Making multiple offers on properties might be a numbers game, but it takes time, research, and persistence to get good at it. Once you do, you’ll realize there’s a method to all the madness.
You can’t always score a deal by simply offering a client a deal that’s 70-80 cents to the dollar; you have to do more. You have to come up with really creative offers and provide a ton of options that prospects would find difficult to walk away from.
In a nutshell, find out what the prospect wants and lay out the game: you are willing to do any reasonable price deal as long as they are willing to wait. If they aren’t ready to wait, they will have to fork out more.
Similarly, they could lower their terms and get a property at that moment. If they decide to stick to their terms, they will have to either pay more or wait longer. Whatever their choice, you will have an option for them.
For that to happen, you must have the relevant experience to know how to value a property and hit your target numbers for contingencies, bargaining strategies, and counteroffers. This is how you can assess properties and make offers that a client can’t refuse.
1. Comparable Sales Method
This method, also known as the sales comparison approach, helps to determine the value of a property. It is one of the most common methods real estate appraisers use when dealing with residential and commercial properties.
Comparable sales are applicable in this method when the property under appraisal is similar to other properties recently sold in the area. When using this method, you must consider the following factors:
- Features and amenities: The more feature-rich the property, such as a walk-in closet or hardwood floors, the more expensive it will be than comparable properties.
- Location and neighborhood: Homes located in perceived safer areas or near popular attractions such as parks or shopping centers are likely to sell for more than those located further away from these areas.
- Square footage: larger homes sell for more money than smaller ones because they offer more living space and amenities. However, doubling the cost of a 1000-square-foot home won’t determine the value of a 2,000-square-foot space because smaller homes are generally more expensive per square foot than larger ones.
- Age and condition of the property: The age of your home may also impact how much money it will fetch when selling on the open market. Older homes have more character but less modern amenities than newer ones.
- Recently sold listings: Provide a starting point for determining the current pricing for similarly specced properties in the same area.
2. Rent Multiplier Method
The rent multiplier method is a simple way to determine how much you should offer for a house. If you’re trying to get a property listed for, say, $200,000, you can offer up to $2,000 per month (the multiplier) over their asking price.
So, if you paid $100,000 for your property and it generates $3,000 in annual rent, your gross rental multiplier would be 33.3 ($3,000 / $100,000). If you want to sell your home at its current value of $100,000, an offer for $33,000 above the asking price would be about right.
3. The 70% Rule
The 70% rule is one of the most important concepts you should aim to understand before starting your real estate investing career, especially if you’re into house flipping. It’s simple:
Max Allowable Offer = (ARV * 70%) – (Repairs + Holding + Selling Costs)
Where ARV stands for “After Repair Value,” which is the amount you think a house will be worth after repairs. You can estimate this number by researching similar properties in your area and their sales prices, and the average of these prices is the after-repair value of the listing, even before you sell.
Repairs are what you think it will cost to make all necessary repairs to get the property ready for sale, including painting and new carpeting. The repair estimate should also include any costs associated with obtaining permits to make changes. You may have to pay extra for these permits or inspections, depending on what kind of work needs doing. I typically calculate the Repair cost and add 20% as an additional buffer.
Let’s say you’re looking at a house listed for $100,000 with a repair list of $5,000, and you think you can sell it for $120,000. That means your maximum allowable offer would be $79,000: ($115,000 * 70%) – $5,000.
The 70% rule is a great way to value a home because repairs may end up higher than anticipated, or the market might dip into your profits. Note that in a hot market, you might have to pay more, and in a potential declining market you might be applying a lower percentage.
4. Sandwich Lease Option
The sandwich lease option is a strategy where a property owner (landlord) leases their property to an investor (lessor), who then leases it to the end user (lessee). The lessee pays a higher rate than the lessor, allowing them to make a profit.
It is a good strategy for beginner real estate investors who don’t have the capital to start as you don’t need to make a down payment or obtain a mortgage. You can even enter a lease-to-own agreement with the landlord, a deal you can then pass on to the lessee if they are interested.
The sandwich lease option is an excellent choice during a seller’s market where potential first-time property owners can’t afford it because of punitive mortgage rates; hence they settle for leasing.
It would be best to be a little creative to survive in the current real estate environment—the old tactics of offering 70 or 80 cents to the dollar won’t cut it anymore. You have to provide a raft of options if you are to walk away with a deal.
Explain to clients that they could get a property for the price or terms they want if they are willing to wait. To ensure you hit favorable price points, even during an economic downturn, opt for the sandwich lease option, rent multiplier or comparable sales method, or the 70% rule.
I always attempt to define the true needs of the seller and “create” my offer based upon those needs, I want the seller and myself to be sitting on the same side of the table and negotiate with the Mr. Market on the other side. This results in a collaboration rather than a competition. Although the examples I am giving are for smaller properties, they apply even more to multimillion dollar commercial properties.
By Gurpreet Singh Padda, MD, MBA