In this episode, I discuss what it means to place a low offer. It can mean different things to different people. And how low your offer is can depend on many factors. I am going to clear this up for you!
Don’t be afraid to place low offers. This is the exact advice that I have given a few of my students over the last several weeks.
When you place an offer, hopefully you’re doing it based on some facts such as ARV, rehab costs, holding costs, profit targets, etc. The term “low offer” is a little misleading. I don’t really like the the stigma that it gets. If you place offers based on facts and figures, the offer is not in fact low, but actually exactly what it has to be in order for a real estate investor to purchase it. So as long as you’re using facts to calculate your offer, it is exactly what it needs to be. Some investors I have known simply look at asking prices and then cut them down by 50% in order to come up with their offer. While this may be relatively safe, it is far from scientific and doesn’t necessarily give you an asking price that makes any sense.
Here is an example of what some would call a lowball offer. I say it’s an offer that makes perfect sense and is very easy to explain:
Asking price: $134,500
Realtor commission: $9,600
Taxes, misc selling expenses: $8,000
Target profit :$20,000
Offer = ARV ($160,000) — Rehab ($30,000) — Realtor commission ($9,600) — Taxes, misc selling expenses ($8,000) –Target profit ($20,000)
That leaves you with $92,400, which is much lower than the asking price of $134,500.
But you will have arrived at your offer using very sound logic. Although it may look like a low offer, it’s actually the right offer for a real estate investor to be able to make money on the house.
This is the kind of thought process that you will often have to educate your realtor on. To them it looks like an extremely low offer, but if you explain the math behind it you can make them understand where you’re coming from. It is critical that your realtor understands how you arrive at your asking price, so that they can send you leads that better suit you and your business. If they are unwilling or unable to understand how you are arriving at your offers, you may have to find a new realtor. Not all realtors understand what we do as investors and how exactly we need to place our offers in order to make money.
So again, do not be afraid to place low offers. Always trust your numbers, and never let anyone talk you into bidding higher than you know you should bid. You’re much better off walking away from a deal than placing an offer that is higher than the numbers dictate.