Making Your First Offer

So now you are ready to make your first offer. How do you do it?

Listed Properties:
The easiest way to make an offer to a seller is to use a real estate broker on a listed property found on the Multiple Listing Service (note: in July the terminology for real estate “agent” was replaced with the term “broker.” All real estate agents are now “brokers.” “Managing broker” or “designated broker” are the new terms for the brokerage operator). Typically, the seller is paying his/her listing broker a commission to market the property, and this commission is usually split between the listing broker and the “selling” broker, i.e. the agent who brings a buyer. So the buyer pays nothing out of pocket to hire his “selling” broker. But is this broker the “buyer’s agent?”

Some investors think that it is less expensive to deal directly with the listing broker, or that it makes their offer somehow more attractive. In fact, the broker will be acting as a “dual agent,” with their primary allegiance to the seller and not to the buyer! This is why they must disclose this fact in writing to the buyer. Some brokerages will not even allow their agents to serve in this capacity, as it increases their liability and many see it as a conflict of interest. It leaves the buyer unrepresented, and few buyers are as sophisticated as a licensed real estate professional when it comes to negotiating the best price from a seller.

Investors are often looking for real estate brokers to give them “pocket listings” or the inside scoop on hot new listings. Brokers tend to do this only for clients that have signed a representation agreement with that broker. So best to interview brokers with whom you intend to do business, and hire them to seek out the best deals and to negotiate with a seller on your behalf. If the investor has signed a buyer’s agency agreement with a broker, then that broker represents the buyer’s best interests—rather than the seller’s.

Unlisted Properties:
This may include FSBO’s (for sale by owner properties), auction properties, wholesale deals found by bird dogs, or homesellers you the investor uncovered through your own marketing efforts.

Each of these situations should carry the warning label “Buyer Beware.” Due diligence is especially critical in these instances, particularly if you the investor are working without an agent. Without an agent, you will need to understand real estate contracts, contract terms, financing options, legal requirements and disclosures, defects which have to be disclosed, and those that might be uncovered during an inspection, rehab and fix-up costs, market value, sales and negotiation techniques. It is possible to work with a broker to review your offer and paperwork prior to submitting them to a seller, but keep in mind that brokers typically perform other duties to complete a transaction, such as negotiating price and terms in the best interest of their client, submitting paperwork and funds to escrow, following up with the lender(s), monitoring the closing process, help in identifying contractors, inspectors, appraisers and other real estate professionals. The more knowledgeable you are as an investor, the more comfortable you may become handling these details.

If these are new areas to you, you may consider working with a broker on these unlisted properties as well. Keep in mind as there is no listing agreement with the seller, so your broker will expect to be compensated separately. His/Her fee or commission could be paid directly by the buyer, or negotiated into the offer price by asking the seller to pay that fee out of the sale proceeds.

At a trustee auction, the buyer can bid directly on any auction property without a real estate agent or without paying a real estate commission. Many of the foreclosure auction companies, however, require a 3% commission to be paid to them, in exchange for the work they do prior to the auction in researching the properties and posting information on a website available to the client. It would be foolish for any investor to bid on a property at auction that they have not personally inspected.

Face-to-Face:
The most important task of the investor buyer when negotiating directly with a seller is to understand the seller’s motivation. You are there to solve a problem for them. This sale will allow them to move on with an important phase of their life, and the more you know about their situation, the easier it will be to find a solution that will work for both of you.

Whether working with an agent or not, the trick is to find a solution that works for both parties. For an investor, there may be a bottom line price to make a deal profitable. Typically, investors adopt a fundamental formula such as the Maximum Allowable Price. This formula works something like this:

After-Repair Value minus repair costs minus holding costs (financing, buying and selling costs) minus 30% profit = Maximum Allowable Price

Such a formula is dependent on a firm understanding of what the property could command in today’s market in pristine, fixed-up condition. If the seller cannot agree to price or terms that allow for a reasonable profit in today’s market, then the investor must move on. Keep in mind that “no” today does not necessarily mean “no” tomorrow, the longer a property sits on the market, vacant, deteriorating or unsold.

Remember, that if you are not making offers, you are not in the game. So keep the door open, and start making offers!