How to Make an Offer to a Seller

On December 19, 2013 by Karen

Invest

By now you know that I invest in real estate. And that I recommend it to everyone. And that I think this is a fabulous time to be buying. Oh that’s right, I think it’s always a fabulous time to be buying!

So, what are some of the steps we take to buy? As investors, we don’t pay full retail, so how do we present an offer to the seller so s/he understands how we came to the number we’re presenting?

At a recent Mastermind meeting, our main topic was how to do just that. Presenting an offer is the most important part of the entire buying process and, done right, it takes time. Never simply give a low offer, but rather take the necessary time to sit and explain, in depth, how you came up with your price. Buying is where you truly make your money, and presenting your offer is the most important time you spend with the seller. Never rush this step.

Before meeting with any seller do your homework to determine, first, that you want the property, the property’s fair market value, and the maximum you can pay for it. Finally, make sure that you can resell for a profit if you plan to resell, or cash flow it every month if you plan to hold it as a rental.

Armed with your research, you’re now prepared to sit down and talk with the seller. There are a number of things you will want to have with you when you do:

    1. Business cards – so they know who you are and that you’re a professional. Leave your cards with the seller so they have all your contact information when you’re gone.
    2. Testimonials – from people you’ve done business with in the past. Always have testimonials on your website and on all your marketing materials, but be sure to print some out to leave with the seller so s/he can look them over later.
    3. Comparables – from the area showing the market value of their home. Many online sites offer this information and you’ll need it to help come to an agreement with the seller about what their home is truly worth.
    4. Seller Worksheet – showing how you determined your offer.

This seller worksheet is the most important piece of information you will carry and share with the seller. It is also the most important piece you will work on for yourself.

  • Begin with the approximate market value that you and the seller have agreed to for their home. Next, you begin subtracting selling costs from that number.
  • Explain to the seller that buyers expect a discount from the asking price. A three to five percent discount is the average nationwide. Some areas show as much as a seven percent discount as normal off asking price.
  • Subtract real estate commission. Six percent is the national average.
  • Subtract closing costs. Today, sellers are paying most of the closing costs to make the purchase of their home attractive to buyers. FHA allows for the seller to pay up to six percent in closing costs when they buyer is using an FHA loan. It is still a buyers market so sellers are taking large discounts and picking up many of the back end costs.
  • Subtract any other costs that will occur with the sale:  home inspection, pest inspection, vacancy insurance, transfer tax, repairs, utilities, yard maintenance, home warranty, mortgage payments while it’s vacant, etc.
  • Repairs. Do you know what the repair costs will be? It is vital that you have an accurate idea when making an offer. If you are not able to determine needed repairs on your own, it is well worth paying a professional inspector go through the property before making your final offer.

The above numbers will subtract out to your bottom line, your maximum offer. These are real numbers that you discuss with the seller to show that you haven’t randomly picked your offer amount, rather that it’s a true and fair number. When you take the time to go over this worksheet with the seller, you have educated them on the true costs they will run into when selling their house and, even if they don’t like the final number, they understand it and see that it’s real.

This worksheet and the time spent with the seller is vital. The best transactions are a win for everyone and, even when your offer is lower than what the seller was hoping for, once you’ve shown them why, they can agree that you took the time to help them out and presented an honest solution that will allow them to move on with their life.

How do you present your offers? Is this information helpful?

5 Responses to “How to Make an Offer to a Seller”

  • Absolutely helpful Karen. a lot of investors around here say that if you’re comfortable getting your offer to your buyer, your offering too much. I think that’s a terrible mindset to walk into a negotiation with.

    You break down your costs in front of the seller more than I do, personally I need to leave a little room for ambiguity to avoid a shock response from the seller. My justification for the seemingly low offer is market uncertainty and intangible costs related to project management and or running around, chasing tenants to pay the rent on time. For me it’s the right balance between having a constructive conversation and allowing wiggle room.

  • Thank you so much for your input, Sean.

    I like the way you handle your conversation. So long as the seller understands we’re not just making up a random low offer, they can much better handle the reality of our pricing.

    To your continued success!

  • Hi Karen,

    New investor here…Loved your post on how to make an offer to a seller.
    I just had one question and that is how you get any equity out of the offer because all if the points you present in the article are hard costs. Commissions, closing costs, construction, inspections…all costs in the deal. Maybe those costs are inflated? How do you explain the equity piece to the seller? Thank you for your time.
    Rob

  • Hi Robert:

    Actually, all of those costs come out of the equity, if there is any. Oftentimes, there is not enough to cover even those costs and we explain to the seller that they will have to write us a check to purchase the home.

    Very few sellers understand how much it costs to sell a home. I tell them to call any closing attorney or title company and ask how often the sellers write a check at closing rather than receiving one. They are often amazed.

    When we go over the costs to sell, we are letting the seller know their real costs. You can also add in “what do you think would be fair for me to make as a profit on this purchase?” and subtract that amount as well. They do recognize that you are in the business to make a profit.

    What we offer them is convenience. We can purchase at this final price today, or you can let your home sit on the market for months and hope that another offer comes along that is better than yours. Many people will pay for the time and convenience you offer them.

    I hope this helps to answer your question.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

%d bloggers like this: