As real estate investors, one of the most important decisions we make is how much to offer when submitting a bid on a piece of real estate. There's no single rule or process that will guide investors through this important decision, but there are a few different strategies and points that can help you to be successful.
First of all, let's consider that the sale or purchase of real estate is one of the largest financial transactions that the majority of people, including investors, will undertake in their lifetime. For this reason, it should not be taken lightly as it can make, or break, your financial position going forward. So let's list some key points to consider when forming your strategy.
1) Remove the emotion!
For most people entering into a real estate transaction, it's personal and likely comes with emotional strings. My advice to investors and non-investors alike, is to force the emotion out of the deal. This will make your chances of a successful negotiation increase significantly. More so, you have to be willing to walk away from the deal if the price is not right - this applies on both sides. I estimate that, when investing in real estate, roughly 90% of success is determined by what happens at the purchase/sale table, and only 10% is determined by what you do in between these two events.
2) Understand the seller!
Remember, a real estate transaction involves at least 2 parties. Understanding the other party or parties, specifically their motivations in the transaction can help you develop your negotiation strategy. Think about what they want to get out of the deal. Is it a high price that a seller wants, an assumption we all make, or maybe they would like to close the deal quickly. Maybe they've already received multiple offers that have fallen through due to financing and you can offer cash which puts you in a much stronger position. By thinking about these things, you can understand where your power lies in the negotiation and use it to get good value out of the deal.
3) Understand your competition!
Understanding your competition can be tricky. But once you know your competition, deciding what to do with this information can be downright destructive. As an investor, if you find yourself bidding on a property that has other bidders (i.e. a bidding war), I recommend being very careful - even dropping out. You've heard the advice about the best investors do the opposite of what everyone else is doing, right? Well, I think it applies here. You are unlikely to get a good deal if there is competition for a property so stay firm in these cases and let others bid up and over pay.
Check out these articles for some additional information and perspectives;
http://www.trulia.com/blog/taranelson/2011/04/5_steps_to_deciding_how_much_to_offer_or_ask_for_your_home
http://independencetitle.com/how-much-discount-should-you-offer-on-a-home-purchase/
In summary, be careful and patient when submitting bids on real estate. Always be willing to walk away and teeter on the edge of losing the deal in an attempt to not leave any money on the table. Know the local market and have a sound strategy for executing the investment to make money. These are the things you need to guarantee success.
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