Yesterday I spoke about real estate pricing strategies. Today I would like to talk about the other side of the game, real estate buying strategies. I have read many good books on this subject, but have found that personal experience (i.e. trial and much error) has been the best teacher. To sum up briefly yesterday, I stated that sellers do not often use a specific pricing strategy, typically they look at the MLS prices in their area and price near the top and expect the buyer to low ball them. With this in mind what is the best strategy for a buyer? Well, despite the seller’s strategy it is often not best to simply suggest the lowest price, hoping to avoid hurting their feelings.
In my experience the best strategy has been to get as much information about the seller and the property as you can. For example, many people meet the sellers for the first time at the closing table (if even then). This is a hard step, but I suggest trying to meet briefly with the seller and their agent to discuss the property and their listing. This can be hard to arrange, but net very valuable information. This is a must for any person buying an investment property, but strongly suggest for personal home buyers as well. This initial step has several benefits. First, you become a real person to the seller. This makes it much harder for them to dismiss your offer. Next, it gives you a chance to ask questions about the property. People love talking about all the things they have done (and even something they haven’t). Watch out for any items the seller may mention having problems with or that he/she mentions will not be included. One of the worst things about buying a property is coming in and realizing all the appliances and window treatments are gone, when you thought they were staying.
Finally, ask a few probing questions. Framing is key here. Say things like, I just visited a property down the street that was selling for x with the following upgrades. How do you think your property compares? It seems like you have put a lot of work in the house and it looks great, is there anything else you would do if you had more time? I am considering remodeling the basement, who did you use for your remodeling? All of these questions give you valuable insight into what work they actually had done, if it was done by reputable people, and if they have looked at other properties when pricing their.
Based on this initial assessment, your bid should be based on the following. First, your bid should allow you to get a reasonable return on the property. If you are an investor, this is obvious because you can consider the NOI and the cap rate. If you are a personal home buyer this is a little more challenging, but should still be considered. Consider a bundle of properties. Think about what you want. For example, if you want a new kitchen consider the price of a kitchen remodel. What is the price difference between that house with a beautiful kitchen vs. the one that needs the remodel? If they are the same (when you add the cost of remodeling), go with the beautiful kitchen because it saves you a lot of headache. If they are significantly different consider buying the cheaper house and take on the remodel. Assign a value to each house based on your needs. Bathrooms are fairly easy to remodel, while kitchens and basements can be tougher.
Houses are unique investments. No two houses are the same, so listing the most important aspects is critical. Keep that investment mentality. Additionally, it is always better to buy the worst house in the best neighborhood vs. buying the best house in the worst neighborhood (or even an average neighborhood). When you buy the worst home in the best neighborhood you can make additional investments at your leisure, the way you want, and get maximum value for your improvements. Nicer properties in average markets tend to stay on the market longer and tend to recover less per dollar invested.