Last Saturday, I took thirteen real estate investors from the Chattanooga Real Estate Investors Association door-knocking. Before heading out, we discussed how to make a written offer to a seller.
The group had a number of questions: 1) How do I find a property’s fair market value? 2) How do I discover market rents in the area? 3) How do I make a written offer right there on the spot?
The first thing to remember is that an offer is different from a purchase contract. A purchase contract is often a formal document written in legalese that no one – especially the buyer and seller – understands. On the other hand, an offer can be written in plain English on a Post-it note that makes sense to everyone! (NOTE: On North Georgia REIA’s Facebook page, you’ll see three of the written offers I made in Chattanooga.)
Randy Shelley is an investor who lives in that area. We spent the day knocking doors in his subdivision. Though he already knew the fair market values and approximate rents for his neighborhood, I asked him not to share this information with the group.
We talked to ten homeowners. From them, we learned that most properties in the subdivision sold for between $175,000 and $185,000, and houses rented for around $1,200 per month. When we compared these numbers to Randy’s, we discovered our numbers were right on target with his.
We made four written offers to homeowners that day, and do you want to know something interesting? Three of the four offers were to folks who did NOT have a For Sale sign in their yard, but were just thinking about selling. How did we find them? We simply knocked on their doors and they told us!
You’re gonna think that I’m making up what I’m about to tell you, but it’s the absolute truth: On one street, a homeowner ran out and stopped the last car in our group of four in which the fourteen of us were caravanning. Was she angry with us? Far from it! She was about to put her house up for sale, figured we were out looking for houses, and wanted us to look at hers and make an offer!
You may find one of the offers I made to be interesting – and a bit crazy. The property was worth $180,000; I offered to pay $2,000,000 for it. Yep, you read this right – $2 million! Of course, I don’t have $2 million, nor will a bank lend it to me, so my offer was a bit creative. I’d give the seller $20,000 down and make $500 a month payments to him for 330 years. Just think – when I’m 385 years old, Kim and I will own this home free-and-clear!
So was this a stupid offer? Not at all! The home would rent for $1,300 per month. Expenses (property taxes, insurance, vacancies, repairs and management) would eat up about 35% of rents, or $455. Now do the math: $1,300 rent - $500 mortgage - $455 expenses = $345 net monthly rental profit. In other words, if the seller accepts my offer, we’ll get $345 in mailbox money every month! Now run this investment through your financial calculator. I’d get a whopping 20.7% yearly yield on my $20,000 investment – plus gain the tax benefits that come with owning rental property! What kind of return are you getting from your bank – 0.3% interest? So who’s actually the crazy one?
By the way, too many realtors tell too many sellers that because I’m a real estate investor, all I do is make low-ball offers. Care to bet the ranch on this? Kim and I make million dollar offers on $100,000 homes all the time!
Hope today’s column helps you to become a wiser, more successful real estate investor!