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How Do Professional Real Estate Investors Price Their Offers to Sellers

Mar 23, 2008
The way some professional real estate investors price their offers to sellers is pretty much standard throughout the industry. What we will look at here is the most highly-competitive lead sources such as pre-foreclosures and see how the pros price this competitive market. The market for foreclosures has exploded in the last two years, and the number of investors advertising to these homeowners has grown at an even faster rate.

Pre-foreclosure homeowners are getting savvier with many sources of advertising coming at them, so approaching them requires a sustained marketing effort and aggressive advertising material. Unfortunately, most of these ads are focused on getting whatever equity is left in the house or making money by using the expertise of the investor to collect a consulting fee. As a generalization, the large wholesalers are not looking to do "complicated" transactions like consulting work or short sales where the time and effort is intensive to get the deal completed. In fact they are looking to buy wholesale and sell wholesale without doing any type of rehab on the property.

So the homeowner "interviews" investors who have contacted him, or from advertising he has answered, and attempts to figure out who he can trust and who has the best offer. The giant wholesalers have huge advertising budgets and staff who are paid on a commission basis which can sometimes blur their vision of "what's best for the homeowner". Besides the huge advertising costs the wholesalers may have franchise fees and fees for each deal they complete. While it may sound wonderful to get 10 -20 leads a day or an hour, the real bottom line may mean a lot of work for a modest income.

Because of standardizing their businesses the pros that do 10 to 50 deals a month rely on a basic approach to seller offers. In flat- to- slowly declining markets, these pros will offer as much as 60% of After Repaired Value (ARV). In declining markets, the offers will quickly drop to 45% to 55% of ARV. Even in very hot markets, their offers were never more than 65% of ARV. This may seem like they are trying to steal the properties and they are! With their cost of money, overhead, carrying costs, sales costs, and general and administrative expenses, it would not be good business judgment to offer more.

Knowing these insider secrets of what pros are offering, why aren't higher offers being accepted by sellers? The business plan is to make a canned presentation to the seller (very scripted), push for a close numerous times and get a signed deed before leaving. The property has been sold almost before the seller realizes it. Marginal equity deals are not acceptable as they would be to other investors because the profit spread is "split" with the commissioned salesman/closer. The profit spread is the net proceeds from the closing for the property less all expenses of the pro, and then divided in some fashion 40%/60%, 50%/50% or even 60%/40%.

How can the average investor compete with these buying machines? He can organize a consistent and continuing advertising campaign using at least five different sources of leads. He next should standardize his presentation to a seller and practice making this presentation, but not to a relative or friend. Finally, he should become very familiar with determining ARV and repair estimates so he can better offer a price that he knows will beat the pros but still make him a profit. Another reason the pros close deals is their "credibility kits" which contain testimonials, BBB's membership and a lot of company hype about how long they have been in business and how "powerful" their machine is.

In summary, the pros are not your competition. You need to know your market, be able to determine ARV and repair costs, have your documentation prepared and ready to use like you've done it for years, and be aggressive about making presentations. Real estate investing is truly a business where the product is a renewable resource and failing on a presentation only gets your closer to the next success.
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