Last week I wrote an article discussing the dynamic that is created when distressed inventory is low in a particular market and demand is high. In these markets, you’ll often see increased competition for REO and HUD properties. For some investors, the thought of offering anything but a lowball offer is completely unheard of. However, if competition from numerous investors in an area is fierce, this strategy may limit an investors ability to acquire property.
I have learned over the years to use the asking price as a guide, but ultimately submit offers based on the way I’ve calculated my numbers. In using my own formula, I typically make offers below asking price and as one would expect, I often get outbid by other investors. However, there are times when a new listing hits the MLS and my numbers actually allow me to bid above the asking price. Knowing that the property will be highly competitive, I have no problem submitting an offer over asking price in an effort to lock up the property before I get stuck in a bidding war. To me, it’s not a game of “how far below the asking price can I negotiate” …. it’s about locking up good investment properties where the numbers make sense.
On the flipside, I have found that it’s also easy to get stuck on an asking price when looking at “pre-approved” short sale listings. In my experience, short sales that have been listed in the MLS are somewhat arbitrarily priced. Often, it’s simply the listing agent’s opinion of what the bank may or may not approve. Again, I try not to get stuck on the asking price, but submit offers based on the way I calculate my numbers. If the asking price works, then by all means submit a full price offer, but don’t get stuck by the fact that the listing indicates it’s been “pre-approved” by the lender.
It’s so important for investors to have a clearly defined strategy when investing in real estate. Whether it’s to buy and hold, wholesale, retail, etc., it’s important to outline and stick to the formula that works for your particular strategy. Once you’ve structured a strategy that makes sense, it’s much easier to make offers without the emotion and gamesmanship so many investors get sucked into. Ultimately, if you are consistent and disciplined in your approach to investing you should be in a position to maximize profitability and minimize losses.