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Making low offers is perhaps the most basic strategy for flipping a house profitably. Of course, even if you buy a house for $15,000 less than it is worth and sell it at market value, the costs of buying, holding and selling can eat up all of that profit. This is why it works best for fixer uppers, which, at market value, are already priced with these costs in mind (if they weren't, investors wouldn't buy them).
Making low offers is perhaps the oldest and simplest negotiating ploy. Virtually everyone knows the technique in it's crudest versions. However, most people are afraid to use it, for two reasons. First, it can be embarrassing. Second, you'll spend a lot of time looking at rejections if you make a lot of "lowball" offers. Then again, do you really mind a bit embarrassment and time spent if it saves you $15,000?
The first piece of real estate I ever bought was a small piece of land (2.5 acres). The seller was asking $4,500 (this was a few years ago). I offered $3,500, because in my ignorance, I didn't know that offering 22% less than the asking price was considered insulting and unrealistic. The realtor didn't want to present the offer, but the seller accepted it, because he was anxious to sell.
A friend of mine purchased a home on a lake for $40,000 under market value a few years back. How did he get it so cheap? He just made the offer. In fact, he was always making low offers when looking at real estate. Most of his offers were rejected, and I may have even hinted that he was wasting his time. It is good that he didn't listen to me. If it meant buying a home for a savings of $40,000, would you be willing to have a dozen offers rejected?
An investor in California routinely made dozens of offers at a time for 25% less than the asking price, without even looking at the properties. He included an inspection contingency and other clauses to protect himself (an escape clause). Most sellers said no, of course, but not all. When they said yes, he had the home inspected for problems (and value), and occasionally got some very cheap houses.
An investor once told me,"If you're not embarrassed by your offer, it's not low enough." He's made millions in real estate, so he may be worth listening to. Of course a truly low offer will almost never be accepted, so isn't it a waste of time? No. There will often be counter-offers. A low initial offer is primarily a way to alter expectations - a negotiating technique.
Think about this for a moment: Your home is worth $$280,000, but when you mention to a friend that you are considering selling it, he says, "Oh yeah? You can get about $230,000, right?" Another friend tells you $240,000. Now, how confident would you be about your $300,000 estimate of value at this point? Your friends may have lowered your expectations a bit.
In fact, if someone offered you $260,000 now, you might jump at the chance to sell, even though you had previously though you wouldn't go below $270,000. But you would still hesitate to sell at $230,000. Almost all sellers will reject a really low offer. Buying cheap real estate isn't going to be that easy. But sellers will make counter-offers.
So let's consider an example. A seller has a fixer upper that is scaring off buyers. You see that you can resolve the problems, and even at his asking price of $169,000 you figure there is a $13,000 profit in the house once done. But $13,000 isn't enough. You offer $146,000, not because you expect to get it at that price, but because the seller might counter offer.
He does counter offer at $162,000, and you come back with $154,000. You eventually settle on a price of $157,000. Now you have a potential profit of $25,000. If you had offered $157,000 to begin with, though, the seller might never have gone lower than say $163,000.
Will you lose a lot of potential properties making low offers? You bet. Actually some sellers won't even take subsequent offers seriously once you have offended them. Because of this, you might want to assure the seller that his property may be worth what he is asking, but that you need a lower price for it to work for your purposes.
So what if you have a lot of rejected offers? (Too many, of course, and you might try going a little higher.) What's a bit of rejection matter if you can get a great deal on a house? Why not try making some low offers on those fix and flip houses?
Steve
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