Some weeks are just full of lessons that lead to blog posts, and this past week was one of them.
I had about a half dozen people that sent me an email that involved making offers. They weren’t asking for advice in most cases; they skipped that part. Some of them didn’t have a question (even though they should have).
But there was one thing that stood out in all the emails, and that was in each case they had made rookie mistakes that had to do with their offer.
So today I want to talk about the one thing that will sink your ship faster than anything else; making bad offers. We all know that you make your money the day you buy a house. But you can also lose it all when you sell if you don’t know how to figure repairs accurately.
These are perhaps some of the hardest things about real estate investing to get right. But these are skills that are absolutely essential if you are to succeed.
How to Purchase Real Estate With No (or Low) Money!
One of the biggest struggles that many new investors have is in coming up with the money to purchase their first real estate properties. Well, BiggerPockets can help with that too. The Book on Investing in Real Estate with No (and Low) Money Down can give you the tools you need to get started in real estate, even if you don’t have tons of cash lying around.
My Realtor Said…
I had a gal send me an email with a strong visual message in it. I could just see her standing there with her hands on her hips as she demanded to know, “Why in the world would an intelligent seller accept anyone’s low ball offer? My Realtor said, “Houses that are probates that are listed on the MLS never sell for those bargain bin prices”.
Well, I wanted to say, “Good for your Realtor. They are probably right in some cases”. Most of the houses I come across fall into one of two categories; nicer houses that will most likely sell on the MLS, and those houses that need updating, a lot of repairs, or ones have sellers that don’t want to be bothered with anything except collecting the cash as a result of a quick sale with an investor.
Now don’t get me wrong: I love and value Realtors. I have worked with them for many years. However, the fact of the matter is that unless that real estate agent is also a real estate investor, they don’t know what a good deal is (for an investor) in most cases.
And the idea that a real estate investor would come away with a fat 5 figure check on each deal is something many of them think is just wrong. After all, they are used to getting a portion of a 6% commission (in my area) most of the time.
As I tried to explain to this gal this past week that wearing the “investor hat” is a totally different thing than wearing the “Realtor hat”, she just wanted to argue with me. She just didn’t believe that anyone could buy houses at 50 cents on the dollar (or lower).
You must learn how to figure out what a good deal looks like and how to present those low-ball offers to sellers with confidence.
The Psychology of Making Offers
My second ah-ha moment came this week when I spoke with an investor that asked, “How I got absentee owners to give me a key to the house before I had it under contract”? She went on to say that she felt pretty confident about her offer and what houses were selling for in that area. But she really wanted to get in to see look at the property and the owner wouldn’t give her a key.
I honestly thought I had read her message wrong at first.
After I read it a second time I said, “So you haven’t done any deals yet, but you have made an offer sight unseen on this house based solely on what some of the houses in the area have sold for at a retail price “? She said that she had. The seller told her the house was in good shape. When I asked her about repairs, she had no idea if it needed repairs much less the scope or the cost of those repairs. I asked her again how in the world she could make an offer under these circumstances. She told me once again, that she was confident about her offer.
This was when the real stunner came.
She said that she would help this lady out even if she didn’t make any money on the deal because “she was so nice” (I think she had forgotten the part about how the seller had refused to let her in the house to see it). She also said that it would just be a learning experience and she was OK with that. I’m pretty sure it had never crossed her mind that she could actually lose a large sum of money in the process. I pointed out that hobbies were something you did without expecting any compensation; not real estate deals.
Don’t make stupid offers.
Know your numbers before you make an offer. And get over the feeling that you are doing something wrong. We aren’t in the “house business” we are in the “problem solving business”.
Rookies Shouldn’t Make Offers on Property in Another State
This is another case of “you don’t know what you don’t know”. There are just too many things that can potentially go wrong to list them here. But here are a few things you need to remember:
- Lining up an agent to help you won’t keep you safe. (Read the first part of the article again).
- The value posted on the tax assessor’s site has nothing to do with what the real value of the house is. It may or may not even be close. Remember that those folks want your house to have a high value for tax purposes.
- Not all contractors are created equally. Don’t assume you will get an accurate repair estimate from a guy referred to you by someone you don’t know. Remember the part about using folks that invest in real estate or have a lot of experience working with investors? Your contractor may be great; or maybe not so great. If you haven’t seen the house, you will have no way of knowing before you have made costly mistakes in most cases. Repair mistakes will sink you as quickly as making bad offers.
Just because you have boots on the ground in the city where you are investing, don’t assume those boots know what they are doing. Do your due diligence. Take a trip to the city where you plan to invest, and build a solid team that you can trust.
Learning to make good offers takes practice, but anyone can learn to do it. The tough part is staying safe during the learning process.
How do you do that? Get a mentor!
Questions? Comments? Leave your thoughts below!