Getting Started With Investment Real Estate – Part 3

by Mr. Cheap

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To start at the beginning – please see part 1 of this series.

My agent was actually very useful in targetting areas of town to look in. After repeatedly telling her my criteria (very affordable, near a subway, possible to rent) she focused on two areas of town. One wasn’t on the subway and so we quickly stopped looking there. I got her to show me two other areas that I didn’t believe her when she said they wouldn’t be the best locations to target, but after seeing some units and becoming more familiar with the area in the end I agreed with her.

If you want to be a total jerk, at this point you could dump your agent and put in offers yourself (which would be quite a bit more attractive without the buying agents 2.5% cut). I did NOT do this and view it as a pretty scummy trick to pull (and this is the main reason buyers’ agents get the signed contract, to prevent people from doing this). My agent had very real knowledge of the city and was able to help me quickly cut through the enormous number of listings and find the right area for me to target, this was VERY valuable, and for it she definitely deserved to be compensated. I’m a believer in “statistical karma”, and if you behave badly towards people enough, eventually you’re going to do it to the wrong person and get majorly burned.

With the area targetted (there were three buildings that were very similar in the area I liked), it is then worthwhile to view EVERY unit available that meets your criteria (a 2 bedroom condo or a very cheap 1 bedroom was mine). The advantage you have as an investor is that you aren’t going to fall in love with any unit. When a buyer loves something, the seller can get top dollar out of them. Conversely, when a buyer is willing to accept multiple properties, it becomes like an auction where the seller who’ll agree to the lowest price gets to sell first. Don’t fall in love. You can’t afford to as an investor. Its expensive, but permissable as a home-owner, but not if you’re looking to make money.

One thing I didn’t do which I should have is factor in the quality differences in the unit. They aren’t interchangeable, so viewing them all as acceptable/unacceptable then putting in equal bids on each in order of desirability (which is what I did) is a mistake. Instead you want to come up with a very low offer price, consider that the price for a unit in good repair, and discount this price by what you think it would cost to bring each unit up “good repair condition”.

E.g. I bought my condo (sorry to skip ahead to the end of the story :-) ) for $126K. I had to put $6K of repairs into it (supplies and labour) and it took 2 months before I was able to rent it out (at $500 / month in condo fees, +100 / month in property taxes + interest on the mortage). So basically, I should have offered $134K to a similar unit that didn’t need repairs and they would have been equal offers (instead I offered $126K to the units in better repair, and unsurprisingly the roughest unit was the first to accept). Live and learn.

Your agent is going to hate you (mine got to the point where if the offer that was accepted hadn’t been she was going to cut me loose), but you put in offers on ALL the properties, with the repair adjusted prices. Let your agent tell the selling agents that you’re looking to buy one of X units, and that you’ll be back with another offer if all of the others say no. This will scare the heck out of the selling agents (all it takes is one of the others to say yes and you’re gone) and they’ll champion you to the seller (I’ll discuss motivations and incentives as it relates to real estate agents in a future post).

If one of your first round of offers is accepted, you probably paid too much. Tough luck, try to be cheaper in the future. My first offer on the place I bought was $122K which was rejected. Clearly the minimum price the seller would have accepted was somewhere between $122-126K, which I’m very happy with as a small range (I’d be depressed if I paid $126K to a seller who would have accepted $110K).

Your agent will try to get you to let them handle the negotiations or will provide advice. Don’t take it. Unfortuately your objectives at this point in the process are not in line, so you have to set the offer price yourself.

Each round when everyone rejects your offer (which should happen at least once so all of the sellers had a chance to give you a low price), you up your offer and go through them again. Agents will try to scare you with the idea that you’ll “offend” the sellers and they won’t listen to future offers. Malarkey! An offer is just that, an offer. Which is an option the seller didn’t have before. They can say no, in which case they’re no worse off then before they heard the it. If their time is so valuable that spending 30 seconds hearing the offer is a huge inconvience they have some sort of mental illness. If someone is such a child that they won’t listen to future offers because I don’t worship their property the way they do, I’ll happily buy from one of the other 11 people I’m offering to.

Even if someone SAYS they’re offended and won’t listen to future offers, they still will.

The only time I wouldn’t follow this advice is if I found my dream house and fell in love with it (again, this is the high price of falling in love with a property). In that case, you’ll want to keep the lines of communication open and stay on good terms with the sellers, in which case low-balling isn’t in your best interest. If someone has just listed a property at a good price in a hot area, you’re wasting everyones time with low-ball offers. HOWEVER, if there are multiple property in the area that have been available for an extended period (the condo I bought had been vacant for 7 months), you should get a good deal.

(continue to part 4)

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{ 3 comments… read them below or add one }

1

I couldn’t agree more about not letting the agent handle the negotiation – all they want to do is close the deal, they don’t care if you save money or not!

2

I’m probably going to do a future post about “incentive” and talk about what real estate agents compensation encourages them to do. I thought it through and realized years ago that smart agents try to sell houses as *FAST* as possible, not for as much money as possible (although they claim that’s their goal). I was tickled pink when the same idea was presented in Freakanomics (and a little bit annoyed when friends started saying “what a great idea that clever author had!” ;-))

3

Hey
You may want to meet a few realtors who aren’t motivated by the small fee they’ll receive on an individual property sale.
I swear, we’re out there !

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