20-30% Rule

[Ariel G.]

Hi Brandon and everyone.

Regarding "The Ultimate Begginer Guide to REI"' 30% rule , or Brandon's "7 years to 7 figure wealth" plan proposal of a 20% discount offer, what do you think according to your experience:

1. What's the realistic amount, 30%, or 20% discounted offer you should try?

2. I feel BAD by offering that, I know that it's the amount that would work for me, or else maybe he wouldn't be able to sell, that's the reason he would consider me instead of having his house not sold (Or else he would hace other better offers for his property and send me away?). Is this the mindset that allows you to sleep well after a purchase like that that obviosuly seems like from the outside to be killing the other guy, or are there any other ideas?

3. Finding these deals, means finding a very bad condition property that is expected to grow in value a lot after fixing right? Or else I don't know who would want to accept my highly discounted offer if it was a desirable property.

5. Any book you would recommend specifically on the subject of finding deals?

Thank you all.

Ariel.

[Steve Vaughan]

Depending on where you are, a 20% discount request can be a lot. Especially for the typical MLS-listed place that hasn't been on the market forever. I don't get how wholesalers are buying at 65% that's for sure! (And why don't they keep them??)

I am meeting a motivated seller today about an off-market commercial hybrid house. He is an accidental landlord and doesn't want to play anymore. He would be thrilled with 80% of FMV. You need sellers that are motivated by a pain point or time deadline.

He called one of my professional looking 'I buy houses signs' I keep on fences of some of my higher traffic properties.  I have also had good luck with targeted craigslist ads.  "I buy this type of plex in this specific neighborhood", for instance.

Shotgunning low offers to MLS sellers would be tough. Need targeted, quiet, off-market transactions. Driving for dollars might help. Good luck @Ariel G.!

[Ariel G.]

Originally posted by @Steve Vaughan:

Depending on where you are, a 20% discount request can be a lot. Especially for the typical MLS-listed place that hasn't been on the market forever. I don't get how wholesalers are buying at 65% that's for sure! (And why don't they keep them??)

I am meeting a motivated seller today about an off-market commercial hybrid house. He is an accidental landlord and doesn't want to play anymore. He would be thrilled with 80% of FMV. You need sellers that are motivated by a pain point or time deadline.

He called one of my professional looking 'I buy houses signs' I keep on fences of some of my higher traffic properties.  I have also had good luck with targeted craigslist ads.  "I buy this type of plex in this specific neighborhood", for instance.

Shotgunning low offers to MLS sellers would be tough. Need targeted, quiet, off-market transactions. Driving for dollars might help. Good luck @Ariel G.!

 Makes sense Steve, "motivated sellers", or desperate ones, or the ones that don't have a clue about the market and are pressured right? Thank you, 

[Steve Vaughan]

Didn't say anything about the clueless, but you are 2 for 3.  Distressed owner situations.  Cheers!

[Jason Hirko]

@Ariel G. Often times these properties need a considerable amount of work, and the owner simply doesn't have the cash. Home Depot doesn't accept equity in your house as payment

[Bill Gulley]

I think it's simplified eye catching stuff that adds content to for those that don't know much about real estate to make them feel like they are learning something. The Guide is just that, an introductory guide, nice presentation that adds sizzle but there's not much meat, I don't think it was meant to provide much meat as you are then off to other materials to "learn". 

Now, I like Brandon, really don't like to call him a guru, but perhaps a marketeer of site topics to enhance BP, that sounds better than guru. (LOL)

In some markets, you'd be laughed at making a low ball offer, to me that isn't real estate it's simply a predatory attempt to steal equity. That's what operators do that don't really know real estate, can't understand the market or use a calculator, it's simple stuff for the simple minded. 

I just advised a friend to buy a place a $1,000 over list from the seller's counter offer, it's worth every dime and with some shine on it, probably could sell for 12-15KL more The price is 118K. Just saying, you need to learn real estate before trying to deal in real estate with guru rules or short cut methods fired from a shotgun. 

Doing things the right way will let you actually buy more houses while others are licking stamps and wasting ink. A little bit here and there adds up, that can be more than the killer deal you find twice a year.......just saying! Good luck :)   

[Ariel G.]

Originally posted by @Bill Gulley:

I think it's simplified eye catching stuff that adds content to for those that don't know much about real estate to make them feel like they are learning something. The Guide is just that, an introductory guide, nice presentation that adds sizzle but there's not much meat, I don't think it was meant to provide much meat as you are then off to other materials to "learn". 

Now, I like Brandon, really don't like to call him a guru, but perhaps a marketeer of site topics to enhance BP, that sounds better than guru. (LOL)

In some markets, you'd be laughed at making a low ball offer, to me that isn't real estate it's simply a predatory attempt to steal equity. That's what operators do that don't really know real estate, can't understand the market or use a calculator, it's simple stuff for the simple minded. 

I just advised a friend to buy a place a $1,000 over list from the seller's counter offer, it's worth every dime and with some shine on it, probably could sell for 12-15KL more The price is 118K. Just saying, you need to learn real estate before trying to deal in real estate with guru rules or short cut methods fired from a shotgun. 

Doing things the right way will let you actually buy more houses while others are licking stamps and wasting ink. A little bit here and there adds up, that can be more than the killer deal you find twice a year.......just saying! Good luck :)

 Thank you for your reply Bill. 

I'd appreciate if you could explain:

"That's what operators do that don't really know real estate, can't understand the market

What do you mean by knowing the market? How do you do it? Can you give an example?

Thanks. Ariel.

[Ralph R.]

@Bill Gulley  I agree Bill  if you know the market and spend some time talking to people its not necessary to apply undo pressure or take ADVANTAGE of somebody in a tough spot. I have bought mostly from other investors.  They too know the market.  Some are retiring, some are looking at other areas etc. etc.  Low ball one of them and you probably won't hear back, and you may miss a deal down the road as well. While  they are aware of the market and know values they also know if there's no meat on the bone for me I'm down the road as well.  Maybe I won't steal the property but when im looking to buy I usually have no shortage of chances to buy solid performing rentals that don't normally require a boatload of re-hab.  The seller gets what he needs, I get what I'm after.  No fluff, No bragging no complex questions about how to write some contract that's only been written 3 times in the last century and the bottom line is the buyer is  trying to steal 25 years of equity from some poor shlup. Where I am from we used to call that a Snake Oil Salesman. 

 Real estate is a slow steady game  Like a train  it takes a bit to get it moving but once its rolling better stay off the tracks because you can't stop it easily. A steady solid honest business plan also makes less snags in acquiring money from lenders IMHO

RR

RR    

[Bill Gulley]

Originally posted by @Ariel G.:

Originally posted by @Bill Gulley:

I think it's simplified eye catching stuff that adds content to for those that don't know much about real estate to make them feel like they are learning something. The Guide is just that, an introductory guide, nice presentation that adds sizzle but there's not much meat, I don't think it was meant to provide much meat as you are then off to other materials to "learn". 

Now, I like Brandon, really don't like to call him a guru, but perhaps a marketeer of site topics to enhance BP, that sounds better than guru. (LOL)

In some markets, you'd be laughed at making a low ball offer, to me that isn't real estate it's simply a predatory attempt to steal equity. That's what operators do that don't really know real estate, can't understand the market or use a calculator, it's simple stuff for the simple minded. 

I just advised a friend to buy a place a $1,000 over list from the seller's counter offer, it's worth every dime and with some shine on it, probably could sell for 12-15KL more The price is 118K. Just saying, you need to learn real estate before trying to deal in real estate with guru rules or short cut methods fired from a shotgun. 

Doing things the right way will let you actually buy more houses while others are licking stamps and wasting ink. A little bit here and there adds up, that can be more than the killer deal you find twice a year.......just saying! Good luck :)

 Thank you for your reply Bill. 

I'd appreciate if you could explain:

"That's what operators do that don't really know real estate, can't understand the market

What do you mean by knowing the market? How do you do it? Can you give an example?

Thanks. Ariel.

 Hi, an entire book could be written about the micro real estate markets, I'm not writing one here :)

Might begin by understanding what makes RE valuable, why we look to the highest and best use in RE. You look at demand for that use, usually a house will just be a house for residential use, it may well be zoned for that restricted use. We also look at utility, how well does that property serve the functions or demand to obtain the highest and best use.

Your market for a subject property consists of similar properties serving nearly the same utility, location is the first consideration as the location serves the owner's utility needs. If the location requires more driving time to commercial districts then the utility has an impairment, value may be less. Obsolescence refers to deficiencies that effect utility and thereby value. Your market then consists of very similar properties as to location, style, type of construction, utility function, social aspects that play on demand. From this an estimated market value may be established as well as an after repair value.

Money is made in RE by adding value, rehabbing a house changes the utility and function to bring the property to a higher use, therefore the value increases. We might change the zoning and never touch the property bringing the property to a much higher use potential, you can more than double the value of a property depending on its zoning and allowable use. 

Operators who believe they add value by filing out contracts or finding buyers or sellers really don't effect the value of a property, they do not "add value" to a property but they have a value of a service they provide. (BTW, the value of that service is also viewed in a market concept, the value of like services performed that are available to be used, so the value of a service is not an arbitrary number that relates to the value of a property, think along the lines of a wholesaler who unethically arrives at the value of their service). However, when you own a property having title, your position changes from a service provider to an owner, at that point you may certainly look to the market value of the property for your profits since you own it. 

A very basic concept of your RE market that is not understood by most "investors" is the difference between personal property and real property. Utility and function, there never will be more land, but personal property can be replaced. Wars have been fought for land, never over a new car. RE has social aspects, it serves a physical need for citizens, shelter, safety, there is a civic purpose in the RE market. These aspects do not relate to personal property, as there is little civic purpose to owning personal property. This is why we deal differently in RE than we would selling a car, there are regulatory aspects that are design to safeguard the public and support civic needs of a community. 

So, when you simply go out and offer 60% of some asking price, you're ignoring all of the factors and influences to the valuation of RE. This may be an approach on a car lot, dealing with something that can be replaced, that serves no public interest, that doesn't carry with it unique ownership rights in title, that has very limited use for an owner or that has much less utility. 

This is pretty much why investors on BP (or anywhere else) begin on the wrong track, they don't really understand the market concept and deal as if they were dealing with personal property, especially wholesalers.

I will also say that after understanding the basics of real estate and identifying your market, much of this will be a flash through your mind when you go look at some property. Much of this will already be known and obvious, but not always, always consider the utility, highest and best use, the functionality of the property because this is where value is determined in your market. :) 

[Robert Wilson]

Originally posted by @Bill Gulley:

I just advised a friend to buy a place a $1,000 over list from the seller's counter offer, it's worth every dime and with some shine on it, probably could sell for 12-15KL more The price is 118K. Just saying, you need to learn real estate before trying to deal in real estate with guru rules or short cut methods fired from a shotgun. 

Is that even a good deal for the investor?

In my market costs of sale hover around 7-8% for a broker and seller paid closing costs.

So in your example.

Front End Purchase Price: $118K
Shine:                                     $4K
Total Investment:                $122K

Back End Sale Price:          $130K
Cost of Sale:                         $10K
Net Proceeds From Sale     $120K

Net Loss                                 $2K

There is simply little to no margin in the deal you describe.

[Bill Gulley]

#1. We aren't in your market.

#2. He will live there for awhile, moving up in 3 to 5 years.

#3. Yes, it still can be good for the buy and hold investor, in our market.

#4. I don't pay 7/8% to sell, standard here is 6% and we can go flat fee as well.

#5. you assumed shine at $4K, maybe that's what put you $2K under. Putty and paint, less than $500.00 with yard work.

Now, I totally agree that if you're flipping, you need to figure in holding costs, which you omitted and costs of disposal and you will need to buy lower, however, also understand that what you plan to do is irrelevant to the property's market value. You plan doesn't devalue a market value, the seller could care less. But, if you can show an owner that his best market will be to an investor, that a prudent and fair dealing investor can only go so much, that you justify costs of repairs and other expenses and then an owner agrees, you're home free to a better deal. 

More often than not, MLS listings are properties offered to any buyer, investors are at a disadvantage because you're competing with the public, Harry Homeowner who intends to live there, that is who sets market values moreover, the open market. If you can't compete at market value then your use for the property is off or you can't add value for a profit. That's where slinky operators give a sales pitch and perhaps a wagon full to convince a seller to take less, thereby stealing maybe 5 years of equity because they need a profit. That's not how professionals conduct themselves in RE as I mentioned above. Obviously if we had found the property before the listing the price could have been lower netting the seller the same thing, but we can make this a deal.

All real estate is local :) 

[Leland Barrow]

I think that there is some bad advice on here. Coming in with an offer at 80% of asking price is not a low ball offer. Most homes are priced at or above market value. Realtors can vouch for how many times a seller wants to reach for the sky with their price. These are homes that are not distressed. Distressed homes have less value and they are still usually priced at or above market value when you factor in a reduced value due to being distressed. They may appear cheaper but are they really?

There is value to an actual cash offer and a quick close. Many people are not into "peopling" and the idea of having to deal with selling a house is terrifying.

Offers are the beginning of a negotiation and anyone that understand leverage and negotiations understands the concept of an "anchoring heuristic". A mls price has already anchored the seller. A low offer is designed to shock that seller and hopefully derail that heuristic.

People get mad and bring emotion into it because they do not realize that they are anchored. Any business person that gets mad over an offer to buy their property is not a good business person or they are extremely ignorant of their own psychology.

There is nothing wrong with offers at 80%, there is nothing wrong with putting in a 1000 offers at 80% of MLS price. Business is a numbers game. Money is made at the purchase and not at the sell of the property.

I agree it should be a case by case basis. To believe that because people accept a low offer that they are being taken advantage of is ridiculous. That is a reflection of a very arrogant and egotistical mind. People make decisions for their reasons and you can go about trying to figure out their reasons all you want. Personally I have better things to do.

When you factor in that most MLS deals involve brokers then there is far less ammunition to accuse people of taking advantage of other people. Is that not what a broker system is designed to prevent?

[Dan Schwartz]

We sold a 4-plex in a low-income neighborhood last year. These are cheap properties with high returns.

One offer came in about 30% below list, with clear investor fingerprints. If they had driven by it, they would have seen it was in very good condition (from the outside...but the inside was equally well-maintained). If they ran a proforma on the numbers we put in the listing (I insist on accuracy), they would have known it was a fair deal at the list price. We simply signed a rejection and moved on. There was no reason to fire sale the property, but kudos to them for trying. No hard feelings.

Another came in about 20% below, but without "investor-type" conditions. This felt like a normal buyer. We countered and settled about 5% below list. These buyers could have easily said, "no we want it at what we offered" and walked. I've done that when the seller insisted on too high of a price. But again kudos to them for trying to get it lower than list. To boot, when I introduced the buyer to the tenants, he told me about a program he was going to enroll the tenants in which would yield twice the rent I was getting (state-paid). I don't know if it worked out for him or not, but the property would have been an absolute ATM machine if he pulled it off.

That's real estate. We aren't buying TVs at Walmart here...

[Ariel G.]

So basically what we are saying here is that we all agree that the real market value (that would be lower in most of the cases than the seller's offered price, because they are always inflated) should be estimated by the investor acording to similar properties in the same area (I suppose you would have to visit many properties to be knowledgeable of the real estimates market worth), and from that estimated price, lower from it the repairing costs to be in the same level.

From that price estimate the costs for the transaction and discount them from this price. That would be the price to break even? You agree?

After that any dollar you succeed to lower would be what you gain from the investment in an immediate way (and not considering future appreciation). There each investor should be thinking on what the amount of earnings from the transaction would make it worth or not to be invested in. 

Here we have a discussion, weather this value, or equity, should be gained only by adding a new force added value to it, or also from taking some previous equity.

Correct?

I think weather or not you would take previous seller equity, would depend of you being or not successfull to create new equity. If you are not, then the only way you would make an offer, would be by taking certain amount of previous equity, if not, that property would not be worth investing for you.

Makes sense? Agree?

Ariel.

[Bill Gulley]

LeLand is speaking as a true marketeer of personal property and doesn't understand that intrinsic values are not shown or proven in a real estate market. Yes, there can be other motivating factors, especially when title is not easily transferred due to defects in the property or title. 

Might understand by looking up the definition of "market value in real estate" you will find certain aspects of a sale must be present before you have a market value, if they are there, you don't ever buy "under market"! You may have a distressed sale which isn't a true market value. 

Which means too, you don't gain instant equity under accounting and legal requirements until you hold that property into a new marketing time, one year. 

Do seller's and some Realtors add fluff to an asking price? Sure, but not always as adding too much fluff kills a property listed on the market, it is seen as overpriced and ignored by those in the market, that increases holding time and costs. If a seller has any real motivation and the Realtor is doing their job, the property will be inline with the market. 

+ or - 10% is acceptable and from there you can begin deducting for obsolescence, functionality, condition and deficiencies. If your 30% offer is justified by pointing out these areas, then fine, a 30% below listed price without justification is a low ball, period. Perhaps the property has been on the market for 210 days, what does that tell you? There may well be justification for offering 70% of the asking price. But firing off offers at 70% or below on marketable properties is just stupidity and attempts of predatory dealing. 

Each property is unique, there is no other property just like it, unlike dealing with cars or TVs. 

When I began I thought in terms of personal property as well, thinking if they are dumb enough to sell to me that's fine by me. Also thought it was no skin off my tail by making a low ball offer. Then I learned that actually, a lot of skin off my tail was lost and what the differences were between cars and houses. I pretty much had to start all over, but that's also where an education comes in. One of the most important assets you can ever have is your reputation, it's hard to establish and it can be lost over one transaction for a long, long time, it can put you out of business!

If nothing else, arrogance is youth ignoring experience. 

Every state has predatory dealing laws as well as federal law that addresses such dealings, it's not really what you can convince an unknowing seller into, an aspect of real estate discussions rarely points out knowing the seller, remember most everyone is related to someone. Attempting to pull a fast one usually brings others out of the woodwork and they can bite you. So, there is a line not to be crossed in conducting business in real estate. Don't be telling granny her house is only worth 65% of market value with documenting your justifications fairly!

Now, I'll leave this for our egotistical youthful experts applying their logic and inexperience. :)

[Leland Barrow]

@Bill Gulley I disagree with you, and calling names, or belittling people hardly justifies a point. I reread what you wrote a few times to make sure I understand what you are saying so that I do not put words in your mouth like you did me, I never said 30%. If I understand you correctly you are saying that it is a predatory practice to submit low offers and that it creates a bad reputation. Your rule of +/- 10% plus accounting for a property being distressed, on market, or whatever is a superior business model.

I don't use either business model. I am a cherry picker that does opportunistic investing. I like my W2 and will do some version of it until I am no longer physically able to. The 4 hour work week sounds French to me. I prefer buy and holds and am very careful about what I purchase and who I ultimately do business with. I also see nothing wrong with a business model that makes low offers and plays a numbers game to get properties below market value, below market price, or below whatever semantics or refined definitions that you want to use. 

Just because you failed at a business model does not mean everyone will fail at it. Your granny comment makes me think that you are confusing wholesaling versus offers based on the MLS? You seem to be addressing me, but I never discussed wholesaling. On that topic like most topics I am sure we would agree my youthful ego, arrogance, ignorance, stupidity and whatever other word you would like to attach included. I am an expert on having an opinion, if you ever need one let me know. However, you hardly seem to be in short supply with 1.2 million posts.

Don't get the impression I am mad, you actually made my morning. I had the mental image of an old man spraying me with a hose and yelling at me to get off of his grass. I look forward to playing in your grass again.

[Joe Splitrock]

@Ariel G. you seem to understand value is all relative. Market price is what someone is willing to pay for something in any given market. In some situations you may be able to offer 100% of asking price and end up paying 20% below resale value. Very often people buy properties at a major discount to average retail, but the condition of the property often isn't comparable. For example you may pay $20,000 under what an identical property sold for, only to find out after replacing the roof, furnace and carpeting the property that you just paid $20,000 back into the property. In that case you achieved no discount to market. Your true discount to market is:

Average retail - Purchase price + Rehab costs = Discount to Average retail

[Andrew Syrios]

I'll run down the list real quick:

1. It really depends on your market and price point. Generally speaking, I aim for 25% because banks loan 75% on investor properties usually, so that's what it takes to BRRRR out completely. That would be my general recommendation, but it depends on how tight your market is.

2. This is tough for me too and a lot of people. You get better with practice though. My best recommendation is to explain how you arrived at your number. This way, it doesn't feel like you're just firing off a heartless low ball.

3. They don't necessarily need to be in very bad condition. It's more about the seller's level of motivation, which could be high even if the property is in good shape. Usually it will require some work though, but if you're less experienced, I would avoid the massive projects.

4. The Millionaire Real Estate Investor is still my favorite real estate book, although it doesn't have a huge section on marketing, it's still good.

[Ariel G.]

Originally posted by @Andrew Syrios:

I'll run down the list real quick:

1. It really depends on your market and price point. Generally speaking, I aim for 25% because banks loan 75% on investor properties usually, so that's what it takes to BRRRR out completely. That would be my general recommendation, but it depends on how tight your market is.

2. This is tough for me too and a lot of people. You get better with practice though. My best recommendation is to explain how you arrived at your number. This way, it doesn't feel like you're just firing off a heartless low ball.

3. They don't necessarily need to be in very bad condition. It's more about the seller's level of motivation, which could be high even if the property is in good shape. Usually it will require some work though, but if you're less experienced, I would avoid the massive projects.

4. The Millionaire Real Estate Investor is still my favorite real estate book, although it doesn't have a huge section on marketing, it's still good.

Hi Andrew. Thank you for dedicating yourself to answer in such an ordered manner to my questions.

Wanted to ask you, in your experience what are the most successful justifications for a price lowering you used that were reasonable to your sellers and worked? 

What are the main points the rebated at you when you throwed at them specific justifications and how did you overcome them and convinced them?

Thanks. Ariel.

[Andrew Syrios]

Originally posted by @Ariel G.:

Originally posted by @Andrew Syrios:

I'll run down the list real quick:

1. It really depends on your market and price point. Generally speaking, I aim for 25% because banks loan 75% on investor properties usually, so that's what it takes to BRRRR out completely. That would be my general recommendation, but it depends on how tight your market is.

2. This is tough for me too and a lot of people. You get better with practice though. My best recommendation is to explain how you arrived at your number. This way, it doesn't feel like you're just firing off a heartless low ball.

3. They don't necessarily need to be in very bad condition. It's more about the seller's level of motivation, which could be high even if the property is in good shape. Usually it will require some work though, but if you're less experienced, I would avoid the massive projects.

4. The Millionaire Real Estate Investor is still my favorite real estate book, although it doesn't have a huge section on marketing, it's still good.

Hi Andrew. Thank you for dedicating yourself to answer in such an ordered manner to my questions.

Wanted to ask you, in your experience what are the most successful justifications for a price lowering you used that were reasonable to your sellers and worked? 

What are the main points the rebated at you when you throwed at them specific justifications and how did you overcome them and convinced them?

Thanks. Ariel.

The two best things I've used before are repairs and comparables. The comparables are best if it's one you've bought (i.e. I bought a house three blocks down in slightly better shape for X, etc.). But other comps work too. To me, I wouldn't be afraid to explain your business model and that you need to make a profit on the property and it requires X to fix and what not. You can then walk them through your justification for the offer. Of course, every situation is different, but especially for fixers with motivated sellers, this seems to work well.