The Second Rule of Thumb and Helping Sellers Understand Pricing

Sellers want to squeeze every penny they can out of their property. They want to walk away with at least $100,000 more than the property is actually worth, and they are insulted when you aren’t willing to pay them more. Your job as an investor is to show them how value is determined and why your offer is the best they are going to get.

When a seller lists their property For Sale by Owner, they are usually trying to save the commission because they want to walk away with more money. When they do this, they often lose out on valuable advice that they can get from an expert who can help them price the property correctly. Sometimes they don’t ask for advice at all, they just decide how much money they want and that is the number they ask for. In some rare cases, that number is low. Most of the time, that number is unrealistically high. When a seller does ask for help with their pricing, they will often ask a Realtor what they could sell it for and then decide what they are going to sell it for.

As a buyer or seller, it is important to understand how price is determined. The first thing that determines value is the current market. Every area of the country has a certain CAP rate that investors in that area want to get for their money. In some areas, that is low, like California. In other areas, like Ohio, that number is much higher. Your job is to research what the average CAP rate in that area is and then see if you can get a better deal.

The CAP rate is determined by taking the Net Operating Income, NOI, and dividing it by the purchase price. If you want to buy a property and turn around and sell it for a profit, you need to be able to buy a property where you can increase the NOI significantly. In order to do that, you have to be able to increase the income and decrease the expenses.

Part of your job is to explain to a seller how a bank determines value. Part of that explanation will be showing them how an appraisal is done. We will go over than in the next blog. Explaining how the CAP rate works is a good starting point. You have to show them that their property is only bringing in so much money and as a result, it can only produce this CAP rate. Because of this, the property is only worth this much money and the lender will only be willing to lend that much money on the property.

Don’t be afraid to teach the seller how things work when you make an offer. The more they understand, the more likely they are to understand why you are offering what you are offering. As always, happy investing.