My Method of Madness When Making Offers on Real Estate
Making an offer: it’s hard to be a real estate investor without doing this.
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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.
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…
- 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.
- “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.
- 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.
- 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!