Did you finally get your paws on what seems to be a genuine deal for a house flip?
These questions will enable you to make sure that your offer will be a good one. One that won’t cause you to spend every night until closing awake, staring at the ceiling, biting your nails, wondering….am I paying too much?
After weeks, months, or even years of marketing to motivated sellers and/or scouring the leads sent to you by a real estate agent, you finally found what you hope is a true deal. You can feel it in your gut. It just feels different. This must be the one.
You’ve been tricked by your gut before. Maybe it was the mexican food you had that day or the hopes of landing that great house to flip caused you to leave logic behind. Maybe fear caused you to ignore all the signs and made you tell yourself that it couldn’t possibly be a good deal.
In order to get past all of this gastrointestinal and psychological trickery, it will help if you make sure that these 6 questions are answered before you make the offer.
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
What is My Exit Strategy?
If you buy the house, what do you intend to do with it? Are you even going to close on it or are you going to assign the contract? Do you intend on fixing and reselling?
What you plan on doing with the property needs to be determined so that you can figure out what to expect in way of costs of doing the deal.
If you are rehabbing, you will have holding costs (while remodeling and while waiting for it to sell), repair costs, unexpected costs, costs to resell, etc.
If you plan to assign the contract, or wholesale the house, you will need to include your assignment or wholesale fee. This, of course, is not to mention what your end buyer will intend to do with it and what their buying criteria is.
I try my best to go into each deal with the idea of wholesaling it. That way, if I rehab it, I stand to make more as I bought the house for cheaper. If I need to sell the house quickly, I can unload it to another investor because I bought it with room to wholesale it.
Where am I Going to Get the Money?
The cost of money will also likely have an effect on what you offer.
If you are assigning a contract, this one is not a concern because you don’t ever actually buy the house. But, if you are doing anything else with the house, you will need to take into consideration where the money is coming from and how much it is going to cost you.
You will need to factor in the cost of the money for the amount of time you intend to borrow it. This will be determined by how long it will take to sell and/or fix up. This is one of the reasons it is so important to know what the average days on market is for similar, recently sold properties was in the area.
How Can I Sweeten the Offer?
How likely a seller is to accept an offer is not always strictly based on your offer amount. Heck, sometimes it’s not even based on how much you are offering at all.
Believe it or not, I’ve had people sell their house to me, even though my offer was lower than my competitors’, only because they liked me more and trusted me. Take the time to really listen to sellers. Sometimes they just want to share how they ended up in the situation they ended up in. Don’t do this if you can’t do it genuinely. People can smell it from a mile away.
Of course, offering to pay closing costs and other things for the seller goes a long way. Many sellers just assume that closing costs will cost them a fortune. Even if they don’t cost that much, some sellers just don’t know and it worries them. When you offer to pay them, it takes the worry out of it for them.
Sometimes people will not be able to afford to move out of the house. If you offer to close and provide a temporary lease for a couple weeks after the closing so that they can get the money from closing to move, you will be helping them with a real problem. Be sure to withhold some of the proceeds until they’ve vacated. You don’t want to become a landlord that has to evict the previous owners.
Get creative. Try to come up with some things that will set your offer apart from everyone else’s.
And always remember it’s not always just about the dollar amount.
What is The Most I Can Pay?
Figure out what the most you can pay is and make sure that you NEVER OFFER MORE THAN THAT!
Think of it like going to an auction. The people that pay too much for anything are the people that either don’t set a limit for themselves or ignore it when the bidding exceeds their limit.
Don’t be that guy/gal.
You will be tempted to go over from time to time. The hardest is when the seller counters and comes within $3k-$5k of your max. You really have to be careful in these situations.
Here’s a tip for negotiating: Always be willing to walk away.
If you want something too much, you will pay too much.
Am I Letting Emotions Have Any Say in This?
When dealing with motivated sellers, you will come across situations where you’re tempted to offer more just because you feel sorry for the sellers. Well, maybe not if you’re cold-hearted. I’ll assume you’re not.
You have to watch yourself. You are running a business. What good would it do if you payed too much for a house and had to get out of the business because you lost too much money? You then would not be able to help other people out of their bad situations.
The other side of this questions is whether you are letting emotions from wanting to do a deal too badly cloud your decision making. You will be tempted to finagle the numbers to make the deal fit your house buying criteria.
This happens a lot for new investors and experienced investors. New investors want so badly to get that first deal under their belt. Experienced investors do it when they are trying to meet a goal of doing so many deals per month or haven’t had a deal in a while. Be aware of it and don’t let it cause you grief.
Am I Embarrassed By This Offer?
This is one of my favorites.
If you are not embarrassed by your offer, you’re paying too much. It’s really as simple as that.
This is a great way to test that you had not let emotions cloud your judgement. To this day, I am still embarrassed by my offers. You’d think you would get used to offering really low and that the embarrassment factor would go away. It doesn’t. Make sure it doesn’t.
Before you make that offer, be sure to answer these questions so that you can avoid making a mistake and be confident that you will get a good deal if your offer is accepted.
Stay embarrassed, my friends.
Photo: Bill and Vicki Tracey