Newbie - Multiple Offer Situation

17 Replies

I am in the process of making my first offer on an investment property (a duplex).  They are collecting multiple offers to choose from and they need to be in by tonight.  Unfortunately at this time I will need to get a loan, and will request an inspection contingency.  There has been a lot of interest in the property.  It is in good shape, and the owner has replaced windows, A/C units, some appliances, and fixed a roof leak.  Asking price is $260k and rents should be $1150/mo (each).  It isn't a great deal, but it should cashflow and is in a good area.

The seller is an older couple who are starting to have health issues and want to liquidate their REI.

Currently I am planning to offer a small amount over asking price.  Any tips to get help get the offer accepted?

How does $1150 rent cash flow with a $250,000 house?

As for getting it accepted I would say offer quite a bit over ask.  Not being preapproved with multiple offers may make it impossible to have your offer accepted. 

When I sell a house I won’t look at offers from buyers without proof of funds and preapproval for conventional mortgage 

Personally that is a horrible price for what it will rent for.    

But perhaps we have different goals 

Use an escalation clause. e.g., you will pay $5,000 more than the 2nd best offer up to X.

Originally posted by @Michael Plante :

How does $1150 rent cash flow with a $250,000 house?

As for getting it accepted I would say offer quite a bit over ask.  Not being preapproved with multiple offers may make it impossible to have your offer accepted. 

When I sell a house I won’t look at offers from buyers without proof of funds and preapproval for conventional mortgage 

Personally that is a horrible price for what it will rent for.    

But perhaps we have different goals 

 It is a duplex, so both sides should rent for $1,150/mo ($2,300/mo).  I am preapproved for conventional with proof of funds for the down payment.

Offer your max offer, that's all you can do. You need appraisal and financing contingencies in there, but you can buy as-is, without inspection. Unfortunately conventional financing is the least appealing option for a seller, so you are fighting an uphill battle.

Here is what I send to clients. Let me know if you have any questions:

Here is a list of the most common used strategies to win a multiple offer situation. Some buyers will use as many as they can, a few, or only one. We can access what would work for you and implement those with your offer.

1. Offer over list price- this is the most common and is usually done in combination with other strategies. How much over is always the question. I tell people you have to go up to the point that if you win you won’t be made that you actually have to pay that but if you find out you lost by $500 you wouldn’t say “I would have paid that”.

** One way to do this is with an Escalation Clause. If the other agent is ok using one of these (some do not allow them for their offers) then you would write something like this into your offer.
Escalation Clause Buyer to Seller: Buyer to offer $500 (X dollar amount) over the highest offer up to $360,100 (dollar amount) gross sales price. If escalation clause is accepted, then listing agent to provide written evidence of highest offer submitted.

- This can help you win but maybe not go up to your highest offer you would have submitted.

2. Buyer pay their own closing costs

3. Buyer pay their own title insurance

4. Buy Home As-Is pending a home inspection and nothing major is found

5. Personal Letter from buyer to seller- you could write a personal letter to the seller on why you want this home. The more heartfelt the better

6. Increase your Earnest/Trust Money

7. Appraisal Clause- Buyer will pay $X over appraisal amount as long as property appraises for a minimum of list price not to exceed agreed upon contracted purchase price

8. Waive Home Warranty- you can always purchase this yourself so it might be a way to give the sellers a little more net profit and put you ahead of others. Estimated Cost ~$600

Originally posted by @Matthew Fitzgerald :

Mike Miller I think it would be wise to pass, if you don’t have your ducks in a row you could loose a earnest money deposit.

We put the offer in with a finance contingency.  We might not get it because it wasn't cash, but it was worth a shot.

Hi @Mike Miller  Best of luck on your offer.

If you are working with a trusted agent, then by all means stick with them. 

With that said... One of the methods we use is to let the listing agent represent us.  When ever I call on a property and discover that it's a multiple offer situation, I always ask the listing agent if one of the offers is from them (the listing agent). 

It's not always guaranteed that you're offer will be accepted if the listing agent is representing you... But the listing agent has a pretty big financial incentive to help you out. 

As mentioned above, an escalation clause is also an option... but bidding wars can ultimately take meat off the bone. 

Good luck. 

So the results are in.  We did not get the contract.  There were of course multiple bids including cash bids.

Lessons Learned:

 - Cash is King (our equity line should be done in about 3-4 weeks and this will not be a problem next time)

 - The escalation clause is a stroke of brilliance and I look forward to using that again in the future.

 - There are many properties out there, and not getting excited and going over your number is important!

 - While I did not get the contract, we will watch the property and if it comes back on the market be able to make a move.

 - I took steps (baby steps) toward the goal.  I did not get stuck in analysis paralysis.

Question about the escalation clause: who sees it and what is to keep that person from artificially bidding you up?  Say if the Seller has an agent who shops your offer, knowing that you'll pay up to X, so all they have to do is find a straw man "buyer" to offer X minus your max bid?

I think it was good that you missed this "deal."  $1150/side rent, less 50% for maintenance, vacancy, expenses, management, and reserves leaves you only $1150 cash flow to cover debt service.  I ran a basic scenario.

Full price offer of $260K, 20% down, Loan balance of $208K, 5% loan, 20 year amortization: $1372 payment (negative $220).  It gets worse with less down.

Even if you go cheap and manage yourself, do all your own maintenance, have unrealistically low expenses and fail to put aside capital reserves (a commonly ignored area of cash flow management by many newbies), you're still barely breaking even.  Is that really your goal?

My goal is real estate should be about increasing my financial freedom,  and this deal has "donated hours from land lord" written all over it.  A rule of thumb (1% rule) says these units should rent for a bare minimum of $1300/side.  I usually don't look at stuff unless monthly rents are 2% or better of the all in cost (purchase, closing, rehab).

Keep looking.  More (and better) fish in the sea.

Originally posted by @Erik W. :

Question about the escalation clause: who sees it and what is to keep that person from artificially bidding you up?  Say if the Seller has an agent who shops your offer, knowing that you'll pay up to X, so all they have to do is find a straw man "buyer" to offer X minus your max bid?

I think it was good that you missed this "deal."  $1150/side rent, less 50% for maintenance, vacancy, expenses, management, and reserves leaves you only $1150 cash flow to cover debt service.  I ran a basic scenario.

Full price offer of $260K, 20% down, Loan balance of $208K, 5% loan, 20 year amortization: $1372 payment (negative $220).  It gets worse with less down.

Even if you go cheap and manage yourself, do all your own maintenance, have unrealistically low expenses and fail to put aside capital reserves (a commonly ignored area of cash flow management by many newbies), you're still barely breaking even.  Is that really your goal?

My goal is real estate should be about increasing my financial freedom,  and this deal has "donated hours from land lord" written all over it.  A rule of thumb (1% rule) says these units should rent for a bare minimum of $1300/side.  I usually don't look at stuff unless monthly rents are 2% or better of the all in cost (purchase, closing, rehab).

Keep looking.  More (and better) fish in the sea.

 Loss of license and federal prison are what prevents someone from having a strawman.  You think an agent, and a 2nd agent strawman want to risk federal prison to make an extra $500 or so?

@Erik W. we do not know the original poster's market so it is hard to make a judgement but in CA if you tried to stick to the 2% of purchase price rule you would never buy anything, it all depends on your local market and personal situation/ goals as to what constitutes a good deal.

@Aaron K. , I completely agree.  As always local markets have to be considered.  My overall point is this property "as is" sounds like an alligator.  However, I try to avoid making mandatory disclosures and trust that folks on this board will look at comments that begin with phrases such as, "My goal is real estate should be about...." with a grain of salt and evaluate it according to their goals.