2014 at 8:45 pm

I have written about it Kay.

Here is the link to the article.

http://www.biggerpockets.com/renewsblog/2013/02/05/real-estate-mentors-accountability-partners-and-masterminds/

I hope this helps.
Sharon

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Scott Costello February 13, 2014 at 9:39 pm

I still consider myself a rookie when it comes to wholesaling despite having done a handful of deals. One thing that I’ve found true with ever deal I’ve done is that every preliminary offer I’ve made based off comps and “knowing the area” have always been good offers. Once I get into the house to inspect it, my offer usually goes down quite a bit.

I like to make a verbal offer over the phone to help me get a feeling of how flexible/motivated the seller really is. After the offer I usually ad that it was based off of not seeing the house yet and the offer could changed depending on our visual inspection.

This is an outstanding blog post by the way!!

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Sharon Vornholt February 14, 2014 at 11:17 am

Thanks Scott. I think you have enough experience to jump out of the rookie arena. I certainly don’t think of you that way. And, my procedure is pretty close to yours. I like to make an “intelligent offer” as opposed to just throwing one on the table without doing my homework. Have a great weekend.

Sharon

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Josh February 14, 2014 at 12:27 pm

Great article. I think there is a substantial difference between a realtor, an investor, and a realtor investor. Someone who has their skin in the game, and are hitting the pavement every day analyzing costs of construction will surely be able to better represent a more demanding client.

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Sharon Vornholt February 16, 2014 at 12:04 pm

Josh -

I agree. There are a lot of investors in my REIA that are also licensed real estate agents of which actively work both sides of the fence. They are great resources in this business.

Sharon

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Rachel February 14, 2014 at 8:25 pm

Wow Sharon, you must have a lot of patience to be taking all those emails!! I remember reading some of your past write-ups about how some folks have just wasted your time going back and forth via email — definitely been there done that!

Going through this post brings back memories. And, it’s funny because I’ve seen both sides as buyer and seller. And, let me tell you — some investor folks (whether new or experienced) just don’t have any etiquette when it comes to talking to sellers.

So many times (even now), I have these kind of folks try to lowball me not even knowing exactly what I’m trying to accomplish. They come in acting like they know it all with the “knowledge” they claim to know — it’s a complete turn off. Some even go as far as just making offers over the phone sight unseen without even driving by (many times due to hearing about the “80/20 Rule”). Seriously!

I’ve learned to shrug off these experiences and just take them as part of being in the business. Honestly, it seems like it’s the same folks over and over again doing most of the deals anyways with everyone else taking the crumbs and the leftovers.

I think that’s what separates those who succeed versus those who do not — the ability to learn from their mistakes, move forward and get really good at what they do. Many come into this business and leave never to be heard from again. And, the wheel goes round and round again bringing in a batch of new recruits!

Nice post, definitely one I can relate! :)

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Sharon Vornholt February 16, 2014 at 12:17 pm

Rachel -

Those investors you speak about are “pretenders” most of the time. The use their boldness (and rudeness) to cover up their lack of knowledge.

What they do in real life is mess up most of the deals. They keep us from legitimately helping folks that really need help in the process many times. You are right about the fact that they don’t last long. You are also right about getting a new batch pretty routinely.

We were all newbies at one time so I can relate to them. But I can honestly say that I never conducted myself the way some of these folks do business.

And don’t get me started on email. I am happy to help anyone. But a word to the wise; don’t abuse folks that are so willing to share their knowledge. Have some manners. They are not going to shut their business down to get yours going.

Thanks for your insights Rachel.
Sharon

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Shaun February 16, 2014 at 10:46 pm

Hahaha…
Newbies and their falling on their swords to justify making a crappy deal can really give one a headache! You really want to help but you can only tell them so much if they don’t want to hear it.

Great points here. The thing people have to realize is that Yes it can be tough to look someone in the eye and make a really low offer and Yes the Realtor is right that most people will not take such low offers, especially on a place that is listed, but some will. I do generally like the REO space since I can make horribly low offers without having to worry about actual humans and their fragile emotions. :)
I have gotten calls form agents a few times berating me for wasting their time for submitting such stupid offers (Often wonder how long it takes them to submit and offer since these calls are usually a bit longer then it took me to write it in the first place) and once got an email from a HUD asset manager asking if I knew how to actually enter an offer into the system. :)

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Sharon Vornholt February 17, 2014 at 6:44 am

Hey Shaun –

Making offers on REO’s is a whole different ballgame. Everyone makes really low offers, and they expect that. I get frustrated with newbies that make “stupid offers” that are way too high, and then they try to justify why you should buy their property that isn’t a deal. Like you said, the most frustrating part is that they don’e want to listen. I try to help everyone, but when they don’t want to listen it’s really tough. Thanks for your insights.

Sharon

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Shaun February 17, 2014 at 2:17 pm

Yes everyone jumping back into real estate because the news says it is the place to be again brings in a lot of stupid bids.
Does drive me crazy as these guys are overpaying for things which makes it a lot harder to find actual deals.

Different mindsets I guess. People seem to get frustrated is they make half a dozen offers without getting something, I on the other hand pretty much always have a visceral “Oh sh*t what did I miss?” reaction if I get something accepted without a lot of pushback. :)

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Sharon Vornholt February 17, 2014 at 3:37 pm

Hilarious Shaun. We always think we paid too much when they accept our offer right off the bat. Maybe they are just really desperate.

It sure gets frustrating competing against the newbies. That’s for sure.

Sharon

Stephanie July 10, 2014 at 2:11 pm

Hi Sharon,

I’m actually trying to figure out an offer on my first property right now–that’s how I found this article, btw. I’m trying to run the numbers but I am going off the seller’s disclosure and public information. I don’t have all the information yet which I understand is normal and I won’t know it all until I finally talk to the seller (and even then, I may not) but my realtor has advised me to go ahead and make an offer. What steps should I take to make sure my offer is a reasonable one? I will be sure to tell the seller that my offer may change after the inspection but like you said, I want to at least make an intelligent offer to start off with.

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Sharon Vornholt July 10, 2014 at 2:56 pm

Stephanie – You can’t possibly make an offer without all of the information. I would caution you not to listen to your Realtor; they have their “Realtor Hat” on; you need your “Investor Hat” on. It’s all about the numbers, and you can’t make offers without knowing them.

You can’t pay more than 70% of the ARV minus repairs. If you haven’t looked at the house, and done your numbers you can’t make an offer.

Sharon

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