The Price Is Right – Tips to Determine a Profitable Offer Price on a Property
One of the most important questions that MUST be answered when you are buying a property is how much to offer. Price is essential to making any type of real estate or investment purchase. Make an offer too high and you will end up costing yourself a lot of extra money. Here is an interesting approach about how to determine your offer price.
Forget About The 70 Percent Rule:
If you have been an investor for any amount of time, chances are you have heard about the 70 percent rule. This is what many house flippers use as their general guide or pricing strategy when it comes to making offers. The idea is to first take the expected after repair value of the property and multiply this by 70 percent. Then, subtract out all costs to arrive at the maximum offer price you would be willing to spend on any given piece of property.
There is a big problem with this rule, however. While a 30 percent margin will probably be OK in certain economic and market conditions, it is a big mistake to use this as a blanket guide covering every type of market condition. After all, who is to say that you are going to be able to flip or sell this property at what its fair or full market value might be? The whole idea of market value, and what is fair, tends to be pretty subjective anyway.
Give Yourself More Room To Work:
Real estate investing is a business and businesses rely on formulas and data. You need to give yourself more than a 30 percent margin in which to pull profit out of a deal. You can certainly start with the formula listed above, only instead of then offering 60 or 70 percent of the market price, you may want to offer only 30 or 40 percent.
You may be thinking that no one in their right mind would sell their property for only 35 percent of what they could otherwise get; before you hit the exit browser button thinking this is crazy talk, consider a few things: To begin with, there is never any guarantee of a sale. In addition to that, while the property might eventually sell for the full asking price, it could take a long, long time. Perhaps the property has already been on the market for weeks, months or even more than a year, and the owners really just want to be done with it.
Make Data Driven Offers:
Whatever percentage of full market value you choose, stick to it. Yes, it might take a longer time to have an offer turn into a sale, but when it happens, your profits will more than compensate for the other few marginally profitable deals you might have missed.
Always base business decisions on sound business reasoning and data. Never let your emotions to enter into the equation. That means you don’t raise your offer when sellers start telling you their heartfelt stories. Stick to your guns and the deals you do get will be tremendously profitable.