I see tons of real estate investors start their negotiations all wrong. If you come out the gate with the wrong number, there’s a chance the rest of the negotiation won’t go your way either. Believe it or not, there is actually a science to crafting an offer that can position yourself right where you want to be. Think of negotiating as a game of chess, and the first move on the board as the initial number you present. This move won’t determine the game, but it will surely set the tone. Always move with tact and strategy.
Here are 4 tips to crafting your initial offer:
1. Know the Ceiling as Well as the Floor
Want to make a substantial offer? You’ll need to determine how high or low you are willing to go. Usually, properties that have been in the market for an extended period are likely to accept low-end offers. And as long as you can justify your offer, you can push the deal to your ideal value range without worrying that you are offending the seller. However, this is not the case for every property. You’ll also need to check out for overpriced properties that could have only been on the market for weeks. You can pretty much determine if the seller will meet your ceiling depending on how they counter. If you go in at 5% below the list price and they offer a 5% counter, it means that they aren’t willing to budge much, and this will help you determine how much to push.
2. Send Out Offers on a Letter of Intent (LOI) A Letter of Intent is a formal document sent by an interested buyer to a seller or their agent expressing interest in the deal and opens the floor for negotiations. This letter is not only used to alert the owner that you’re interested in their property, but also provides the seller’s agent with some hints on what you are willing to bring to the table.
It’s very important that you keep the Letter of Intent short and straightforward. Avoid putting too much information in the letter. You want to send a strong message to the owner about your interest in their property but, not too much all at once. Save the additional details you want to communicate for the Purchase and Sale agreement. Always consider the letter of intent as a part and parcel of the sales process. Giving away too much information at the first point of contact during real estate negotiations can give the other party more leverage.
3. Offer at 80% of the Asking Price Professional investors don’t leave any space to get hurt even if they made an erroneous judgment. The best way to do this is by making offers that are 20% less than the asking price. Although it sounds a little extreme, lowering the initial list price by 20% helps you to find out how motivated the sellers are and enables you to gain their perspective. However, if the deal doesn’t make sense even after reducing the purchase price by 20%, then trash it. Now keep in mind, deals can still look attractive if you’re unable to negotiate a purchase price with built-in equity.
4. Get the Agent on the Phone When you put a perfect property on your radar, it is wise to get the owner or their agent on the phone right away. This will help you source valuable information about the seller and their property in addition to a quicker response time. Phone negotiations help you understand the seller’s perspective and motivation. Use this information to craft a strategic offer that presents a win-win situation for both parties. Calling the seller can also help you connect emotionally with the seller and create a common ground for further negotiations.
Final Verdict Following these simple steps can guide you in determining your initial offer. As long as you consider these 4 easy tips, you’ll be able to develop a smooth negotiation process for yourself and ensure that you are setting yourself up for success with the terms of the deal.
Are you looking to purchase a property and need a way to submit the opening offer? We invite you to download ourLetter of Intent (LOI)document to submit to the seller's real estate agent to make an initial offer and begin negotiations.