There are two main reasons why a property for sale will a ridiculously low listing price, far below real market value:
1)The seller is desperate to get rid of the property
2)The seller is ignorant of the true worth of the property
Offers generally come rushing in for these sellers. Some will be from real estate investors and some will be from people looking for a home. Now let’s assume you’re interested in purchasing this home as an investment property so you submit an offer to purchase. If you write a typical offer, your offer is just going to be thrown into the pile of offers that the homeowner has received. You need to make your offer stand out. The way you do this is by carefully writing and constructing your offer in such a way that it’ll be accepted. You need to write your offer with the thought of how the homeowner is going to perceive your offer.
Personally, I generally consider anything a property that’s listed at $25,000 or more under market value to be an excellent deal. Most real estate investors are going to be trying to low-ball the owner, knowing that the owner is likely to be desperate to sell. If you absolutely know that you want this property and that it’s going to be profitable for you, then what are you waiting for! Don’t lowball, offer full price! In fact, I would suggest you offer at least $1000 above the listing price – this means you’re likely going to beat any other offer on the table.
Some investors are scared that the seller, if they receive multiple offers, are going to want to start a bidding war. For the most part, this doesn’t happen. What usually happens is that the property owner just takes the best offer available and closes the deal. Homeowners selling their property are generally not professionals at real estate negotiation! They aren’t comfortable with the whole process and just want to get their money and move on with their lives.
Here’s another tip to get an edge over the other offers on the table: Offer to pay closing costs on the contract. Let’s say you do this and the owner accepts your offer. What you want to suggest to the seller is that you’ve spoken with your mortgage broker and your broker has suggested that you finance these closing costs into the price – this is done by attaching an agreement to the contract which will raise the purchase price of the home by the amount of what you anticipate the closing costs to be. Remind the seller that this will not affect the amount of money the seller will be getting at closing nor will it affect the seller’s taxable gain. Remember to speak to your mortgage broker about this and be clear about your local laws – what generally happens is the appraisal will then come in at a higher price than the original contract price which will then help cover the closing costs. Of course, this will increase your monthly payment by a few dollars per month.
When writing the offer, to further sweeten it up for the seller, you may want to very seriously consider taking the property “as is”. Here’s a tip to make this even sweeter for the seller, which multiplies your chances of getting this offer accepted. In the special stipulations section of your contract (the blank area at the end for additional terms), write something like this:
Buyer is purchasing the property as is. Buyer will not ask Seller to make any repairs to the property nor will the Buyer ask the Seller to expend any money on fixing any items on the property.
In order to protect yourself, I would also add an inspection clause like this:
Buyer has the right to inspect the property for four (4) days. If this inspection is not satisfactory to the Buyer, Buyer may then invalidate this contract and receive a refund of earnest money.
This gives you an out clause in case the house really is beyond repair. To go really extreme, you could even leave the out clause in there, but instead offer that the seller will keep the earnest money if the inspection shows you reason to cancel the contract.
A lot of people reading this article might feel very nervous about submitting an offer to purchase a property “as is”. The reason why you want to consider this tactic for certain “high-demand” real estate opportunities is that the seller is going to love it and is already going to see you as being easy to deal with. I know you don’t really care about making the seller your friend, there’s a strong negotiation reason for this. By having the seller put you in the “easy to deal with” frame, it’ll help you gain a helpful negotiation stance for later.
For example, let’s say you use the clauses I’ve given you above and the seller accepts your offer. Of course you added the inspection clause and upon inspecting the property you’ve found $9,000 worth of serious repairs you’d have to make to the property. What you now do is that you explain in writing (writing is generally less confrontational than face-to-face) that you anticipate making $5000 worth of repairs. Those repairs you need to make include painting, roof repairs, kitchen updates, bathroom updates, and new carpet. After those initial findings, you’ve also found significant structural repairs that need to be repaired. These repairs were not mentioned in the disclosure statement by the seller, so it was impossible to know of these serious repairs before you presented your offer. Be sure to also include a statement you’re sure that the seller didn’t know about them either as this was only found by using an extremely thorough inspection – you don’t want to accuse the seller of lying to you! You continue this letter to the seller by stating that these repairs would need to be done before the seller could sell the house to anyone at all. Tell the seller in the letter that your own carpenter can make these repairs at a cheaper price than any retail structural repair company. In our example, perhaps make a suggestion that the seller credit you with $6000 at closing for the repairs. The seller may come back with an offer for $4000 or $5000 which may want to consider accepting.
One of the reasons this tactic is so effective is that you’re leaving yourself room to negiate with your inspection out-clause. Homeowners generally don’t want to have to make repairs, they just want to rid themselves of the property and get some cash. By you taking the property “as-is” and stating that you will not ask for repairs, you’ll be beating out any other offers that have an equal or lower price that also includes a repair request. Another great thing about this is that you’re also automatically beating out owner-occupant contracts because almost all potential owner-occupants ask for repairs to be done. In fact, by you including this non-repair request contract you may even beat out other contracts that may offer slightly more money. Always remember that homeowners want the easiest way out of the situation – so this means you’re in prime position to get the investment property you’re looking for.