As a real estate investor, there is a fine line between due diligence and taking action. On one hand, you need to take a step back and be comfortable with the decisions you make. (Especially when first learning how to make an offer.) On the other hand, waiting too long before you feel comfortable could jeopardize landing a deal. Having said that, the biggest test presented to new investors comes sometime between identifying a property and actually making an offer on it. The moment an offer is made, it becomes more difficult to back out. That’s why you should have everything in order before you make the commitment. Whatever you decide to do, you need to do it before you put your name on a contract. Here is a last minute list of items you need to go over before you finalize your next offer:
1. Risk Assessment: Every deal has some degree of risk. Before you enter the real estate offer process, you need to make sure you are comfortable with the risks associated. Some deals may be a whirlwind, and come and go before you even realize what is happening. What you never want to do is get involved in a deal where the risk exceeds the reward. Doing this will leave you paddling upstream for months, constantly looking for a way out. It may sound old school, but make a list of all the pros and cons associated with the property. Think about what the worst case scenario is and what is needed to get there. Too many investors only consider what the upside is without at least considering the alternative. Before you make an offer, you need to be 100% comfortable with it.
2. Neighborhood Knowledge: The market the property is located in is a direct reflection of the property itself. There is a big difference in spending a half hour at the house and fully understanding the local market. Even if you have bought or sold property in the area before, it may not be a reflection on the property you are buying. There is a lot that can change in the course of just a few miles. Before making an offer, you should spend a few minutes looking at comparable sales, demographics and everything else you deem relevant. It is a good idea when you are at the house to talk to any neighbors who are on the street. Ask them what they think of the location and if there are any changes on the horizon. A ten minute conversation with the next door neighbor can often tell you more about the house than anything else you can do. A deal may seem great on paper, but it is only as good as the market. Take some time to familiarize yourself with everything about where you are buying.
3. Financing & Expenses: Making an offer to purchase is an obligation to buy. The first thing you need to do is recognize all of the costs and expenses involved. Even if you are an experienced investor, the expenses for the subject property may not be the same as previous projects. These expenses will have a direct impact on your offer. It is not prudent to estimate or speculate on the expenses, rent prices, returns and any other numbers on the property. Even if the real estate agent or seller supplies you with figures, you need to spend a little time verifying them and doing your own research. You also need to factor in the financing costs or loss of capital. If you pay cash for the property, you may not have the reserves to purchase another property when it comes your way. You need to be confident that this is the property you really want. If you are slow and haven’t closed a deal in some time, there may be a temptation to get involved in the next best deal that comes your way. If you do, keep in mind that you may be missing out on a better one in the future.
4. Justify Your Offer: You should never arbitrarily throw a random number out for your offer. With every offer you make, you need to be able to justify it, even if only to yourself. Think about how long the house has been on the market or what the situation is. If you are dealing with a bank owned property with increased competition, you need to adjust your offer accordingly. If you have found the property through direct mail or your own lead source, you may be able to offer a little less. Look at current listings and comparable sales to justify your price. If you are too low, you may not even get a counter offer. If your price is too high, you are costing yourself money.
5. Consider Seller’s Perspective: Do you know why the seller is selling? If you have their motivation, you need to use it to your advantage. If you don’t have it, you need to try to figure it out. Is the seller looking to get out of the house as quickly as possible, or do they want the highest price? Do they want to stay in the house, or can you purchase as is? You will get more offers accepted by thinking about the seller and catering to their needs.