Thursday, August 01, 2013

Good To Know: Making Offers

In the real estate world the only way to succeed and get ahead is to make offers. It's actually the foundation to it all. It's the only way to move forward. You need to get a property under a purchase contract and to do that you need to send an offer.

Making offers can be intimidating. This year, I've inquired and sent offers on 193 different properties. I've been concentrating on multi unit rental properties

That number should actually be much greater, but I have the bad habit of slowing down when closing on properties and around big holidays like Christmas. Still, 193 is nothing to sneeze at. This is why my database is so important. I just can't keep track of so many properties. In my database I keep track of the MLS number if it's a listed property, the province, city, address, the asking price, the number of units and my notes on the deal.

Before you can start the database, you need to start contacting realtors and sending offers. Start sending email to realtors, ask for the income and expenses details on properties. Once you receive a reply with the information you requested run the numbers. To make this streamline I use a spreadsheet that calculates all the income as well as all the expenses. Be sure to take all expenses in consideration. Most of the time the income and expenses does not include expenses for vacancy, maintenance or management. Be sure to add an amount to your calculation for those. Also take in consideration debt repayment, and if you are taking on investors for the down payment, debt repayment would be for 100% of the price. Based on your calculation, figure out what your asking price would need to be to obtain the cap rate you desire.

The numbers should be your only guide to what your offer should be. This is the difference between investing in cashflow and investing in appreciation. We invest in cashflow! Investing in appreciation is gambling. So once you get the amount of what the property needs to be to obtain the desired cap rate that is the most you can offer for this property. Your first offer should be 80% of that number, or 90% if the seller is willing to hold a VTB (Vendor Take Back / hold a second position mortgage).

All of these calculations should be on your spreadsheet, making the process of running your numbers quick. You get a big advantage with you realtor if you can give them answer on the information they sent you within a day. Even more so when you can offer them an amount every time.

By now you may have realised that most of the time, our first offer will be embarrassingly low. Keep in mind, you lose nothing by sending in your low offer, but if you don't you will gain nothing. If the offer is really low, instead of sending an offer, send the realtor an email saying that you have run the numbers and and based on your criteria your first offer is in the ball park of "x" amount. Let them tell you know if the seller is interested in seeing this offer. But at least that way, your interest as been made known. If the seller is not interested yet, he may become motivated down the road and he will know where you sit.

So design your spreadsheet to make running the number a breeze and start sending in offers. Hundreds of them.

Next week, I will discuss which clause should be in your offers.