Have you found a property that’ll make you money? How do you buy an investment property?
Once you’ve found the property you want to buy and have a plan for financing it, you have to buy it. In The Book on Rental Property Investing, Brandon Turner explores the process of making an initial offer and the negotiating skills required during the purchasing process.
Here’s how to buy an investment property as a first-time investor.
The Introductory Offer
According to Turner, there’s no set rule for an opening offer, but you should ask two questions if you want to learn how to buy an investment property: First, how much competition is there for the property? When competition is strong, higher offers can put you ahead of the pack. Conversely, a buyer who’s had a property on the market for a while without an offer might abandon her original asking price, making bidding low a sounder strategy. Second, ask why the owner is selling—for money or expedience? This helps you better gauge a number they’ll accept.
Even if the answers to the above questions suggest that a lower offer may be accepted, it may be wise not to go too low. Specifically, some experts warn against low-balling: bidding significantly below the list price (the price initially determined by the seller).
This practice can bring negative consequences beyond just losing a deal: It can damage potential sellers’ confidence in an investor’s seriousness and reputation. It can even harm an investor’s relationships with real estate agents and attorneys. If you’re serious about entering the rental property industry, and you aim to buy multiple properties in a given area, it’s prudent to keep these relationships strong. Therefore, make sure that lower bids are logical to the property’s value.
Soothing Seller Anxiety
When you’re making the initial offer, the seller may doubt your ability to pay or good intention to buy, weakening your bargaining credibility. Turner notes that sharing a pre-approval letter from your lender can ease the first concern, calming fears that the deal will fall through. To ease the latter concern, offer an Earnest Money Deposit (EMD), roughly 1-2% of the purchase price, up front. This is held by a third party, such as a real estate brokerage, until the deal is closed. If you back out of the deal without cause, the seller keeps the money.
Turner advises that you can add contingencies to the EMD to protect yourself. For example, you might add one that frees you from the sale if a late-stage inspection discovers new property damage or that the seller was dishonest with you about the property’s value or condition.
(Shortform note: The third party will likely use an escrow account to protect your EMD. This acts as a neutral place for funds to sit until all transacting parties fulfill their ends of an agreement. In many cases, the buyer will address the EMD check directly to the escrow service rather than the seller, adding another layer of protection against the seller simply absconding with the money before the process is complete. The escrow holder can then either apply the check to the eventual purchase of the property or return it to the issuer if the deal falls through.)
The Art of Negotiating
Turner highlights three post-offer scenarios: acceptance, counter-offer, or rejection. Counter-offers are extremely common, especially if you don’t immediately meet the seller’s asking price. They can also happen after a rejection, if the seller changes their mind.
If the seller counter-offers, you may want to negotiate to reach a lower price that suits you both. Turner emphasizes that while negotiating, you must avoid appearing aggressive, confrontational or insulting. You’re likely to get a better price if the owner finds you professional, friendly, and approachable. Also, cite data to back up your offer—things like local income and rent averages, vacancy rates, and employment rates. If it’s clear that you know what a fair value for the property is, the seller is less likely to think they can take advantage of you.
(Shortform note: When negotiating, remember that counter-offers, or even counter-counteroffers, typically invalidate an offer that came before it. In other words, if you come up with a counter-offer that the seller rejects, you most likely won’t convince them to return to their previous number—no matter how friendly you are or how much data you cite.)
Finally, Turner reminds you to never be so emotionally invested in a property that you can’t turn your back on a deal if the numbers don’t work or the seller expects more than your maximum budget. There will always be another investment opportunity.
(Shortform note: It’s common for an investor to forge an emotional connection with a property when it has features that create feelings of attachment, such as inviting grounds, an old-time charm, or the potential for appealing renovations. If you notice this happening, try creating physical and emotional distance between yourself and the property by asking other professionals from your team (most likely your real estate agent) to take over the handling of the deal. They’ll bring a neutral perspective to the transaction, reducing the chance of you overcommitting, getting stuck in a bad deal, and undermining your finances.)