All real estate investments begin with submitting an offer to the seller, and your fix and flip investment is no different. In some ways, this may be the most daunting part of the process, as you’ll likely need to submit offers on a great number of properties before one is accepted. The pool of investors looking to purchase distressed properties has grown quite large in recent years, and the bidding process can be very competitive. Don’t let this discourage you, though – with the right approach and a little time, you will begin to win some bids.
When preparing your offer, start by finding as much information as possible about recent sales in the surrounding area, with an emphasis on sales that occurred within the last six months. Sites like Zillow.com and Realtor.com are great free resources, in addition to information provided by your real estate agent. Determining the average price per square foot in the neighborhood will guide your estimate of the renovated value of the property. Research current listings to see if prices are increasing or decreasing, and pay attention to how long those listings have been on the market. If the listings indicate softness in the market, reduce your bid – but be very careful about increasing your bid based solely on listing data: the prices on those listings don’t represent actual sales and may need to be reduced later on.
Know the Math
Your ultimate profit (or loss) will be determined by many factors, including rehab or renovation costs, the renovated value of the property, taxes and insurance costs, the time needed to complete and re-sell the property, and the costs related to any loan you obtain. Once you’ve estimated the renovated value of the property, subtract all your costs (plus your desired profit margin) to arrive at your estimated bid.
An important rule at this step is to never let your anticipated costs (including the purchase price) exceed between 75% and 80% of your estimated renovated value (70% being a more conservative number). Any higher than that, and you’re likely putting your capital at risk if any of your assumptions prove to be incorrect.
Know the Seller
Is the seller a private individual, an estate, a bank, etc.? Many properties in need of renovations today are previously foreclosed properties being sold by banks. These institutional sellers are in some ways different from private sellers – the banks usually have a set bottom-line acceptable offer (which is usually near the listing price) and are less willing to accept lower offers. So, if you’re planning on bidding on these properties, plan to bid competitively. Conversely, private sellers may have much more flexibility, and it’s a perfectly valid strategy to submit low offers on many properties. You’ll never know when a seller is particularly motivated to sell and will accept a lower offer.
When submitting your bid, you’ll likely be working with limited information about the actual condition of property. For this reason, it’s important to talk to your real estate agent about the types of contingencies you can include in your offer. Most contracts will include a short period after acceptance for you to inspect the property and decide whether you want to continue with the deal (note, though, that adding too many contingencies may make your offer less appealing to the seller). Take advantage of these contingencies when bidding – with the right contingencies, you don’t need to get every bid right every time.
Let your Agent Help
If you’ve chosen a good real estate agent, he or she can help guide you through this process. That is, after all, what he or she is there for.
Most importantly, though, don’t let the emotional heat of competition cause you to overbid. Do your research, know the math, and know the seller – and make a bid that makes sense for you as an investor.