So you found a house with good potential, completed your repair estimate and calculated your maximum offer price. You then made an offer somewhat below that price in order to allow room for negotiating.
As expected, the bank owner has returned a counter offer….that’s higher than your maximum offer price. Now what?
If you’re like most investors (or home buyers for that matter), you’ll pluck a number out of thin air give it a little bit of the smell test (smells decent to me) and shoot it back over to the seller. In most cases, this results in another counter-offer from the seller and the game is on. I often ended up with the seller sticking on a number that was higher than my maximum offer price…..which created a situation where either my profit margin was impacted or I had to do less cosmetic work than planned.
But then I stumbled across a method that has worked for me almost every time:
Do not make any counter offer in round numbers. Your counter offer is not $87,000. Its $87,540. Why? Because this gives the seller the impression that you have really sharpened your pencil and have made the highest possible offer you could as an investor. And this is the message that you should send your realtor back with.
Lets say you used the method I described above and you still received a counter offer….above your maximum offer price. Respond again with a counter offer, your maximum offer price and document how you arrived at the offer. That’s right, show the seller your repair cost estimates, holding cost estimate and even your desired profit. The risk is the seller not agreeing that your work is not worth a 20% flip profit, but what I’ve found – particularly when a private seller is involved-is that the seller didn’t fully understand the amount of repairs that the house needed and was looking at your counter offer as just an investor trying to make a killing.
Now you’ve given them ammunition to go back to their friends with…..”yeah I only got $53,425 for the house but it needed over $20,000 worth of repairs! I don’t know what that investor guy was thinking buying this house! A Bank seller will appreciate the documentation as a means to prove to their investors that the price they accepted was reasonable. I always include comparable sales too…..there are enough foreclosure sales happening today to show them what other similar REOs are selling for + to validate that you aren’t low balling the after repaired estimate to make the numbers work in your favor.
When you are negotiating with a bank, don’t be intimidated by a lack of response or unwillingness to move off a number that doesn’t make sense for you. If the bank’s counter offer is higher than your maximum offer price -especially if its significantly higher- it shouldn’t make sense for other buyers either. I’ve had more than one experience where the bank got an offer at a price that just didn’t make sense and took it over mine – only to have that deal fall out of escrow a month or so later. The bank then came back to me and suddenly I had negotiating power. Don’t assume everyone who makes an offer higher than yours knows what they’re doing or has their financing lined up.
For method #2 to be effective, you need a tool to quickly put estimated repair cost documentation together and present it in an organized way. That’s why I created the Rehab Offer Calculator Excel house flipping spreadsheet and the Home Remodeling Cost Calculator for IPad and Android tablets. Both of these tools allow you to easily calculate your maximum offer price for any fixer upper house and they also automatically create the documentation you need to validate any offer.