The Importance of Knowing Your Numbers in Real Estate

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”.

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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

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.

Final Thoughts

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.

Colby Litzenberger

Replied over 5 years ago

Good article Sharon. I have found that any time while negotiating if you have data/research to back up your offer you can proceed with confidence and if the other party gets “squirmy” you will typically have a better case for why your offer is reasonable. Often (although not always) the other party has a less well thought out/researched reason for what they expect to be paid. If you can walk them through your numbers they often realize they may have been off in their ballpark estimate of the value of their commodity.

Sharon Vornholt

Colby – You are definitely right about that one. Often the other person just pulled “their price” out of a hat, and they don’t have any facts to back up that number. Personally, I don’t share my numbers with sellers. I just say that my offer reflects the work needed to bring the house up to the standard that would make it desirable to a retail buyer. I might expand on that thought, but it’s my feeling that they really don’t need to know what you’re making on the deal. Thanks so much for reading. Sharon

ilhan

WOW! what a great article Sharon, As always i enjoy reading your articles and marketing ideas. you made a great point to always care after the end buyer whether landlord or rehabber, because credibility is important. Also, its great to create a win-win situation at the end. Thank you.

Clare

OK. Get all that. But this does nothing not to offend the seller. Being right can still sound offensive to them. I thought you had some idea on how to present it to them with a little sugar coating.

Clare – The article didn’t have the correct title on it when you left this comment. You always have to be kind and respectful when you present your offer, But there is no sugar coating the numbers. This is quite simply a numbers game. Each offer should solely be based on the numbers, but that offer should be presented to the seller in a way that they don’t take offense. If you can convey to them it is simply a business decision, they may not like your offer but they will respect it. Now you can always offer them “something else” to sweeten your offer. Maybe they need the house cleaned out if it’s an estate. i once paid someone’s moving costs. Was this reflected in my offer? Sure it was. They just needed money to move. Another time I paid off liens put on the house by code enforcement. There are many ways to satisfy the seller. It’s not always about the money. Sharon

Ilhan – Those repeat cash buyers on your list are invaluable. When they can make money on the deals you send them time after time they will be willing and eager buyers. That’s why it’s so important to know your numbers. It has to be a great deal for them, but you have to be able to make a profit at the end of the day too. It has to be a win, win for everyone at the end of the day. Some sellers will choose to list the property and that’s OK. We are looking for that smaller number of distressed sellers. Thanks for stopping by. Sharon Reply Report comment

Tyson Bumgarner

Great article! I can’t help but feel that this was aimed at me, because I just made a post a day or two ago about this same topic of “lowballing” on an offer. I chalk it up to being new and not knowing much. But you can be sure that going forward I won’t worry about what I offer as long as I did my analysis correctly and I know what I should be paying for a property. Great stuff, thanks for taking the time to post this information for folks like me to read and learn from!

Tyson – I don’t care what anyone says; learning to make offers is a process. We all make mistakes especially when we are new. The biggest thing I see is wanting an offer so bad that we try to make it work. We start “adjusting” the numbers so they will work on paper and we can get the deal. Bad idea! The first deal is often slow to come, but if you do it right you will get great deals down the line. Let the other ones slide by and just go “next”. I’m glad you like the article and thanks for your comments. Sharon

Walt Payne

Funny thing, right before reading this I just answered two similar posts to those you mentioned. Asking price does not have to have any valid basis, it is just a number. Besides that, even if it has a valid basis considering current market value it may not work. I agree that you have to offer based on what works for you, and it either gets accepted or not. The other mistake is to think that when you are asked to make a “best and final offer” that you need to increase your offer. If the offer was based on good numbers, it is what you can pay. Overpaying is something you should not do, unless you are reasonably certain that the lost opportunity will cost you even more. But do so knowingly, not out of emotional response.

That is a point folks really need to understand Walt. Your best and final is usually the one you just made if you did it right. You can’t get attached to a property. If it’s not a good deal you simply need to walk away. Beginner wholesalers often set themselves up to fail buy bringing skinny deals to an end buyer. Once again, this is a bad idea. You want to build a good reputation in this business, and you do that by making solid offers so you can bring your buyer’s list great deals. sharon

Wendy Noble

Thanks for the timely article. I’m about to (maybe) make an offer on a property. I’ve been doing eraser math! Guilty as charged. Still going to have the place looked at and might still make an offer but I’m going back to my spreadsheet to fix it. I got some advice on a forum the other day to focus on properties that had more days on market. The longer the property has been on the market, the more realistic the seller’s expectations will be.

Wendy – LOL. Eraser math is a noose around a new investor’s neck. Luckily you learned before you made the offer and got stuck with a house you paid too much for. Doing your numbers correctly is vital to the success of your business, But you need to learn to do it quickly, because if you don’t the deal will be gone before you get your offer in. In my business, my cash buyers will generally go look at the house the same day I call them, and call me as they are driving away from the property. That is how fast it happens. They know that on day 2, I will go “next” and move on to the next person. The takeaway here is don’t get stuck with “analysis paralysis”. Make an offer on every house you look at. Your offer should be low enough you feel uncomfortable. Good luck. Sharon

Antonio Coleman

Sharon, I pretty much over price all my projects an extra 5% to 10%. By doing this I’m never caught in a situation where I’m likely to lose money. Save yourself a headache by coming in higher to cover the unknown. Antonio Coleman “Signing Off”

Hey Antonio – I always use “average” comps; never those couple of high ones. When I am figuring repairs I do that on the high side. And yes — there is always a fudge fund for “what ifs’ and other unknowns”. The % that I use depends in part on the age of the house. I will have a higher number for older homes. Thanks for stopping by. Sharon

Kim Martin

Oh Sharon, you are spot on! I learned from an appraiser friend, that if I can share the facts and data on how I arrived at my asking price, it is not such a scary number. For example, the seller may not realize I cannot get insurance on a home with knob and tube electrical and I have to allow for the expense to re-wire the home, etc. When I am working with a deal on the MLS, I have my realtor present the offer, in person. That way they can review how I came up with my asking price.

Thanks for sharing Kim. Sharon

Shaun

Good stuff as always Sharon. If you don’t know your numbers you will be dead in the water. As for being concerned about the “low-ball” offer, you can’t worry about that. You can only offer what the place is worth to you. Maybe that is way less than they want and the get annoyed, it will happen. If you are screening your leads you should not see too many places that are only worth 20-30% of what they are asking for.

Hey Shaun – Agreed. The whole screening process starts with that first contact. When you’ve been doing this for a while, it’s just part of the business. Thanks for your comments. Sharon

Karl S.

This was a very good article. Really solid advice to follow regarding knowing the numbers. I too have done some eraser math in the past when I first got started. Sometimes I still get tempted to do it in certain situations…From now on I’m sticking to my guns….lol Thanks

Thanks Karl. You really have to nail your numbers if you want to make money. There is only so much “winging it” that you can get away with. But like anything else, it just takes practice. Thanks for reading. Sharon

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