Buy Low and Sell High
(An excerpt from 69
Ways To Make Money In Real Estate)
By Steve Gillman - 2005
You can make big profits when you buy low and sell high. But
it is easy to make mistakes when valuing a property, and transaction
costs can eat up your profits if you are a little bit off in
your assumptions.
This strategy the most obvious way to make money with anything,
right? Selling high is probably the more problematic part of
the formula, but if you buy low enough, you can even sell low
and still make money. So the big question then, is how to buy
for less.
Of the many ways to pay less, what is the simplest? just offer
less - the oldest and simplest negotiating ploy of real estate
investing. Everybody knows the technique in it's crudest versions,
but most are afraid to use it. It can be embarrassing, and it
can be a waste of time if you don't do it right. On the other
hand, do you really mind being a bit embarrassed if it saves
you $20,000?
My first piece of real estate was a small lot for which the
seller was asking $4,500 (now that's cheap real estate). In my
ignorance, I didn't know then that offering 22% less than the
asking price was considered insulting. Looking back on it, I
understand why the realtor didn't want to present the offer.
In any case, the seller accepted my offer of $3,500, because
he was anxious to sell before moving.
My friend bought a home on a lake for $40,000 less than it
was worth. How? He made the offer. He was always making low offers
as he shopped for a home. Of course this meant most of his offers
were rejected. I may have even hinted to him that he was wasting
his time. Good thing he didn't listen. Would you be willing to
have a dozen offers rejected if it meant buying a home for a
savings of $40,000?
There is the investor from California who routinely made dozens
of offers at a time on houses - without even look at them. He
wrote the offers for 25% less than the asking price, and included
an inspection contingency and other clauses to protect himself.
Most sellers said no, of course. Most did, but not all. He occasionally
got some very cheap real estate this way.
Lowering Expectations
A real estate investor once told me,"If you aren't embarrassed
by your offer, it isn't low enough." Considering that he's
made millions in real estate, he may be worth listening to. You
need to understand, however, that a truly low offer will almost
never be accepted. Is it a waste of time then? Not at all, because
there will often be counter-offers, and a low initial offer is
just a way to alter expectations.
Suppose you think your home is worth $300,000. You mention
to a friend that you are considering selling it, and he says,
"You should be able to get $250,000, right?" You ask
another friend what he thinks the home is worth, and he tells
you $260,000. How confident would you be about your $300,000
estimate of value now? You might lower your expectations, right?
This is perhaps the primary functions of a low offer; to alter
expectations. When a seller is asking $300,000, and you offer
$250,000, will he accept your offer? Probably not. He'll almost
certainly reject it. Getting cheap real estate isn't going to
be that easy. He may counter-offer, however. Suppose you go back
and forth, and finally agree to $182,000. He might not have considered
selling this low before, but maybe now it even seems like victory
to him after starting at $160,000.
You'll lose a lot of potential properties making low offers.
Sellers sometimes won't even take subsequent offers seriously
once you have offended them with your extreme offer. You might
avoid this by assuring the seller that his property may indeed
be worth what he is asking, but that it only works for your purposes
at a lower price. On the other hand, so what if you have a lot
of rejected offers. Isn't a bit of rejection worth it to get
really cheap real estate?
If your plan is to simply buy for a low price and immediately
sell the property, you should carefully consider the transaction
costs and holding costs. Transaction costs include all the costs
of buying the property, as well as all the costs of selling it,
and can easily top 10% of the sales price if you pay a full sales
commission.
Your holding costs include property taxes, insurance, utilities,
and any other ongoing costs while you own the property. Estimate
the monthly costs of these and multiply that figure by an estimate
of how many months it will take to sell the property to arrive
at your total holding costs.
Leave lots of margin for error if you want a safe investment.
Copyright Steve Gillman.
69 Ways To Make Money In Real Estate
Want to know the other 68 ways? Get my ebook:
http://99reports.com/make-money-in-real-estate.html
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