Things to Remember When Making Your Purchase Offer

Just as with retail merchandise, bargains can be found in investment real estate, but you must know where and what to look for. When you've located a property that you think will meet your investment needs, you'll want to make a purchase offer for it. But in order to position yourself to get the best deal possible, there are some things that you would do well to keep in mind.

First of all, you should remain aware that a "firm" price is actually seldom truly firm; indeed, at least some bargaining is almost always possible. Even when a seller refuses to reduce the price, he or she may frequently negotiate on the down payment amount, interest rates (assuming any seller financing), or what items stay with the property (as opposed to going with the seller).

Furthermore, if you're even vaguely considering making an offer on a property you've found and evaluated, you would generally be wise to keep that information to yourself. People telling people who then turn around and tell other people can only create interest and, ultimately, unwanted competition for you at a time when you'd just as soon do without it. While there's certainly nothing wrong with letting others know after you have made a purchase, refrain from doing it before the deal is done.

Seller Motivation

Try to discover the property owner's motivation for selling. If you're dealing directly with the owners - or if they're present when an agent is showing you the property - don't be apprehensive about asking their reason for selling. Owners will typically give you a truthful answer. The greater the owner's motivation, the more likely it is that you'll be able to purchase the property for a price significantly below its market value.

When a broker advertises a property and uses the word "asking" in the ad, he or she is actually saying, "The price is soft," or, "Make the seller an offer." The same inference is given by using the words "motivated seller," or including a reason for the sale. In these situations, ask the agent how long the property has been on the market and if the seller is truly motivated. If the property has been marketed for an inordinate amount of time, a significant discount on the listed price can often be expected.

While the seller's agent technically should not without permission disclose the owner's motivation to sell, many will nonetheless do so if asked. In fact, some seller agents may volunteer the fact that an owner must sell and provide the reasons. If you're using a buyer's agent, he or she has an obligation to disclose to you what's discovered about the seller's motivations. You can also instruct your agent to search for situations where there is extraordinary owner incentive to sell. Knowing why an owner is selling can literally be worth tens of thousands of dollars to you in negotiation leverage.

Unmotivated sellers, on the other hand, are the primary reason that you should avoid becoming emotionally attached to any property prior to purchase. They are under no financial or emotional pressure to sell. Holding the property presents no hardship to them, and they have no strong need to use the proceeds of the sale for any particular purpose. Of course, this doesn't mean that you should not make offers for their properties - only that you should avoid prolonged dealings with them. Often sellers who claim to be unmotivated are, in fact, strongly motivated to sell. They've simply adopted a not-very-interested approach in order to hide the fact that they may indeed be desperate to make a deal. Therefore, don't be afraid of making a low offer to anyone. The most sensible approach is to make an offer under the assumption that the seller is highly motivated. If they turn out not to be, quickly move on.

When inexperienced buyers believe that sellers are not strongly motivated to sell, they tend to begin negotiations at a higher figure than if the sellers were motivated. They'll also set their actual target purchase price at a higher amount. As such, the unmotivated seller has claimed a victory even before negotiations have begun.

Conversely, while as a buyer you want to know the seller's motivation, you don't want a seller to know how motivated you are to buy. If a seller knows you're in love with a property, your bargaining position will automatically be significantly weakened, and all your knowledge of negotiation tactics will become virtually meaningless.

Find out What the Seller Paid for the Property

In preparing a purchase offer, it helps to know what the seller has invested in the property. If you can discover when the seller acquired the property, you should be able to formulate a fairly good idea of what was paid for it. By talking to neighbors and divulging that you're interested in purchasing in the area, you can lead up to the sellers' property and find out when it was purchased. Neighbors who were living there at the time the property was purchased may even remember what the present owner paid. Also, you may be more likely to uncover the real reason that an owner is selling from a neighbor than from a real estate agent. In talking with neighbors, be sure to ask about any known problems with the particular property and the neighborhood in general.

Ask how the Price was Set

When dealing directly with the owners, ask them frankly, "How did you arrive at your price?" The response will often reveal very subjective thinking and indicate that the price is by no means firm. A good follow-up question to then ask is this: "What's the lowest price that you'll accept for the property?" The answer to this question will actually serve to give you a new asking price without you having made an offer. Any subsequent negotiations should then be based on discounts from this new price, not the original asking price. This technique is simple, straightforward, and most importantly, it works.

If, on the other hand, you're dealing with the seller's agent, ask the agent how the price was set. Request a copy of any competitive market analysis (or CMA) that was prepared. Some agents may feel that the CMA is proprietary, and not allow you access to it. If so, ask the agent to prepare another analysis showing all similar sales in the area within the last six months. This information can typically be readily obtained from computer files. Armed with such data, you'll be able to negotiate from a position of greater strength at the low end of comparable sales, or perhaps even lower.

Make Your Purchase at the Right Time

There are times and situations when bargains are available in both prices and terms. During a buyer's market (when there are few buyers and many sellers), you as an investor will find the best bargains. There are always some sellers who for one reason or another must sell quickly. While a very low offer in a normal market might be immediately rejected out-of-hand, the same offer in a buyer's market will usually either be accepted or produce a counteroffer. Outright rejections become less likely when few offers are being made.

You Determine What Your Offer Will Be

Your offer need only make sense to you. Don't worry that it may be rejected. A rejected offer costs you absolutely nothing, but an offer that doesn't make sense for you and your unique circumstances can cost you a great deal.

Problem or distressed properties usually can be purchased at attractive prices, terms, or both. When a property has problems such as vacancies or health or building code violations, any offer may look reasonable to the owner. If a property has developed a negative cash flow and the owner must pay a significant amount each month just to keep it, what would otherwise be an unacceptable offer might be welcomed. So don't be afraid to make too low an offer.

Your offer is your decision. Don't worry if the real estate agent says that it won't be accepted; it's your offer. Remember that the primary responsibility of the seller's agent is to get the best possible deal for the seller, not for you. But also keep in mind (and, if necessary, remind the agent also) that he or she has a fiduciary responsibility to present your written offer to the owner.

Further, don't ask your friends what you should offer, especially if they aren't in the investment real estate market. You're the one making the offer and the one who will have the responsibility of making the payments. Therefore, while it might be wise to listen to some voices, such as those of your attorney and accountant, the offer must still be your own.

Finally, when making an offer, keep in mind that while $199,900 may psychologically seem to you to be a much lower price than $200,000, it will also appear that way to the seller. It could therefore be well worth your while to round off your offer price. The time to use those $199,900 prices is when you sell!

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