The other day, I flabbergasted a friend of mine.
(I’ve always wanted to use that word in a blog post. Score!)
I explained to him my simple funnel for getting real estate deals:
- I get leads coming in (direct mail, MLS, driving for dollars, etc.).
- I qualify the leads to see if they deserve a deeper look.
- I do a quick analysis of the property (using the BiggerPockets Analysis Calculators) to see if it warrants a site visit.
- If all looks good and it’s a bank foreclosure, I make an offer.
- If the offer gets accepted, I go look at the house and proceed to closing.
As I walked him through this, my friend was befuddled! (Another word I’ve always wanted to use in a blog post!)
“Wait a minute,” he said to me, “you are telling me you make an offer BEFORE ever stepping foot in the house?”
“Of course!” I responded. “At least, if it’s a foreclosure. If it’s a motivated seller, I still make a verbal offer.”
“That’s crazy!” He laughed. “How would you know what to offer? And how do you know the condition?”
As I explained it to him, I thought it would probably interest others as well, hence this blog post!
So before I explain how I do it, let me tell you why I do it this way.
Why I Make Offers Before Looking at the Property
I realize that to newer investors, making offers sight-unseen probably seems crazy.
When I think back to my early days investing in real estate, I used to do exactly what my friend does:
- Walk through the property
- Walk through it again
- Measure everything
- Make a detailed spreadsheet
- Walk through it again
- Get scared and overthink everything
- Then make an offer
- And the offer gets rejected 80-90 percent of the time still.
Today, I make my offers before I step foot into the property.
- I don’t have time to look at every property I want to offer on, knowing 90 percent will be rejected. Life is busy enough! Besides, my real estate agent would go nuts if I made him open up so many properties!
- No one ever accepts the offer up front — they always counter-offer (negotiate with a higher number). This gives me time to see where they are really at price-wise.
- I can estimate the rehab budget reasonably well based on photos and talking with real estate agents who have walked through it.
- I always include an inspection contingency so I can back out or re-negotiate if I find something other than I assumed.
I love the phrase “if you want to get a prince, you are going to have to kiss a lot of frogs!” Of course, this applies perfectly to real estate. If you want to buy a great deal, you are going to have to make a lot of offers and get a lot of rejections. But it’s OK! It’s part of the game.
By offering on properties before touring them, you can save yourself dozens of hours of time every week.
How I Make Offers Sight Unseen: Two Real-Life Examples
So, let’s walk through a couple quick examples that have happened to me in the past week.
1. The Motivated Seller
I talked with a motivated seller yesterday (after church, of all places).
She knew that I did real estate, and thought I might be able to help.
She told me that she is the Power of Attorney for an elderly woman in a nursing, and due to complications with Medicaid, the elderly woman needs to sell her house FAST in order for Medicaid payments to kick in.
The first thing I did was asked some questions, like:
- Where is located?
- What’s the condition?
- How much do you think it would take a contractor to fix it up?
- What’s the roof like?
- Do the floors slope at all?
- What kind of price are you asking?
- If I could pay cash and close in a week or so, what’s the lowest you’d take? (With this question, I know where negotiations are going to START. She told me $140,000 is what the county assesses it at, but that was way higher than she was thinking.)
I got a LOT of information about the property this way. Not everything, of course, but enough to paint a decent picture and make an offer!
(If I had been home and not at church, I could have also headed to my local county assessor’s website, where I’d find recent photos of the property, and I could take a virtual drive on Google Street View to see the neighborhood and what I was dealing with. Luckily, however, I knew the neighborhood well!)
Because I know my area well, I already knew a general “after repair value” for this property — or at least close enough for now. If I hadn’t, I might have run over to Realtor.com to see what other similar houses were listed at to at least get a ballpark. For this property, the ARV was likely around $150,000.
To determine how much I might pay, I turned to the often-misunderstood “70% Rule of Thumb.” This rule of thumb is often used by flippers to ballpark an offer price. (Had I wanted to rent this house, I might use the 50% Rule of Thumb instead.)
The 70% Rule of Thumb says:
The maximum amount you should pay for a property is 70% of the After Repair Value, less expenses.
In other words, whatever the home would sell for when it’s 100 percent fixed up — multiply that times .7 and subtract out the repairs. That’s the offer price.
Based on my conversation with the seller, I estimated the rehab to cost around $25,000. Therefore:
$150,000 x .7 – $25,000 = $80,000
Now I had a very rough ballpark estimate. So, I made a verbal offer! The funny thing is my offer was made in such a way that didn’t sound like an offer at all! It was just a conversation.
I said something like:
“Great! So, for me, it’s a fairly simple mathematical formula to figure out if I can buy the property. I haven’t done all the numbers yet and haven’t even see the property, but I’m guessing I’ll be somewhere in the $75,000 – $85,000 range, but again, that really depends on what I see at the house. Does that sound like at least ballpark? Can we set up a time for me to come look?”
Notice that I didn’t commit to that $75,000 – $85,000 price; I simply threw it out there to see if it was in the realm of possibility.
In this case, the seller might say, “It’s a little lower than I was hoping, but feel free to come look. It really is in good shape.” And, in fact, that’s pretty much exactly what she said. I know that if my $75,000 was offensive to her, she wouldn’t want me coming over.
But since we’re at least in the ballpark, I’ll come check it out and do a more thorough job of analyzing the deal.
My appointment with her is tomorrow morning. Will I get the property? Who knows! But at least I’m not wasting my time looking at a deal that I have no chance of getting.
Now, let’s look at another quick example — this time, a foreclosure listed by a real estate agent.
2. The Foreclosure
Last week, I offered on a foreclosed property, but never stepped foot in the house. The property was listed on the local MLS for nearly $80,000. Instantly, there were a few things I liked about it:
- 1950’s construction (better than 1920’s, like most of my leads)
- 1 story
- 3 bedroom, 1 bathroom
- Great neighborhood
Looking at the photos online, I could tell a few things:
- It likely needed new windows.
- It likely needed a new roof.
- It likely needed all new paint, inside and outside.
- The cabinets looked OK.
Knowing this, I estimated the rehab to cost around $30,000 for the project. It might be $20,000, and it might be $40,000. I’m not sure, but I think $30,000 could be close. That’s good enough for now.
I also know that the value of this property, when fixed up, (the ARV) would be conservatively around $130,000, based on a list of “comps” I received from my real estate agent.
And because I want to flip this property, I used that 70% Rule of Thumb again and determined that:
ARV = $130,000 x .7 = $91,000 – $30,000 = $61,000
So I officially offered them $60,000, with a five-day inspection contingency, using my real estate agent to do all the paperwork. In fact, I signed the offer on my iPhone, and it took about three minutes from beginning to end.
The next day, they countered at $68,000. They wanted to play ball!
However, I couldn’t do $68,000. I could do $60,000. So I told them, “No — I can do $60,000.”
Now, at this point, I could have gone and looked at the property, to see how close my $30,000 rehab budget was.
Instead, something funny happened.
Remember my friend I mentioned earlier? The one who was flabbergasted?
In that conversation, I used this foreclosure as an example of how I make offers. And while I was explaining this to my friend (who has been dying to flip a house for several years), it hit me: this property is FAR better for him. He is planning to do his own rehab work, which means he can pay a bit more than me. He could do this whole rehab for under $20,000. It’s also a great “first flip” sort of deal — a nice “base hit.”
And we know the bank is OK at $68,000. I told him to make the offer.
He did, and he’ll be closing next week on his first flip!
So, should you make real estate offers sight-unseen?
Maybe, maybe not. Obviously, I have a bit of experience with this, so I know how the game is played. You might be newer, and going to look at properties would likely be a fantastic learning experience. But I hope this post has helped you see that making offers is not a scary thing. You can do it without stepping foot into the home.
And remember, the more times you offer, the more accepted deals you’ll likely get.
So get out there and start making some offers!
[Editor’s Note: We are republishing this article to help out readers newer to the BiggerPockets Blog.]
Investors: Have you ever made an offer on a property sight unseen? Why or why not?
Leave your comments below!