When it comes to making offers, most investors only know how to make one offer at a time. They usually make an all cash offer, also known as the MAO (Maximum Allowable Offer) or they get a loan from a bank, hard money lender or a private investor. This strategy has worked fine for investors and if you are only making offers on bank REOs on through the MLS, then a cash/MAO offer is really all you will be able to make.
The average number offers to get one accepted with this approach is 20-40 offers to get one accepted in today’s market for most of the country. Some more experienced investors have been able to reduce that number down to about 5-10 offers to one acceptance by being very selective on what properties to make offers on. In other words, they know from experience that certain properties from certain banks or listing agents simply will not accept their offers so they don’t even make the offers.
The secret to success in the real estate business is making offers. The problem is that most investors use the same offer process when dealing with sellers directly and they are missing some huge opportunities if they just knew how to create alternative offers that don’t require cashing out the seller.
Ask yourself these two questions:
- Have you ever made an offer that was so low that the seller got upset with you just for making the offer?
- Have you ever gone through the process of analyzing a deal, running the numbers and then not even bother making the offer because you were afraid that the seller would get upset with you because your offer was so low?
If you answered yes to either one of these two questions, then you need to continue reading.
Look at a property that needs $50,000 in repairs and has and ARV (After Repaired Value) of $200,000 and has a MAO of $90,000. Is $90k to low of an offer? Of course not, but it is less than 50% of the value of the property so many people think it is a lowball offer. The reality is that is a fair price for that property for a cash offer. A $90k offer has a 15% profit margin for the investor which equals $30,000. If you can’t make at least $30k for putting up all the cash or taking on the personal liability of $150,000 loan, then it isn’t even worth buying the property in the first place.
If you make multiple offers and give the seller a choice, then when you make your $90,000 cash out offer it won’t feel like you are making a lowball offer. In this case I might make the following offers to the seller:
$90,000 all cash and close quickly.
$115,000 with a $5,000 down payment and $700 a month for 60 months and the remaining balance of $68,000 due in 5 years.
$140,000 payable at $1,166.67 a month until paid in full, approximately 120 months.
Option 1 is your all cash offer that you may feel is low, however, you are also giving the seller the option to take a much higher offer of $140,000 (Option 3) which is almost full price less the rehab budget. If the seller accepts your high offer, the advantages to you are:
- No down payment
- No large cash upfront
- No loans from banks/hard money lenders required
- Own the property FREE & CLEAR in 10 years (120 months)
If the seller is ok with monthly payments, but needs/wants some money down, then we gave them that option as well with the second option plus the bonus of getting the rest of their cash in 5 years.
Making Multiple Offers like this gives the seller options and something to think about rather than just being insulted by the low all cash offer. After thinking about all 3 options, many times the sellers will accept your all cash offer and every once in a while they will take your higher price, no money down no interest rate seller carry back offer which in reality is the best option for you in the long run if you understand the time value of money and the power of no interest on the seller carry back.