"Introduction to Investment Real Estate Negotiation"
The process of investment real estate negotiation is a little different than negotiating to buy a home, where emotion creeps into the process. I mean, heck, you gotta live there, right? Conversely, investment real estate generally does not have an emotional undercurrent. As an investment, it's ALL about the
real estate analysis
...your sole goal is to build
long term investment
MAKING AN OFFER
The real estate negotiation process for you – the buyer – begins when you make a formal offer to the seller. Typically, you'll make a lower-than-list-price bid, the seller will come back with a counter-offer, and so on.
Negotiations on rental properties can encompass 3, 4, or even 5 or more counter-offers from each side. You will not typically be directly involved in this back-and-forth process, as the exchange will take place between both parties' agents.
In terms of your initial offer, the goal here is to start as low as possible, but not so low that the seller is offended. Your offer will be based on projected
property condition, the neighborhood, and other factors.
Property Inspection Checklist
will be invaluable in helping you determine the physical condition of each property, which in turn will impact your bid amount (note: you'll need Adobe Reader...to download a copy, click here).
FACTORS IMPACTING YOUR OFFER
In my experience, 20% less than the list price is often a good place to start your real estate negotiations. Of course, every situation is different and so there really is no hard-and-fast rule of thumb. For example, you may be able to bid even more than 20% under list price if:
- The property has been on the market for a long time
- A lot of repairs are required
- The property has serious problems such as foundation issues, lead paint, pervasive unleveled floors, large-scale mold infestation, or a buried underground tank
- The listing is dramatically overpriced
- The property has one or more problem tenants
- The seller is highly motivated (beware, this could be a red flag, too)
- You are operating in a buyer's market
However, there will also be situations where you'll want to bid less than 20% under list price. For example:
- The property is located in a highly desirable neighborhood
- The property itself has desirable attributes (large number of bedrooms, big lot, low property taxes, etc.)
- The property has not been on the market long
- The property is reasonably priced
- The numbers not only work, they blow you away
- You’re operating in a seller's market
In extreme cases, like the white-hot market we saw from 2002-2005, you will likely have to go full price and maybe even more in order to "win" the deal.
In any case, your
rental property agent
will be invaluable whenever you're immersed in investment real estate negotiations. Leverage his/her experience to determine the best possible starting offer, and then take it from there.
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