How to Make an Offer in a Seller's Market | Real Estate Investing

It seems many investors these days are complaining about the lack of good deals in their markets. In many hot markets, there are no deals listed for sale that even come close to meeting their expectations.

And, when those rare good deals do pop up, they tend to get scooped up almost instantly, well before they get around to making an offer.

This is a problem that I hear about time and again from first-time investors and others who are just starting out. There’s nothing on the market that they can analyze that would produce satisfactory cash flow in an area that they want to invest in. And the few good deals that they think might meet their criteria are quickly gone before they’ve been able to pull the trigger.

I hope to solve this problem by explaining an approach that I’ve used in the past and continue to use currently. I want to help others:

develop realistic expectations about investing in their market
realize what it takes to get an offer accepted on the deals that are still out there
learn to make an offer on a house (or any type of property) in a timely manner when the opportunity presents itself

My method will hopefully provide a mechanism to quickly and easily analyze the market so that you can be prepared to identify, offer, and close on a great deal when it hits the market.

How to Make an Offer — Instantly

Step 1: Understand What You Want in a Deal

Figure out your price point and other basic details about the type of investment you want to make or house hack you want to buy. Figure out the area you are comfortable in and the type of structure you’re looking for, including the year built, square footage, beds/baths, lot size, zoning, etc.

I have mine down pat. I’m looking for:

a duplex/triplex/quadplex in Denver, CO, within the city limits
something likely to be located in Southwest Denver or Northeast Denver in specific neighborhoods
some deferred maintenance, some management problems, or other issues that are within my wheelhouse to solve

I’m an investor; I know that nobody is selling a perfectly maintained property with great tenants paying market rent in a great location at a steep discount.

Going into the details, I’m looking for:

a 1950s build or later
1-bed/1bath or 2-bed/1-bath units preferred, 500 to 800 square feet per unit
property that is zoned for upside

For example, a property with a duplex on it that is zoned for commercial redevelopment is a great find. A property with a quadplex on it that was grandfathered in, but in an area zoned for single family is less attractive and limits my exit options.

Further, I want my pro forma to deliver $1,000 to $1,500 in gross rent over and beyond the mortgage with a 25 percent down payment (PITI) to cover my operating expenses and CapEx as a rule of thumb.

I personally do a more thorough analysis using the BiggerPockets Rental Property Analysis Calculator.

I am willing to slide on that rule depending on the quality of the neighborhood and its prospects for appreciation. That being said, I am stricter with my cash flow requirements in neighborhoods where I perceive less appreciation potential.

Do you have your criteria down as well as I do, if not much better? If the answer is no, you have a clear deliverable for yourself before moving forward with your investment journey.

It’s perfectly fair to have multiple types of properties with different criteria for each. I should probably repeat this exercise for single family properties to give myself another type of property to purchase and increase my odds of finding great deals. But you can’t really enter into this business, in my opinion, with a high probability of success if you don’t know what you want.

Step 2: Pull up Every SOLD Property in Your Area and Analyze Them Against Your Criteria

Call up your agent, and ask them to send you every property of that type that has SOLD in the past 180 days. Notice I capitalized, underlined, and bolded the word “sold.” Don’t even look at properties that are listed right now or properties that went under contract recently.

The good news is the vast majority of aspiring investors—your potential competition—are only looking at current listings. Since few listings make sense in some markets (like mine), many people lose hope after one look and don’t bother coming back.

Don’t make their mistake! Plenty of good deals may have sold recently, even if there are no listings currently that look great.

Make a list of those deals that have sold that you would have purchased, given the opportunity. This list will tell you extremely important information.

You’ll likely find one of these two possibilities:

There were NO properties that you would have purchased in the last 180 days that make sense as an investment. If this is the case and you are a first-time investor, then you need to take a reality check. Real estate investing may not be for you if you are uncomfortable with every property in the area you are looking to invest. Or maybe you just need to change your area. It’s a sign that you are unprepared and that your expectations are unrealistic. Don’t waste everyone’s time if you wouldn’t have come to the table for ANY deals in your market.
There were somewhere between three to five properties that you would have purchased that transacted in the last 180 days. If that’s the case, then you know that there is a reasonable possibility of getting a similar quality deal in the near-term future.

I recently conducted this analysis for the Denver market, and I found two properties that I would have purchased at their selling price in the last 180 days. One was a triplex in the Southwest part of Denver, the other a quadplex in the Northeast part.

Two properties is pretty sparse. It tells me that I need to be thoroughly ready to buy when an opportunity crosses my path. It also tells me I may have to wait patiently for three to six months on average for each deal that I might purchase. Additionally, I have to make a strong offer and close when I do decide to act.

Step 3: Make the Decision to Buy BEFORE Your Next Buy Hits the Market

My father had a rule for me as a kid:

“If someone offers you the deal of a lifetime but says that you have to decide right now on whether to take it or leave it, the answer is always NO!”

And he is damn right. This advice has saved me from countless scams and fantasies that had no hope of ever truly materializing. It’s something to take very seriously, especially when the stakes are high, which they are for early-stage real estate investors.

But (yep, there’s a “but,” Dad) there are a lot of real opportunities that you can miss if you don’t pounce on them immediately.

If I’m hoping to get one of the one to two great deals that will flow through the Denver market in the next six months, I have to be able to pounce on them the moment they come across my desk. I need to make an offer instantly and get the place under contract. Otherwise, I will lose every time to the prepared investor, who offers quickly and closes professionally.

The good news is that by following the two steps outlined above, I don’t have to make an instantaneous decision. I’ve already made my decision.

The fact that I know exactly what I am looking for—down to the location, year built, zoning, rents, square footage, and more—allows me to offer instantly. I can make a split-second decision.

I spent weeks, months, or years (depending on how you look at it) isolating exactly what I’m going to buy. I’ve toured properties that are incredibly similar to the one I’d offer on. I own and am intimately familiar with properties of this type already.

The decision-making process is slow and methodical. It’s calculated and analytical. And it’s done before the property I want to purchase hits the market.

Step 4: Make a Great Offer, and Make It Immediately

If you know what your criteria are and what you’ll buy, then make the decision to buy the next property that meets your criteria—the moment it comes up. Get your ducks in a row ahead of time.

Here’s a quick checklist that I have ready at all times:

Pre-prepare and be comfortable with your offer. In my case, that means being familiar with the contract to buy/sell. Go over it with your agent and understand what might be important to think through before making an offer. Personally, I have a template ready to go. I specifically try to be ready to communicate what issues that might come up in inspection that would be deal-breakers for me or would cause me to submit an inspection objection. I put it into my contract that I’m willing to accept the property as-is, with the exception of major defects. This indicates that I won’t renegotiate for things that are petty or obvious prior to inspection.
Get pre-approved by your lender for the purchase price. Ask your lender to be on call and to give you a pre-approval letter that specifically references the property you will be making an offer on. When a deal comes across my desk, I call my lender and he provides me with a pre-approval letter within hours that clearly calls out the property I’m offering on and green-lights financing up to my offer price.
Maintain liquidity that leaves you capable of buying real estate. I have money set aside exclusively for real estate in excess of my other investment accounts and emergency reserve. This liquidity is designed to enable me to close on a rental property and has no other purpose.

From my perspective, my real estate business is not time-consuming, but it is time-sensitive. It doesn’t take me hours and hours to underwrite a deal each time one comes across my desk. It only takes me hours and hours to understand what I’m looking for. Once I know that, analysis is nearly instantaneous.

When that deal does present itself, I’m instantaneous from the seller’s perspective, too. That evening, I’m rearranging my plans to drive by. I’m texting my lender to prepare a pre-approval specific to that property.

I submit an offer no later than 9 p.m. the night the property is listed. And I make it clear in my communication with the seller that I’ve done this before, am serious, and am not going to jerk them around for minor problems that might come up in due diligence. (But like I mentioned, I will do due diligence on high-ticket items, of course.)

I don’t submit a lowball offer, either. I can’t risk getting beat out on the one deal this quarter that meets my criteria. Instead I submit a competitive bid at a price I believe will get me the property, or I don’t submit.

Conclusion

I believe my system for finding properties is low-effort, high-reward. I don’t think about real estate most days but can still pounce on opportunities when they come up. While I must be reactive, I can choose to be proactive or not about building my mostly passive business.

I also think that this approach can work well for many folks who are scared away after their first glance at listings in the current marketplace. It’s not about properties’ listing price; it’s about the price for which properties are sold.

And lastly, I hope that this approach will wake up newer investors who are living in fantasyland with absurd expectations from the market or their agent. If no properties have sold in your area in the last 180 days that you would have purchased, you are wasting everyone’s time (including your own) by thinking that you will be investing in real estate anytime soon. You need to change your expectations, change your market, or both.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.