Sorry for the long winded question. Basically I would like to know if there is rule of thumb for how much under asking price I should offer on a property. I am looking soley for immediate cash flow…for sake of arguement assume that there is a very small positive cash flow generated at asking price.
I don’t really care about hurting the seller’s feelings, I am comfortable with a low ball offer…but I think to make it a viable offer it has to be in the ball park of tasking price. Is it 5, 10, 15%. I know a lot depends on the circumstances…but looking for any ideas.
I agree wholeheartedly with the other two responses and add that your initial offer should be lower than what you are willing to pay for it. For example, if you run numbers on a property and find you MAO (maximum allowable offer) is $50,000, you shouldn’t offer $50,000, but something lower. This will be your negotiating range. A lot of it has to do with the variables of the situation.
The first house that my wife and I bought was this way. She found the house, i looked at the neighborhood and thought no way can we afford this! A few days later, I made the phone call and about fell out of the chair when they told me what they were asking. ( It was all in my favor as you will see). I made arrangements to look at the inside. I made mental notes of everything that needed to be done i.e. windows, paint, etc. They were askin 70k, I told my wife that it would cost us 10k to get it to move in condition and she balked. Told her I was going to offer 58k. “We shouldn’t take advantage of these people” my wife said. Offered 62k and they snapped it up. I could kick my self, talked to the owner, they were willing to go as low as 55k. :o Anyway, it really only cost us 5k to take care of what needed taken care of! At closing, the appraisal was for 75k.(Loan reasons) Did a little more around the house and to the family room and recently had it appraised at 95k with “plenty more to go” according to the appraiser. According to him, when I get the yard, driveway, back porch and a few other small things, he believes it will be worth about 130k! Just my personal experience.
In my experience, you need to do a bit of homework to be effective at low-balling. I like to know three things to start 1) how long has the current owners owed it 2) how much did they pay 3) why are they selling. The first two items will give you a good indication of how low you can go. I have seen a few examples where what I was willing to offer was even less than the current owner paid (they over paided). In general, long -time owners will a low cost basis are going to be more inclined to deal with a low offer and less sure about what their property is really worth. The last item (why selling) is just an open ended question which many people will make up an answer or lie. I like to use this one since most people will just start running their mouth and tell you their life story and this will give you plenty of info as to how to structure the deal (not to mention can provide some humourous stories for later on to tell your friends)
Lastly, when making a low offer, I think you need to show you are serious and will and can close the deal (vs looking like a marginally qualified buyer trying to stretch).
I agree with the other poster tyo offer below your MAO to give room to haggle over the price and T&C of the contract.
Well, here’s something that I don’t see mentioned:
It doesn’t matter how much (or little) they are asking, as “asking” price doesn’t matter.
The price that matters is how much YOU can sell it for if YOU do get the property. So, your question should be “how much under fair market value should I offer?”
The answer to that will vary based on your market and experience, but generally, the going figure is 70% of FMV minus costs.
As far asking price. I’ve bought several properties that other investors never made an offer on because the “asking” price was too high. It wasn’t a deal. Let me say, if the price is set low enough, then it becomes a deal to anyone. The real “deals” are made, not found via price.
I’ve also bought several properties where the price was low and it was a “real deal.” I won out over other investors that got greedy and still tried to through low ball offers to an already great price. In fact, I’ve offered MORE than asking price on really good deals. If it meets or exceeds your buying criteria, then buy it.
I would like to add that it not always about the price.
Sometimes you pay the full asking price for the property if you can get good terms from the seller. Getting seller financing with terms that are below market will enable you to profit as much or more than just getting a price reduction.
This depends upon the seller, of course. I’ve had some sellers so hung up on getting their price that their whole ego was on the line. But they didn’t care that they were giving me low payments and little or no interest on the financing that they carried back for their equity.
This lets me get in light with good cash flow from the beginning.
It also gives me the opportunity to possibly pay off the seller financing later on at a discount.
It’s funny, but some sellers won’t discount their selling price, but they will discount the note they carry back.
