How much do you adjust your offer if the property has been listed for a while?

Question

Hello BP,

Amateur investor here that is looking to buy my first MFR in southern California. I wanted to ask the more experienced investors - is there a formula you use if the property has been listed for some time?

For example.... "if the property has been listed for 90 days, I offer 20% less than the value. If the property has been listed for 30 days, I offer 10% less than value."

I'm just curious if there is any method you use to adjust your offer relative to how long the property has been listed?

Here's an example of one that is kind of interesting to me: https://www.redfin.com/CA/Los-Angeles/181-S-Virgil...

I'm concerned on why it's been on the market so long though.... what would you offer?

Adam Johnson · Answer

Please don't take my comment personally.  Basing any offer around the asking price is short-sighted and narrow-minded.  Never, ever, ever, did I say EVER use any formula that takes the asking price into consideration when determining what to offer.  Doing so takes away ALL of your power to make an informed judgement as to whether it is truly a good investment or not!

First, you can use the fact that it has been on market for a while as a potential factor to further consider the property.  After that, if you are truly going to be an investor, it should be numbers based...YOUR numbers.  You will have to use some information from the seller, such as rents, expenses, etc. BUT you will have to verify all of them.  Are rents in check with the market?  Are expenses reasonable?  Note that in many cases, expenses are under-stated by the seller because it makes their property look like it is worth more so they can sell it for more!

One of the most important things you need to learn is to first determine how much the property is worth to you, the buyer.  That will determine how much to offer.

Here are a couple examples of deals that I have closed within the last year.

Deal 1 - Asking price is $ 990,000, I offered $ 300,000 and bought it for $ 400,000.  Obviously, the asking price was out of line.  Luckily, the other parties involved, as well as myself, were all very reasonable and after a long negotiation, we agreed on a good price for what I was buying.

Deal 2 - Asking price was $ 75,000, I offered full price because it was a great asking price and I didn't want to waste time and potentially get beat out of the deal by somebody else that recognized it as a great deal.  This particular deal had several back-up offers after mine that were all ready to act if, for any reason, I didn't close the deal.

Notice that in neither case did I base my offer price around the asking price.  The offer price was based on a number that worked as an investment and got the deal closed.

Josh Prince · Answer

Hi @Daigo Kurosaki - when it comes to evaluating up and coming areas, there is no computer program that I know of. There is a lot of statistics to parse through and a lot of information and opinions on the internet to read, but at the end of the day, you have to make your own decision about the quality of a neighborhood and why it might get better or worse.  The only way I have been able to do this to my own satisfaction is to spend time in the neighborhood driving around and walking around too.  Also, watching listings come on, sell (or not!), and maybe even be relisted. Why not use redfin to check out recently sold properties in the area and see how they compare to listings - that might give you an idea of what is a good price (or at least what everyone else is willing to pay).  Ask an agent to run comps for you.  They love to do this.

There are lots of people on BP and elsewhere who can give you information, but markets are local, and times change.  In Los Angeles, investing for cash flow over the last however many decades you want to count will leave you trailing behind anyone who bet on appreciation.  However, not everyone is comfortable gambling.

In  terms of practical steps when making an offer, look at the information you have online - if you think it could be a decent deal, arrange to see the property.  If you like it, make an offer subject to inspection.  Once it is accepted, then you call in the inspector, contractors, etc.  If you find big problems you didn't expect (and that the seller was hiding or didn't know about), then ask for some money off the price. That is the traditional way of doing things. However, that doesn't mean it is always the best way to do it.  But, for your first time it makes sense.

Get a buyer's agent for your first time. You may want to use the seller's agent or do a deal with no agents sometime, but for the first time, get a buyer's agent and ask the agent lots of questions.  Figure out what the agent recommends.  Find an agent who is familiar with that area, maybe he or she will educate you about the area, and perhaps give you reasons to get in or out.  However, don't trust the agent - they are only loyal to closing the deal - nothing else.

Good luck and let us know what happens!

Adam Johnson · Answer

I usually write an offer after I have done some of my own analysis and inspection of the property condition.  For smaller properties (2-4 family), I generally rely on my own contracting background as well as some general observations to get a "feel" for the property condition.  I usually don't write in an inspection contingency UNLESS there is something that I need to research further.  If that happens, I will sometimes write in that contingency to buy me time to figure out an answer to a question I might have.

For commercial property, I generally write in a period of time for me to perform my due diligence.  I may or may not list all of the inspections that I might require, but generally include some language that basically says I can ask for or verify anything about the property.

One important thing to keep in mind is that you DON'T want to spend money on inspections until you have a contract to protect your interest in the property.  Sometimes this is referred to as "tying a property up" or "locking it in".  If you are going to have to pay for the inspections out of pocket, you want to have some protection that the seller can't simply go with another offer.  There is a possibility of them accepting another offer subject to non-performance of your offer, but at least then you maintain some degree of control over the deal.  I don't recommend ever hiring any inspector for a fee prior to getting a signed purchase offer.

Some will advise that you should write a higher offer, then use the inspection results as a way to lower your offer later.  Personally, I disagree with that strategy unless the inspection reveals a substantial condition that was not obvious at the time the offer was written.  For example, on a commercial deal I was in, we agreed on price/terms, subject to my inspections.  During the Phase I, we discovered that at some point there had been underground fuel tanks on the property.  No records were available to show they had been removed and the owner claimed to not even know they ever existed.  This was a substantial change and therefore warranted renegotiating the deal.

On the other hand, making an offer on a house with curled shingles that are falling apart, then later saying you want to discount your offer after the home inspection because the inspector said the roof needs replacement is a waste of everybody's time.  As I mentioned, I have a heavy construction background, so I can tell quite a bit about a property and it's condition just by walking through it.

There are those that have less experience or knowledge in repairs and upkeep.  For those, an inspection is a good idea.  Try not to pay much (or any) until after you have a signed purchase agreement.  You may also consider making friends with a contractor that would be willing to walk through with you.  Don't abuse this, respect the contractor's time.  Maybe you buy lunch, maybe you pay for a couple hours of time, maybe you give them regular work as a result of them helping you review/inspect the property.  Take care of them and they will take care of you.

Hope that helps.

Eddie Werner · Answer

After I view a property I make an offer.  The offer is always contingent on the inspection.  I never go off of list price but run the numbers for cash flow purposes, confirm all numbers provided and make an offer based on these numbers and what I need to get in monthly cash flow.

Daigo Kurosaki · Answer

Thank you guys for your very helpful and insightful advice!

I just had one more question: when do you guys make an offer? Do you view the property and have an inspector check it out first?

Or do you make the offer (based on the #s) and then view/inspect property after?

Seems like the former option is better, but would take much more time per property (and thus cause you to lose out on quite a few deals).

Bryan N. · Answer

Contact the owner directly.  Make a deal without agents.  The price will most likely drop if done that way.

Daigo Kurosaki · Answer

Thanks @Josh Prince  - some really great advice. When you say " not likely to be gentrified... Far from silver lake..." I'm curious if you use any website or program to research which areas are going to be "up and coming" ? Or is it just something you instinctively know with your experience?

I'd love to find a more systemic way to find up-and-coming areas that might soon be gentrified.

Josh Prince · Answer

Hi @Daigo Kurosaki - I don't use any formula like you described in terms of how to make an offer under listing price.  Obviously the property you linked is overpriced as it has been rotting for almost half a year.  Rather than basing your offer on the listing price, I would figure out what price makes sense for you to buy, as an investor, and base your offer on that.

For example, that duplex is in an area that is still a bit rough, and not necessarily expected to gentrify soon. It is not that close to silverlake, and on the less nice side of koreatown.  It is also on a big street.  I doubt that you will have trouble renting it, but maybe at premium prices.The listing agent's projected rents seem reasonable for a 2BR, if maybe a little high depending on how much you fix it up.  Let's take them at face value.  $3200/month is $38,400 per year.  Assuming you are comfortable at 12xGRM because you will have low 30 year financing and hopefully not too much hassle with only 2 tenants, that puts you around an offer of $460,000.  Will the seller take that offer?  the only way to find out is to write it.

I doubt they have been getting any offers near the listing price, but you have no idea the seller's mental state.  Perhaps his or her agent will give you a little information if you are lucky.

How much do you adjust your offer if the property has been listed for a while?

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