Don’t get emotional when making an offer
If you read the title of this column, you probably already gathered that you shouldn’t get emotional when making an offer. And that’s true — when you get emotional, you tend to make a bad deal.
I’ve seen this concept play out in many ways. A newer investor will overbid on property. And since they’re excited about doing their first — or next deal — they become overly optimistic on how much the rehab will cost and what it will sell for. They pay too much, and their profit gets killed in the process.
I’ve also seen experienced investors get into bidding wars with competitors. This emotion turns into a turf war, and it becomes a battle of who is willing to pay the most. The reward for this pee-peeing contest ends up being the satisfaction of beating their competitor instead of actually making a good deal.
And, of course, we see high emotions in the retail market today. In this situation, we see buyers exasperated by the lack of inventory and frustrated by rejected offers. They get emotional and put in an offer way above list price with an appraisal gap clause that says they’re willing to pay cash over the appraised value of the home. In this situation, the buyer begins with their house underwater, and that’s not a good place to start.
To keep anything like that from happening to you as an investor, you need to have a process for making offers and a top offer formula to go with it. Our method is simple. We make two offers. The first one will be some sort of owner financing offer. This may be as simple as us making payments to the seller until the house is paid off or as complex as using a master lease and option to gain control of the property.
Next, we make a cash offer starting with a conservative, after-repair value, subtracting the costs for rehab, closing costs when we buy and sell, our acceptable profit value and the remainder is what we can afford to pay.
Sticking to that formula and not going over the calculated top offer keeps you from getting emotional.
That being said, I found it impossible to keep emotions out of a recent situation.
Here’s what happened:
I got a seller call about a 3,000-square-foot farmhouse with over three acres of pasture, a 40 by 60-foot steel building, two car detached garage and a creek feed from the springs on Johns Mountain. The reason this situation became problematic was when I got there, I thought this property matched what Ashley had been dreaming about. I brought her and the kids out there and they loved it!
Now, the house was in rough shape. When I say rough, I estimated the rehab at around $140,000. Part of this had to do with the sheer size of the house. But there were lots of other things — an uneven floor system, leaky chimney, rusted cast iron pipes and more — that were going to cost a lot. And we were going to need to redesign the floor plan. As the house sits, it’s only a two-bedroom, two-bath layout… on 3,000 square feet. The design would need some reworking.
When I saw how much Ashley and the kids loved the property, I found it impossible not to get emotional. I wanted it for them, and that factor can make logic go out the window.
Ashley and I talked about what we should offer, recognizing the fact that we could not separate our feelings from this one like we do investment properties. So instead, I let the situation fuel my creativity, and I made our normal two offers.
The first was double what they were asking. Yep, you read that right. Double.
But, just like our methodology when making offers on investment property, this price was with owner financing. I would give them a sizable down payment and then make them annual payments each year until it was paid off. Then, I used our top offer formula to make a cash offer.
The last thing I did was make a benefits list. I try to do this on most offers. In this section, I list out in bullet points to the seller why my offer is good for them. Then, I tell them why this offer is good for me. And I’ve noticed the benefits list gets my point across to the seller better than anything else. And we’ve gotten more deals because of it.
After I made the offer to the seller and went through all the benefits, he understood and loved the idea of being paid double what he was asking. “But,” he said, “I accepted an offer yesterday. And I sure wished I would have waited.”
We wished he’d have waited too! But I told him to keep my number and give me a call if anything changes because my offer will still stand.
It is a little hard not to get excited, hopeful and then disappointed when putting in an offer on a personal house. So, I get it. But do your best to mitigate those emotions so that you don’t make a bad deal. And if it is an investment property you’re offering on, for goodness sake, do not get emotional. It will come back to bite you.
Joe and Ashley English buy houses and mobile homes in Northwest Georgia. For more information or to ask a question, go to www.cashflowwithjoe.com or call Joe at 678-986-6813.