So you’ve analyzed numbers, done your property walkthrough and the property meets your standards. Now it’s time to consider gathering your team and putting in an offer. For this stage, you’ll want to be working closely with your mortgage broker/lender and your real estate agent.
First off, you need to make sure your financials are in order. You’ll want to let your mortgage broker/lending agent know you plan on putting in an offer and have your pre-approval in hand. You also need to have your money in order including the cash deposit, 20% down-payment and closing costs (typically 1-2% of house value).
We have an interview with a local mortgage broker coming up later this month to discuss this in detail, so keep an eye out for that!
Real Estate Agent
Next up, it’s time to contact your real estate agent. She/he can run comps, look at market cap rates, look at sold homes in the area, and come up with a reasonable valuation of the property. If you plan on using a property manager, you may also want to call them up to verify rental rates for the area and condition of the property (if not, your real estate agent can help you with this step as well). Together, you can discuss the market value and where you want to start negotiations.
Your realtor can give you guidance on the current state of the real estate market. There is a lot of information about primary market, but not as much available information about the sub-market of investment properties. The investor market is entirely different than the general primary residence market and an investor-focused realtor can give you a much better understanding of recent investment property sales in the area.
While the general market may be leaning towards a seller’s market (*less than 6 months of inventory available resulting in many homes in bidding wars receiving way over asking), much of the investment property market could be leaning more towards a buyer’s market. Some tell-tale markers of this include average number of days on market, sold prices of properties and quantity of homes at particular price points (high inventory of properties). In addition, due to the potential buying pool’s small size, investment properties tend to sit longer.
Based on all of this information, your real estate agent will guide you to a fair starting offer. S/he will help guide you through the back and forth of the negotiation in order to get your a deal you are satisfied with. Two things to note:
- Don’t be afraid to offer less than asking in a buyer’s market: some new investors I work with are afraid of offending the seller with a lower offer and losing out on the property. While I’m not suggesting sending in an offer for 50% less than asking, it is perfectly acceptable to start your negotiations 10-15% below asking based on the numbers and condition of property. The seller is a businessperson and the numbers don’t lie (and remember, if they choose not to counter, you can always go back with a higher starting offer).
- Draw a line in the sand where you walk away. You have to remember that this is an investment. It is not your primary residence and therefore it cannot be an emotional buy. It needs be treated like any other financial investment you choose to make and it needs to make financial sense!
Now, let’s talk a little bit about the offer itself and the conditions you can put into it. Most investors choose to make their offers conditional on home inspection and financing. These are both important in protecting your financial investment. The condition of home inspection allows you to have someone inspect the property fully, looking for anything and everything that requires repair and will cost you more money. The financing condition protects you if for some reason the bank’s appraisal of the property is unfavourable or you have an issue with financing (remember, just because you have a pre-approval doesn’t mean the property itself will qualify).
Another condition I like to add in is extra visits to property throughout the conditional period. This allows you to complete other inspections, get bids of scope of work, and verify that the property stays in the same shape as when you first visited.
You may also choose to place additional conditions on your offer. As the buyer, you can make your offer conditional on basically anything. You may choose to have it conditional on seller financing, or conditional on passing environmental testing (mold, asbestos), or conditional upon partner review. The conditions are there to create options in which to protect yourself and your assets.
Do keep in mind that an offer with a lot of conditions may not be as attractive to a seller, especially in a seller’s market. In this situation you can arrange your inspections and financing conditions before you put in an offer so your offer can be condition-free. This tells the seller that it is a guaranteed sale if they sign.
Setting a conditional period is an important conversation to have with your real estate agent. It is a fine balance between a shorter timeline that is attractive to seller, but long enough to do your due diligence and fulfill conditions.
Figuring out how motivated a seller is is important to your negotiations. They may be looking to get out quick or may just be testing the waters to see what they could get. In some cases, the sellers are very motivated and tell their listing agent to let buying agents know. In other cases, sellers hold information close to their chest.
One strategy we use in this scenario is putting in a lower starting offer. If the seller counters, you are likely looking at a more motivated seller. If they reject the offer outright, there may not be as much room to negotiate (at which point you can choose to send in another higher offer, or wait to see if the property sits for a while (at least 30-90 days) and then put in another offer if you are still interested).
Seller motivations are important to know in a multiple offer situation as well. As we discussed in how to compete with multiple offers, money isn’t always the deciding factor. Some may value a quick closing, few (or no) conditions, or a cash offer (which means no financing issues).
It also helps to find out the terms that would make the seller satisfied (closing date, conditional period, etc) so you don’t have to go back and forth as much and/or open yourself up to a multiple offer scenario.
Putting in the Offer
By keeping both the market and the motivations of seller in mind, you and your agent can discuss what you are comfortable offering. Once you confirm the price and conditions you want, your agent will draw up an offer for you to sign. Once you have signed it, you are contractually obligated to the deal. If you have conditions in it, you still have an opportunity to back away from it should there be a problem. If you are going in condition-free, you are obligated to purchase the property as outlined in the terms of your offer.
Best case scenario, the seller signs the offer and the deal is done. As that is not normally the case, you are likely to receive a counter-offer. A counter is an offer extended back to you, the potential buyer with changes to your price and/or conditions. During the irrevocable period, the seller is contractually obligated to sell to you under the conditions outlined in the counter-offer. That means, if you sign it, the property is yours (again, if there are conditions, you still have the opportunity to back away from the deal but the seller can not accept another offer during the conditional period). If you choose to counter their counter-offer, they can accept or look at any new offer that comes in.
Making an offer on a investment property doesn’t have to be intimidating. By teaming up with a mortgage broker/lender and real estate agent that understand the investment property market, you can ensure you start building your real estate portfolio with a good deal.