How to Make Good Real Estate Offers That Beats Out The Competition
Note: this is Chapter 4 of an entire guide of How To Buy Your First Investment Property.
Great, at this point, you've identified a SOLID deal. But how do you make a compelling enough offer that the seller will actually sell it to you (and how can you beat out the competition)?
For most people, this is usually the one of the most nerve-racking part of investing in real estate. But generally, there is a consistent legal procedure when acquiring a property that an agent will be easily walk you through, which means less guesswork on your side.
This chapter will be focused on negotiation in real estate, making offers, contingency plans, and doing your due diligence to ensure the property is 100% a good deal for your real estate goals.
Making The Offer
This section will assume that you have a real estate broker or agent that can create and draft documents on your behalf. If you do not, the process becomes more complex as you'll first need to learn how to comply with your local real estate laws.
First, you'll need to decide if you want to keep the property in your name or in another legal entity. For example, if you are investing with a family member or friend, it may be wise to create a Limited Partnership (LP) to dictate the ownership stake in a property. Or if you would like to limit liability of the home, you may want to create a Limited Liability Corporation (LLC). You'll need to weigh the pros and cons of creating a separate entity for your investment property.
Next, you'll make the offer. When purchasing real estate, it is crucial that you have everything in writing. Do you want the fridge to be included in the property? Put it in the contract. Maybe the owner expects to take part of the landscape plants with them? Make sure that the expectation is written. Typically, the more detailed the contract is, the better for transparency.
In this contract, you'll typically include a few line items:
Earnest Money Deposit — a deposit to show that you are a serious buyer to the seller that is typically ~1% of the purchase price. Note that these are typically non-refundable deposits. So, in the case you no longer want the home, you lose this deposit.
Financing — how you expect to purchase the property. This is important as it can act as a contingency (discussed next) in case your financing does not work.
Maintenance Warranty — a warranty on major appliances or other expensive components of a home (like plumbing and electric) that is sometimes supplied by the seller. This gives you peace of mind that there are not major underlying issues in the home.
Legal Description — a description of the exact home you are purchasing and any additions that you want in a home.
As with the rest of the offer, you'll want to include contingencies. In essence, this is to force a seller to promise and guarantee that certain items are met. These are meant to protect you when purchasing the property. The following items are typical in a standard real estate deal:
The title of the property is clear
Acceptance of existing lease(s) on the properties
A satisfactory inspection of the property
Financial records are accepted
The home (or unit(s)) are in acceptable condition
Negotiation
Once you submit your offer, the seller has 3 options: accept, reject, or counter offer. Almost always, a seller will counter offer, which means you'll need to negotiate with the seller by adding an addendum or changing the terms of the contract.
Always note that the seller will have a conflict of interest with you. They are trying to get as high as an offer as possible, while you (as the buyer) are trying to get the lowest offer possible.
In a negotiation, you'll want to know what your maximum buy number is. In the end, the purchase price will affect how good of an investment a property is for you. If you offer too high, the property may not cash flow properly.
Then, you're off to talk to the seller. It is wise to try to understand your seller. Are they selling the property for profit? If so, they'll want to negotiate the price more. Are they looking to retire soon? They may be looking for a cash offer for a faster closing.
Always remember that you're buying the home as an investment. And if the numbers don't work out favorably after a negotiation, it would be better to walk away from the property.
Due Diligence
Great, by this point, you and the seller have agreed to favorable terms for the both of you. Now you are under contract and you enter the due diligence stage. This means that this is the point you can examine the property in-person and with professionals.
There are two primary pieces of this stage: inspection and appraisal.
The inspection is hiring a property inspector to inspect the home and look for any issues or things that might become issues. Typically, property inspectors have heavy experience in construction and maintenance that gives them the ability to find issues that most people won't see.
The appraisal is ordering an appraisal. Typically, your lender will have a preferred appraisal firm that you can use. This person will appraise the home and give it its face value. If the appraisal ends up far below the purchase price of the home, it is often a red flag for the lender that it is not a good investment to give you the money to purchase the home. For example, if the appraisal comes back for $50,000 when you want to purchase the home for $100,000, it would be unwise for them to lend you for value that is not there.
While those are the two you always should complete, looking at utility bills, outstanding contracts, financial statements, and anything else is important in this stage as well.
Conclusion
Now, you are armed with the knowledge and know-how of how a real estate deal goes down.
When working with Doorvest, our Acquisitions Team does this for you! We source the homes, negotiate the purchase price, and ensure that the property is in rent-ready condition which gives you the peace of mind that you need.
In the next chapter in this guide, you'll learn about financing the deal.
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