Shotgun Investing

by Mr. Cheap

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My brother has to travel constantly for his job. While he was in North America, he and his girlfriend owned a Mazda3. As they were getting ready to leave North America they wanted to sell their car (instead of paying for it to sit in storage). A bunch of his co-workers were also going to sell their cars, so they invited a used car dealer to come and view them all at once. My brother was offered $8500 for his car, and after refusing, sold it later for $19,000. Apparently the dealer made everyone similarly low offers and no one sold to him. The dealer was following what some people call the “shotgun approach” to investing (which I touched on in a previous post).

Like a shotgun, this approach doesn’t focus on accuracy. You don’t care whether any individual deal goes through or not. Basically you make MANY low ball offers, and the profits from any that are accepted pay for all the legwork for deals that didn’t go through. Real estate agents like to warn about “offending” sellers with low ball offers. There’s a very good chance you’ll offend people with this approach, but you don’t care: it’s volume you’re after.

Those signs you see that say “We buy houses for CA$H” are all people pursuing this strategy. They call it “wholesaling” and they basically try to get a killer deal from people who are desperate to sell.

Some real estate agents claim that people who try to do a “for sale by owner” will get swamped by low ballers. I’ve asked people who tried to sell their own homes and they say that’s not the case. For both FSBO and real estate represented sales, I think going to tons of open houses or visiting listings in the area you’re interested in and making low offers would be a great approach to finding a good deal if you have the time / energy to do it. Many real estate agents won’t work with you as a buyers agent if this is what you’re doing (they’ll give you lots of excuses, but ultimately I’d guess it’s just because they’d be putting SO much work into every purchase). You may have to deal with the selling agent / owner directly.

Obviously you need to be able to properly value something to do this. If someone is selling their place for a crazy high price, and you offer them a low ball based on their asking price, you might still be overpaying. If you pay a low price for a property in bad repair you can get into similar problems. Finally you might get burned if you bought a bunch of properties right as the market was turning, so probably the best approach to this would be “slow and steady” rather than getting a bunch of places at once.

Finally, you need to be able to sell whatever you buy at the proper price. If you get a property cheap, then find you are getting eaten alive by the holding costs, you’ll turn into a desperate seller yourself!

I don’t think there’s anything inherently wrong with making low ball offers. You’re not trying to trick them or force them into anything, you’re just saying “This is what I’m willing to pay, if you have a better offer – take it, otherwise give me a call”. That being said, you’d need a pretty thick skin to offer someone $120K on a $200K property and be able to smile and say “give me a call if you change you mind” when they start cursing at you. I don’t do this myself, but am always tempted (I’m too sensitive and would find it hard to keep going when people kept getting angry at me – I wouldn’t be able to do cold-calling sales either).

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{ 4 comments… read them below or add one }

1 Praveen

I read about someone who does this with auctions.

He buys surplus electronics parts in bulk and then sells them to hobbyists for profit.

He said something like if he starts winning more than 1% of the lots he bids on, then he is offering too much.

Which struck me as a new idea. I always thought you bid on things you like, and then get disappointed if you don’t get it.

But, this was the shotgun approach.

2 growthinvalue

I would imagine you’d definitely have a problem dealing with agents on both sides with this approach, but yeah, if you’re got the patience, this sounds like an excellent strategy. Especially for a first home, where you’re best off not being too picky about the particulars, and should primarily be worried about overpaying.

3 Four Pillars

GIV – I couldn’t agree more that first time home buyers should be “primarily worried about overpaying” but unfortunately I don’t know if that is reality!

Mike

4 Alex - My Trader's Journal

Lowballing is the way to go for buying a house. Anyone who is offended shouldn’t accept the offer. If they accept it then they should deal with it.
I had a friend’s agent tell him that she didn’t think the seller would even look at him at closing because she was so offended. We always laughed and wonder why she accepted his offer if she thought she could do better.
If you think of a house like a stock, you wouldn’t get pissed at someone for buying your shares if you didn’t use a limit order and sold at market.

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