Vicki Irvin-Maryland Real Estate Investing-Vicki Irvin

15 – About Lowball Offers, Part 1- Maryland Real Estate Secrets
Vicki Irvin
Lloyd Irvin

As an investor, never pay the asking price (unless a foolish seller is asking below market—a real rarity!). Sellers almost universally ask more than they are willing to take for their homes. They expect to come down some, hence the above market asking price. If you pay what the seller is asking, you’re wasting your money. Remember, the less you pay for the property, the greater your profit when you sell.

TIP: In hot markets, houses sometimes go for full price or even more. If you’re investing, that’s usually a market to stay away from, unless you think the price is going to rapidly go up even further.

The real trick is knowing how much less than asking price a seller will take. Sometimes a seller will only come down a few thousand dollars. Other times they may drop 10 percent or more. And, of course, there’s that occasional seller who refuses to come down a dime. How do you know one from the other?

Unless you have supernatural powers (or the seller’s agent spills the beans), you don’t know. That means you have to learn through the negotiating process. Your offer and each counter-offer the sellers make tells you more. Eventually, if you’re a good negotiator, you will have gotten the lowest possible price.

How Do I Begin Negotiations?

It all starts out with a low-bid. (You can’t very well go lower after you’ve previously made a high bid; you would lose credibility and lose the seller’s interest.)

The rule of thumb is to always offer at least 5 percent less than the asking price for investment homes. Notice that “at least.” That means that you won’t offer a price that is higher than 5 percent below market, but you might well want to offer a price that is far lower than 5 percent below market.

How much less depends on several factors including:

• The Market—Is it hot or cold? You can always expect to pay less in a cold market.

• The Property—Is it just a run-of-the-mill investment, or does it have phenomenal potential? If it’s common, offer less, far less. If it’s exceptional, you’ll want to offer more. Keep in mind that the more run-down the property is, the less it’s likely to bring. The more spruced up it is, the higher the price.

• The Asking Price—Is it right at the market value, or is it higher or lower? If the house is already priced below market, you may want to offer closer to full price. If it’s priced above market (which most houses usually are), you’ll want to offer much less.

• Your Perspective—Remember, you can make money in real estate simply by paying full price and holding onto the property. If you’re satisfied doing this, offer just 5 percent below market. However, if you’ve decided to be a cutthroat investor, offer far less.

How do you know what the home’s true market value is? Learning this is a good starting point. Begin by going to an agent or checking at one of the many Internet websites that offer comparative market analysis (CMA) figures. The analysis takes a look at all similar homes sold within the previous six months (or perhaps a year) within the area. You then compare the sold homes and prices with the subject home and its asking price. Add for extra features the subject home has. Subtract for features the sold properties have that the subject home lacks. By comparison, you can quickly determine the market value of the property.

Keep in mind, however, that a CMA only tells you what homes sold for a few months to about a year ago. It usually doesn’t tell you what they’re selling for right now. In a rising market, you have to add a certain percentage for recent appreciation. Find out what the increase is and then add that to the CMA price. (Usually the increase is given as an annual figure. Divide that by 12 months and then add the amount for however many months it’s been since the latest comparable sale.)