Buying Below Market - How to Do It

When buying any property, you should always try to pay below market except when doing so creates unfavorable terms. In most cases, a buyer must sacrifice either price or terms. Whichever he sacrifices, you must ordinarily give up on the other. To get a low price, you must be willing to accept strict terms, such as all cash. To get really sweet terms, you must be willing to pay a higher price. You need to decide which is best in any given situation. We have found that it is often better to pay a high price in order to get really profitable terms (discussed later). But this does not always hold true. Each property is different. You will have to evaluate the potential of the property in order to know how you must buy it. How much you can safely pay will depend on good planning on just how to profit from the property. It is unwise to buy any property without first having determined how your profit will be made, and how much. By making these determinations first, it becomes a simple matter to determine how much you can pay under any certain set of circumstances.

When making any offer on a property, always start lower than you expect to actually get the property for, and the terms of your offer should be generous to you. In other words, try for both a low price and good terms. Your offer will likely be rejected, but the seller will probably make a counter-offer. His offer will tell you in which area(s) he is most flexible. If his offer does not change many of the terms you set forth but states a much higher price than your offer, you can figure that you can get good terms. Now, concentrate on lowering his price by making a counter-offer, or accept his price in exchange for even better terms.

Remember, always be willing to give away nickels for dimes. If he comes down $3000, then you should only raise your offer by about $1500 or even less. Let the other guy give more concessions than you do.

Now, remember all those sweet terms you put in your offer? You should have included some that you don't really need or want, to be used as negotiating chips. For example, if your terms stated that the seller needs to repair some small $500 item prior to closing, you could trade that for something more valuable, like a $1000 price reduction. Again, trade nickels for dimes.

Usually, you can get between 10-20% off the selling price. If not, you should abandon the deal and find a more flexible seller, or find a way to profit even when you pay top dollar (see next chapter). The reason you can usually talk the seller down by at least 10% is because most sellers "pad" their selling price by at least that much. They take a shot at getting more than they really expect, hoping a fool with too much money will come along. Sellers also pad the price to cover broker's fees, and to leave themselves room for negotiating. For these reasons, you probably aren't getting much of a deal if you offer 10% less than the asking price because that is likely the real value, anyway. It is in your best interests to start your offer at a price that is 20-25% below the asking price. Even if the offer is rejected, it will make your next offer more attractive in comparison. The up-side is that the seller may snap up your low offer due to his having to move quickly, or some other consideration unknown to you.

In the event the seller will not sell under equitable terms, then the price must come down. In such cases, the stiffer his terms, the lower the price must be.

Do not pay more than 85% of the market value (as opposed to the asking price) unless you are using the double escrow and have a buyer lined up. In that case, it is OK to settle on $95,000 for a $100,000 home you are reselling for $100,000. That is still a $5000 profit for you.

Here are a few tips on getting the price down:

1.) Your first offer should be 25% below the asking price
2.) Include terms that you are willing to give up, piece by piece, in exchange for a lower price.

3.) Once the buyer accepts an offer, tell him that the price is contingent upon a final inspection of the premises. Everything you find wrong during this inspection (that he did not tell you about) should be noted, a value placed on fixing it, and these costs applied to reduce the price. For example, home is in need of paint, a stained ceiling needs repair, and the 100 amp electric service needs to be upgraded to 200 amps. Total cost of repairs - $4000. Your offer should then be reduced by $4,000.

4.) After noting repair costs (and you are using a Land Contract, Option or Lease Option), advise the seller that such repairs will take a month, costing you a month's rent on the property. Another $600 can then be legitimately deducted from the price, or you can ask for a one-two month moratorium on payments.

Again, use your imagination. Look for ways to get the price down. Once the price is acceptable, try getting even better terms. If a certain term is important to you, such as the seller pays all closing costs, then be willing to raise the price a little, but not so much as to wipe out the benefits of him paying those costs. Remember two important points:

1.) Do not enter into a deal that is not profitable to you. Find another property.

2.) Remember your target property. It is a "white elephant" to the seller, and he is more anxious to sell than you are to buy. Don't give up too much just to make him happy.

Comments

[Tax Lien Information]

Great information.

The real estate agent you choose to represent you is also important. I always try to get the best price. Some agents consider all the back and forth a waste of their time and just want to get the deal done.

I've dealt with this type of agent in the past and finally told her to take a hike.