Real Estate Investing - Preparing an Offer

Now that you have determined your Total Rehab Investment Needed, it's time to prepare an offer.

The two steps to preparing an offer are:

1. Calculate your maximum offer.
2. Negotiate lower to increase profits.

Step 1. Calculate your maximum offer.

The best way to do this is to "work backwards". First, start with the amount that you feel your property will sell for when completed. This can be estimated by obtaining a market analysis from a real estate agent or appraiser.

A market analysis is an in-depth look at what has sold in the local area over the most recent months or years. This will show square feet, # of bedrooms, # of bathrooms, selling price and date of sale of each property.

With this information, you can compare how your property will stack up to the recent sales. You should adjust the prices to make the properties as comparable as possible on paper (compare apples to apples).

The following is an example of how to do this:

"House A" sold for $75,000.00 two months ago. It has 1,000 square feet of living area, a detached garage, 3 bedrooms, 1 bathroom, replacement windows, a fenced back yard, asbestos siding, wood heating system and no air conditioning.

Your house has 1,400 square feet of living area, no garage, 4 bedrooms, 2 bathrooms, original windows, no fencing, vinyl siding, new gas furnace, and central air conditioning.

Clearly, there are advantages and disadvantages of each. You need to make a list and estimate the value of each aspect to the sale. Start with the sales price ($75,000). Add the estimated value for any item that your house has and "House A" does not. Deduct for the items that "House A" has that your house does not.

" HOUSE A" YOUR'S ADJUSTMENT

$75,000.00

square feet + 4,000.00

garage - 3,000.00

bedrooms +2,000.00

bathrooms +1,000.00

windows -1,500.00

fencing - 500.00

siding +3,000.00

heating +1,000.00

air conditioning +1,000.00

TOTAL $82,000.00

By using this method, it would seem possible that you could sell this property for $82,000.00.

It is important to remember that this is not an exact science. The amounts given are estimates. Also, you need to take into consideration the intangible factors that may be present. These include: appearance, location, # of comparable homes currently for sale, neighbors, your strength in sales and anything unique to your area.

When you first start investing in real estate, estimating the future sales price may be very confusing. You should ask an experienced real estate agent their opinion. With time, you will become more comfortable with this step.

Now that you have an estimated future selling price, it's time to calculate your maximum offer.

Here is a basic equation to use:

Future Selling Price - Investment Needed - Required Profit = Maximum Offer

The only part of the equation not already covered is Required Profit. You need to determine how much profit will make it worth buying. Some investors will require as little as $3,000 per investment while others will require $15,000 or greater. In surveying several investors, The average Required Profit was $10,000. Remember, this is just an average. Only you can determine the amount that you require.

Step 2. Negotiating to increase profits.

Now that you know your Maximum Offer, it's time to start negotiating.

Negotiating is when you deal or bargain with another party in the attempt to reach an agreement. It is done everyday. It can be as simple as trading days off with another person at work or as complicated as a labor union contract. The final conclusion turns out the same… an acceptable solution for both parties.

Making an offer for a property is no exception. You may go back and forth several times before a common ground is found or you give up. A deal can only be achieved if both sides agree.

Negotiating is an art form. Compare it to learning how to play a musical instrument. When you first try you are not very good at it, but the more you play the better you become. The key is to learn from every transaction.

Tips for Preparing an Offer:

• Give yourself room to increase your offer. If you start with your maximum offer, you will have nowhere to move.
• Ask for more than you really want (curtains, washer/dryer, new roof, early possession, etc.). This will allow you to give up more if you need to make another counter offer.
• Show interest but don't be excessive. If the seller believes that you really want a property, they will expect a higher price.
• Don't be afraid to make a low offer. It may get shot down, but you never know. The seller might really need to sell the property.
• Use different techniques for different properties. The same technique may not be applicable to every deal. For example, if you are dealing with a bank representative on a continual basis, you might not want to waste time asking for extras. This may jeopardize your relationship. Sometimes the best way is a straight-forward offer.
• The better you negotiate, the higher your profits will be.