Check out the podcast episode here: https://itunes.apple.com/us/podcast/pillars-of-wealth-creation/id1296372835?mt=2&i=1000404127577
Now that you have found a deal and determined that it’s worth making an offer, we need to formulate the offer and present it. You will be either making an offer to a broker or directly to the seller. Before submitting your offer, you need to determine what your maximum offer will be – your strike price. You also need to decide the ideal price and how low you want to start. A lot of this will be determined by the market cycle and the competition involved.
When I was making offers on real estate from 2009-2012, low-balling was acceptable and quite frankly expected. As time went on into 2013, 14, 15 and beyond my offers grew closer and closer to the list price. Now as we are in 2018, the chances of low-balling an offer and getting it is slim. If you don’t understand the market cycle and demand, then you will end up over paying or just wasting your time and possibly offending sellers and brokers. Now, in a hot market, there is nothing wrong with offering less than asking price, just be sure you are doing it with good reason, that is fully justifiable.
We are going to dig into making offers to brokers and to sellers and different strategies that you can utilize, first let’s start with brokers:
Offering through Brokers: It is very important to understand if the broker is working on your behalf or the seller’s behalf. Either way, the more you can build rapport, the better. Make sure they know you and trust that you can close the deal. Be sure they know that you are ready to buy and can trust you. Also, be sure they know your expectations and you know theirs.
Presenting an offer on an off-market deal: If you are brought an off-market deal that is only being shown to you and maybe a few others, then you may have more time and a better chance to negotiate. This is your opportunity to be creative with terms and price if you so wish. If the deal that comes to you is fully marketed and is being seen by a lot of interested buyers, then you really need to sharpen your pencil and make a strong, clean offer, without many – if any – contingencies. You should also include a Bio on your company and experience, a business plan for the property and a letter of interest from a bank for financing (this can be done with the off-market deal as well to strengthen your offer).
After you look at the property and underwrite it, then let the broker know that you are sending in an offer. The first step is to present a Letter of Intent to purchase (LOI). The LOI will mention the property name/address, the purchase price, special terms, due diligence time frame and what should be delivered by the seller, financing period and if it’s contingent upon financing, earnest money amount, brokers involved and any other terms that are non-negotiables. The LOI is usually 2-5 pages and acts as the template for the purchase agreement.
I usually try to include some creative aspects into the LOI. I may have option A as $5,000,000 purchase price with new financing, but then have option B as $5,050,000 with a 10% seller carry-back for 3 years at 5% interest and option C as $5,100,000 with seller financing for 5 years at 5% interest or a variation of sorts. With these 2 options, it is helpful to provide the seller a Bio on you and reasoning they should consider the options. Maybe show them how much interest they will make or the differed taxes they will pay.
After the LOI has been sent, it is now time to negotiate. A few words on this. Don’t tell the broker your max price, until it is actually reached. I don’t care if they represent you or the seller, telling them your max price will only hurt you. When you get a counter offer, counter back by only increasing your offer slightly.
If you are able to come to terms, the next step is to have the PSA (purchase and sales agreement). This agreement you may want to have drafted or at least reviewed by your attorney. It is important that you have everything possible in this agreement and that you are protected.
If you are directly working with the seller, then likely you can be more aggressive on your offer. When working with the seller, you have the advantage of being able to work and talk directly to them. This can be a huge advantage, but also a disadvantage. If they are savvy and crafty, they will often outwit you and beat you at the game you thought you would win. The other downfall is that you don’t have a broker that is telling them that they should sell at the price you offered. When working with the seller, it is important to build rapport. The more they like and trust you, the more likely they are to work with you and be honest with you.
As for making offers, I would go about it the same way as you do with brokers. Write your LOI and then submit the offer either via email or in person. In person can be great if you have good rapport.
A few last notes on making offers:
Make offers on properties: 1. don’t wait for the perfect one to come around, because when it does, someone else will buy it out from you or you will end up paying too much. 2. Learn to negotiate. Read “Never Split the Difference” by Chris Voss. 3. Build rapport with sellers and brokers. If people trust you, they will want to do business with you. Make yourself easy to do business with. 4. Be creative. If you like a deal, then find out how to make it work for you and the seller.
To your success!