It took you weeks or months of searching, but you’ve finally found the perfect house for sale to buy as an investment property and now it’s time to make an offer. This is where things begin to get serious and the paperwork starts to build. A purchase offer is a legal document that outlines the price you’re willing to pay for the home as well as other key terms of the transaction. For a real estate investor, putting together a strong purchase offer is the single most important step of buying an investment property – it’s what determines whether you’ll become the new property owner or start your property search all over again.
In order to score a good real estate deal, you need to understand how much to offer on a house. Certainly, you don’t want to overpay (who does?) as a general rule in real estate investing is: the less money paid up-front, the higher the ROI. However, if you offer a low price, you risk having the seller write you off completely. So, how can you make sure your offer will be the one the seller can’t refuse? Hint: it’s all about striking the right balance where both the buyer and seller get what they want.
Given the size and long-term implications of this step of the buying process, it’s in your best interest as a first-time real estate investor to fully understand the following:
- What’s inside a purchase offer letter
- How to determine the best offer price
- When should you offer below asking price?
- How to craft the best offer
What to Include in an Offer Letter
Making an offer on a house isn’t just about telling the seller how much you’re willing to pay for it. Typically, a purchase offer consists of the following key components:
- Consideration Window: specifies how long the offer’s terms remain valid – i.e. how long the seller has to consider it. If the seller doesn’t respond by the end of the window, the buyer is free to make another offer.
- Earnest Money Deposit: should be spelled out in the offer and in a personal or cashier’s check in the document. It shows that you’re serious about purchasing the house and it may be anywhere between 1% and 3% of the total purchase price according to NerdWallet.
- Description of Property: legal description of the physical property as written on the original title. This should consist of a combination of the subdivision name, block and lot numbers, property’s numerical measurements, and descriptions of its physical boundaries.
- Total Purchase Price and Financing: This outlines the total price that you’re willing to pay for the property. If you’re financing part of the purchase price with a loan, this part describes the financing method (such as a conventional or FHA mortgage), the down payment amount, the amount to be financed, the loan terms, and the interest rate.
- Description of Included Fixtures and Appliances: describes the fixtures, appliances, mechanical items, personal property, and other “appurtenances” to be included in the property’s sale at no additional cost. The most common examples are kitchen appliances and HVAC equipment.
- Closing Costs: specifies who’s responsible for closing costs and in what amounts. For example, you might request the seller to pay $3,000 toward closing costs, with you being responsible for the balance.
- Contingencies: conditions that the seller should agree to if they accept your offer and want the real estate deal to carry on. Common contingencies include home inspection, hazard inspection, appraisal, financing, sewer and well inspection, title, and walk-through contingencies.
- Closing and Delivery Dates: stipulates the closing date or the day the transaction is finalized. It also stipulates when the home is to be delivered by the seller to the buyer – in other words, when the buyer can move in.
- Arbitration Agreement/Disclosure: an optional addendum that, when signed by the buyer and seller, both parties agree to settle all disputes through binding arbitration and waive their rights to a court trial.
What Is a Good Offer on a House?
As you can see, the price you’re willing to offer on the house or investment property is only a component of the purchase letter. Still, it’s the most significant factor that sellers look at when evaluating offers. It’s up to you, as the buyer, to decide how much to offer on a house that you’re interested in for real estate investing. Now to determine your offer price, you need to consider these 5 factors:
1- The Housing Market’s Condition (Buyer’s vs Seller’s Market)
The first thing that first-time real estate investors should remember is to not believe the price tag. In the end, it’s the market that rules. Meaning, the best offer you can make on a house depends on the current market conditions – if it’s a buyer’s or seller’s market. So, before you make an offer, determine what type of market you’re in. To do this is simply a matter of supply and demand.
Buyer’s Market
Look at whether there are a lot of similar houses up for sale and if houses are staying on the market for longer than a month. If so, then you’re in a buyer’s market. Traditionally, buyer’s markets (where available inventory is high but demand is low) put buyers in a strong position to negotiate, giving them the ability to open with an offer below listing price (also called a lowball offer). In addition, it’s more common for sellers in buyer’s markets to set the list price “just right” because they don’t want to end up scaring away potential buyers nor feeling stuck if only one offer comes in at list price. Therefore, buying an investment property in a buyer’s market is great for beginners because it comes with a lot of flexibility in price and sellers tend to be more willing to negotiate offers.
Seller’s Market
On the other hand, making an offer on a house up for sale in a seller’s market (where the demand is high but inventory is low) is tricky. In such markets, homes could go into contract within a week or two of being listed. Sometimes, sellers take advantage of this and list their houses at a low price. Seems counteractive right? This is actually a strategy that some sellers follow – they know that prices are on the rise, so asking a low price ensures they’ll get the maximum number of offers. As a result, a bidding war follows and the price goes sky high. Therefore, if you’re interested in buying an investment property in a seller’s market, don’t go below asking price. In this case, investors should offer at least the list price.
To determine which real estate market you’re currently in, read this: Is It a Buyer’s Market or Seller’s Market?
2- How Long Has the Home Been on the Market?
Now that you know the market conditions, check out the amount of time that the property you’re eyeing has been up for sale (days on market). Such data is publicly available on the MLS and other sites for finding investment properties like Mashvisor. As mentioned, this gives you an insight into the overall state of the area’s housing market. Moreover, this is also a good indicator of buyer interest and gives you a clue as to whether or not the seller has priced the home fairly. As a real estate investor, your offer on a house has to both reflect current local demand and be in line with other offers the seller is likely to receive.
For example, say that the average home takes a month to go into contract in your housing market, but the property in question has been up for sale for longer than two months. This tells real estate investors that the seller has priced the home too high and the seller is struggling to attract bids. In this case, the seller is more likely to be willing to accept an offer lower than the list price. Plus, the longer a property has been on the market, the less of an upper hand the seller has in negotiation. On the other hand, a seller who has just listed the property for sale will expect offers at or above the list price. As you can see, by paying attention to such property data, you can get a better idea of how much to offer on a house.
3- How the Price Matches the Market Value
Market value is simply what someone is willing to pay for a home. It’s not a specific number, but rather a range of the price that both the buyer and seller can agree on. At the low end, you’re getting a great real estate deal, and at the high end you’re paying top dollar. Where you end up on the market value spectrum is based on a combination of market conditions, motivation, and financial comfort.
You can find the current market value of an investment property by looking at the recent comparable sales and factoring in current market conditions. In other words, the next factor that’ll help you determine your offer price is the comparative market analysis (CMA).
Most sellers will order a comparative market analysis before setting their initial asking price. As a buyer, this is something you need to do as well before putting in an offer. A CMA estimates the current market value of a property for sale by evaluating at least three recent sales of similar properties in the surrounding neighborhood. Analyzing recent comparable sales (also called real estate comps) shows you the list and sale prices for similar homes that have sold in the last few months which you can use as your guide when making an offer on a house.
Related: How to Do Comparative Market Analysis Step by Step
For example, if a similar house in the same neighborhood was sold for $10K less, then it makes sense for you to go $10K lower than the asking price too. Moreover, a comparative market analysis spots overpriced homes. For instance, if the CMA suggests that the market value is in the $250,000 to $270,000 range and the home is priced at $300,000, you know that you can make a lowball offer and have the space to negotiate it. It’s important to emphasize that you should focus on sold homes, NOT active listings – these only reflect what a seller thinks their home is worth, not what a buyer is willing to pay for it.
Looking for comps for investment properties in your area? Sign up to Mashvisor to access data of recent comparable sales and download an Excel sheet containing all the details you need to compare them!
4- What Is the Competition for This Home?
Whether you’re in a seller’s or a buyer’s market plays a role in how many offers the seller is receiving. If you’re in a seller’s market, there will probably be multiple offers for the home you’re buying for investment, increasing the level of competition. You might also be up against not only regular homebuyers but other real estate investors like yourself with all-cash offers. Before sending your offer, ask your real estate agent to ask the seller’s agent about recent showing activity. The seller’s agent probably won’t reveal whether there are other offers, but he/she may admit that there isn’t much serious interest in the house or, conversely, that there’s been a lot of recent interest. This type of information will help you determine your offer price.
For example, if you know that it’s unlikely for the property to have much competition, you can make your offer lower than the list price as you’ll likely have an opportunity to negotiate. On the other hand, if the seller has multiple offers in hand and you know there will be competition, your offer has to be more seller-friendly (i.e. higher offer price, fewer seller-paid costs). You might also want to put an “escalation clause” in your offer. This basically allows you to say “I’ll pay X price for this home, but if the seller gets a higher offer, I’m willing to increase my offer to Y price.” Doing this not only makes negotiations easier, but you’ll stand out as a serious buyer and increase your chances of scoring a new real estate investment.
5- The Seller’s Motivations and Needs
Too often, buyers go into writing an offer thinking it should only meet their needs. However, the strongest offers are those that address the needs of both the buyer and seller. In fact, the seller’s motivations are just as important as the housing market’s conditions. Finding the middle ground is where the best real estate deals lie. Hence, savvy real estate investors try to get as much information as possible about the seller from the listing agent to determine how much to offer on a house around those needs. In addition, it’s more likely that the seller will notice the effort, and that will help in setting your offer apart from the crowd.
For example, some sellers, like those downsizing from a long-held family home into a shorter-term rental property, are in no particular hurry to move out and can afford to wait for the right purchase offer. Other sellers need to close the deal as quickly as possible, maybe due to an urgent relocation or to raise capital to buy another property. These are motivated sellers and are often willing to accept substantially less than their asking price, especially if it’s a buyer’s market. This information about the seller’s motivation can help you structure a winning offer and use that as a bargaining tool during negotiations.
Related: 8 Negotiation Tips for Buying an Investment Property
When Can You Make a Lowball Offer?
When buying an investment property, real estate investors want to save money and so they go in with a lowball offer. However, this isn’t always the right move – it might start you off on the wrong foot with a seller or you may wind up without the home you want. We’re not saying that you shouldn’t do it. Quite the opposite, sometimes a lowball offer satisfies both the buyer and seller. But making a lowball offer depends on circumstances more than the investment property itself. Here are a few scenarios where making a lowball offer makes sense:
1- The Seller Wants Out
As mentioned, not every seller wants to wait for the highest purchase offer. Some are in a tight financial spot and really need to sell their property fast. Maybe the seller inherited the property and wants to avoid the hassle of maintenance. Such homeowners are more desperate to sell the property and are willing to accept lower offers to do so.
2- The House Has Been on the Market for a While
If the property for sale has been sitting on the market for over a hundred days, there may be some room for a lowball offer. Also, consider listings that have been on the market, then off, then on again. Sellers will be frustrated and might be more open to considering any serious offer – even one lower than list price – just to get through the process.
3- The House Needs Updates
Is the house you’re looking at in need of a lot of work before anyone will want to live there? Is it a distressed property and needs an extensive amount of remodeling? If so, lowball offers are entirely justified. Replacing the roof, updating flooring, and other major structural changes cost thousands of dollars. Sellers may accept lowball offers over making these repairs themselves.
4- The House Is Obviously Overpriced
Sellers often get an exaggerated sense of their home’s value and don’t list it based on prices and values of similar homes in the area. Try to find features in the house that may increase its value. If there are none, your CMA will show you the true market value of the house which you can use to make a lowball offer.
Use our Property Finder to find lucrative investment properties in your city/neighborhood of choice that match your criteria and fall within your budget!
How Much Below Asking Price Should You Offer?
Before submitting a lowball offer, it’s important for a first-time real estate investor to understand just how much to offer on a house below asking price. You want sellers to see you as a serious buyer, but you don’t want them to feel insulted. So, what’s the best offer to make on a house when going with a lowball offer? According to Realtor, an acceptable lowball offer is 15% off the listing price and anything above that is considered an extremely lowball offer – which real estate experts warn against. Your agent can help you determine how far below listing price you’re comfortable to go with, and what you think the sellers might respond to.
Making an Offer on a House: 4 Tips
Many real estate investors today, especially beginners, are facing fierce competition. So, what can you do to boost your chances with the seller if you’re in a competitive housing market? Here are some strategies and tips to make the best offer for buying an investment property and beat your competitors without overpaying:
1- Work with a Real Estate Agent
As mentioned, a purchase offer is a legally binding document. There are many state and local laws guiding the process so you need a legally approved form. Online templates are not binding legal agreements which is why we don’t suggest the DIY route when writing an offer letter. As a result, it’s crucial that you have a real estate agent on your team from the start of your investment property search- from making an offer to closing the deal. A good agent will know their way around the whole process and will provide you with a Residential Purchase Agreement that complies with applicable state and local laws.
Don’t have an agent? Find a top real estate agent in your area today!
2- Get Pre-approved for Bank Financed Transactions
Sellers are – rightfully – concerned about getting to settlement on any offer they accept, so they prefer buyers who are pre-approved for a mortgage. So, if you’re not an all-cash buyer and want your offer to compete against others, you have to get approved by a mortgage lender and include your pre-approval letter with the earnest money deposit. This will tell the seller that when it’s time to close, you’ll have the money. Getting pre-approved further tells you how much house you can afford and confirms what to offer on a house. Keep in mind that the higher your deposit and promised down payment, the more likely the seller is to take your offer seriously.
3- Eliminate Unnecessary Contingencies
Contingencies give both parties a fair way out of the transaction if buying a property for investment is no longer possible. Buyers love contingencies as they give them the ability to exit the real estate transaction with their security deposit in hand. Sellers, however, see them as obstacles to successful closings. Including many contingencies in the offer is, in fact, a common deal-breaker. So, it’s best to keep contingencies to a minimum, especially if you’re in a hot seller’s market or making a lowball offer. Focus on contingencies that you truly need for the offer to make sense for you (like a home inspection contingency), and forgo those for non-essential repairs and credits.
4- Support Your Offer with Data
The offer letter can make or break your chances when it comes to buying an investment property. When submitting a lowball offer, it’s important to justify your offer price if you don’t want to offend sellers. The best way to do that is by including the collected data for comparative market analysis as well as the CMA’s results in the purchase offer letter. This way, you’re showing the seller that you’re offering the best and most reasonable price.
Related: Buying Investment Property: 4 Best Tips to Get an Offer Accepted
Remember, you can use Mashvisor to study the housing market through big data analytics and get access to data including recent comparable sales in the area, median listing price, and price changes. Moreover, we give real estate investors access to data regarding property details, characteristics, taxing info and history, sales history, owner info, a breakdown for the expenses, and much more!
To learn more about how we will help you make faster and smarter real estate investment decisions, click here.