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How we make offers on MLS listed investment property

January 23, 2011

As buy and hold investors we only buy a couple of properties per year, but we do make lots of offers.  We don’t lowball bulk offer on every property listed.  This is NOT a good strategy.  You will develop a bad reputation and waste time. We are looking in only a few specific neighborhoods that we are very familiar with. We find a property that meets our criteria, view it, and then submit an offer.  If it looks like a good fit we go after it hard.

Here is how we make most of our offers.

  • Offer ALL CASH.  We are primarily making offers on REO properties and cash is what they are looking for.  Cash shows you are a serious investor, allows for a quick closing, and it separates you from the conventional financers and hard money buyers.  Banks should consider your offer more attractive and might take your lower offer over a higher one with financing.  It takes less time to close and your closing costs will be minimal – my last one came in around $300.
  • No contingencies.  We make our offers with no contingencies.  This requires you to do a bit more homework on the property up-front, but here again it sets your bid apart. If we really want a place we counter with no termination option.
  • Use a cover letter.  This highlights the advantages of your bid and helps to show you are a serious investor that is familiar with the process.  The letter will point out the key points of your offer without having to flip through various contracts, addendums, proof of funds, etc.  Keep your letter really simple. 
  • Tell them you have viewed the property with your contractors and accept it in as-is condition.  Many investors are just putting in offers on lots of properties without even viewing the homes.  Then they put some out clauses in the contract and just walk away before closing.  Banks don’t want deals that fall through, they want someone who will do what they say.
  • Tell them you can close quickly.   The exact language I include in my cover letter is “Can close quickly at the bank’s convenience”.
  • At least $1,000 earnest money.  Don’t submit $100 as earnest money in your contract – this is not telling them you are a serious investor.  I usually offer $1,000 as my typical purchase price is in the $50-$70k range.  If you really want to get their attention offer $10k.  Once you get an agreed contract, get your funds over to the title company right away in whatever form they need (typically a cashiers check).
  • Do the cash flow analysis.  To determine the maximum I can pay for a property, I do a cash on cash return analysis.  This does not consider appreciation, depreciation, other tax advantages, etc.  It is just quick math on expected annual rental income – total annual expenses divided by total invested.  I am looking for at least a 10% return at a minimum.
  • Don’t submit your highest offer right away.   After your initial offer the bank will probably counter.  Leave room in your initial bid for this.  Another strategy is to go in with your ‘Best and Final’ offer and just stick to it.  For Freddie Mac’s and some banks they come back with the “Multiple Offer Procedure” (MOP) form.  This is a process they go through here in Texas if there are multiple offers on a property.  All the bidders have a chance to re-submit another offer.  I usually play the game, but would love to hear others strategy on these scenarios.
  • Know your maximum bid and stick to it.  With all the counters, MOPs, BAFOs, etc it is easy to get carried away and pay more than you planned in your cash flow analysis.  Find your maximum and stick to it.  Be prepared to walk away, there are plenty of others to bid on.   
  • Have a contingency plan.  Play out the worst case scenario in your mind.  Maybe the repairs will be way beyond your plan.  Perhaps it will take a lot longer to get it rented out.  Be prepared with a contingency plan to wholesale the property or rent it quickly well below market.  If you just bid on properties in neighborhoods you know and do your homework up-front you should never need the contingency plan, but in this game you always need a back-up plan.

After submitting the offer, I like to call the listing agent to insure they received my offer.  Then hopefully they might reveal more information on the bidding.  Try and find out how many offers there are, how urgent is the bank looking to close, what kind of issues do they know about the house, etc.  They are limited as to what they can tell you, but you might as well ask.

[Update in April 2014 to this post – Changed the title of this post to How we make offers on “MLS listed property”]

We seldom ever offer on MLS listed properties anymore. We are not even close to getting bids accepted like we did in 2009-2011. Now we focus almost exclusively on FSBO properties. Many of the sellers are coming to us at this point. FSBO is the way to go.. Virtually no competition and we can focus on terms which is not even a question on an MLS listed property.

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2 Comments
  1. Cesar permalink

    Good post. I think I read it 3 or 4 times and take away something new each time. Just a couple follow-up questions: If your all cash offer is accepted, aren’t you tying up this money and limiting yourself from other investments? Perhaps you refinance afterwards, in which case my next question would be when do you do this? Also do you work directly with the seller’s agent when submitting an offer? Or do you have a buyer’s agent you work through?

  2. I have lines of credit available from other properties we own outright. I will draw these lines down to get my cash. I will then of course pay back the line over time. We only buy a couple of properties per year so it works out. We use all net rents to pay the line off quickly. Usually we get it done in around 5 years. The rate on these lines is currently at 5.49%. Converting these to fixed rate mortgages is something we could do, but we pay them back so quickly, we just don’t bother.

    This does cap us on how many properties we could pick up, but we have not had this problem yet.

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