Probably one of the toughest parts of real estate investing is deciding what to offer for the property.
Offer too little, and you lose the deal. Offer too much and there is no profit.
Whether buying to renovate the house and resell; to keep it as a rental; or to sell it wholesale to another investor, these mistakes are often made by both novice and even more seasoned investors.
If I’m completely honest with you – I catch myself still starting to make some of these crucial errors. Make sure you are informed and armed against these deal-killing mistakes.
Not dealing with a motivated seller – If the seller is not motivated – even desperate to sell – then you will never be able to negotiate a price that works and you are just wasting time and frustrating yourself for no reason.
Too much emphasis on the seller’s desired price – Investors often start with the Seller’s desired price as a benchmark and attempt to work the seller down from there. What the Seller wants for the property is irrelevant to what can be paid. Use a formula you trust and determine your price first. Begin your negotiations with a number below your top price and negotiate up from there. If the seller is not remotely interested, then they are not motivated.
Using comps that aren’t really comps – Although appraisers can use houses that are as much as a mile away and sales that are up to a year old, it is better to use comps that are less than six months old and less than a quarter mile away (even up to ½ mile). Make sure the comps truly are similar houses, in similar areas. Lately, many wholesalers are using comps from neighboring areas that are within the desired distance, but completely different types of areas. The house and the neighborhood must be similar to be an accurate comp.
Not determining your highest price before starting negotiations – Before you even start to negotiate with the seller you need to determine your maximum profitable offer (MPO). This is your drop dead point – the deal breaker price over which you will not pay. You must know what that number is.
Changing your highest price offer after negotiations start – It is not uncommon for an investor to become so excited by the negotiation that they start to adjust the MPO figure they calculated prior to negotiations. They justify why the figures can be adjusted.
Don’t do that. You were sane when you calculated the MPO, and the thrill of the negotiation makes you insane. Don’t listen to your insane mind!
Not including margins for your (or your investor buyer’s) buying/selling/holding costs – These costs are often forgotten yet represent anywhere from 12% to 20% of the final value of the property. This one figure can be the difference between profit and loss on a deal.
Forgetting to add profit for both you and your investor buyer – Seems crazy, but YES! this is a common mistake – especially among rookie wholesalers who either forget to include a margin for their Assignment Fee or forget to leave a profit for the investor buyer. That’s why it is so important to follow a formula.
Not stepping back to look at the house/street/neighborhood through your buyers’ eyes – There’s more to a good deal than just the numbers.
Literally, stand back and look at the property from your end buyer (whether owner/occupant or investor buyer) and see what they’ll see. Is the house on a busy street? Is there a cemetery next door? Does the backyard have a steep cliff that presents a danger to children? Is there a highway behind the house? Do trains pass right by the house? All of these are real examples I have faced. They don’t necessarily kill the deal, but they do require the numbers to be vastly adjusted.
Making profitable offers that are accepted by prospective sellers is an art more than a science. There is much to consider – and if you were to make one of these common mistakes, you could be creating an unprofitable deal.