How To Buy Low And Sell High

Large profits can be made quickly when you buy low and sell high. However, it is easy to make mistakes valuing a property, and transaction costs can eat up your profits if you are a little bit off in your assumptions.

This is the most obvious way to make money with anything, right? Of course selling high is the more problematic part of the formula. But then again, if you buy low enough, you can even sell low and still make money. So the big question then, is how to buy for less.

There are many ways to pay less. What is the simplest way? Offer less. This is the oldest and simplest negotiating ploy of real estate investing. Everybody knows this technique, at least in it's crudest versions, but most are afraid to use it. Why? Well, it can be embarrassing, and it can be a waste of time if you don't do it right. On the other hand, do you really mind being a bit embarrassed if it saves you $20,000?

The first piece of real estate I ever bought was a small lot for which the seller was asking $4,500 (now that's cheap real estate). Fortunately for me, in my ignorance, I didn't know then that offering 22% less than the asking price was considered insulting. Looking back on it, I now understand why the realtor didn't want to present the offer. In any case, the seller accepted my offer of $3,500, because he was anxious to sell his last property before moving.

A friend bought a home on a lake for perhaps $40,000 less than it was worth. How? He made the offer. He was always making low offers as he shopped for a home, and of course this meant he had most of his offers rejected. I might have even hinted to him that he was wasting his time. Good thing he didn't listen. Would you be willing to have a dozen offers rejected if it meant buying a home for a savings of $40,000?

Then there is the investor from California who routinely made dozens of offers at a time on houses - without even look at them. He wrote the offers for 25% less than the asking price, and included an inspection contingency and other clauses to protect himself. Most sellers said no, of course. Most did, but not all. He occasionally got some very cheap real estate this way.

Cheap Real Estate - Lowering Expectations

During a seminar, a real estate investor once told me,"If you aren't embarrassed by your offer, it isn't low enough." Considering that he's made millions in real estate, he may be worth listening to. You need to understand, however, that a truly low offer will almost never be accepted. Is it a waste of time then? Not at all, because there will often be counter-offers, and a low initial offer is just a way to alter expectations.

Let's suppose you think your home is worth $300,000. You mention to a friend that you are considering selling it, and he says, "You should be able to get $250,000, right?" You ask another friend what he thinks the home is worth, and he tells you $260,000. How confident would you be about your $300,000 estimate of value now? You might lower your expectations, right?

This is one of the primary functions of a low offer; to alter expectations. When a seller is asking $300,000, and you offer $250,000, will he accept your offer? Probably not. He'll almost certainly reject it. Getting cheap real estate isn't going to be that easy. He may counter-offer, however. Suppose you go back and forth, and finally agree to $182,000. He might not have considered selling this low before, but maybe now it even seems like victory to him after starting at $160,000.

You'll lose a lot of potential properties this way. Sellers sometimes won't even take subsequent offers seriously once you have offended them with your extreme offer. You might avoid this by assuring the seller that his property may indeed be worth what he is asking, but that it only works for your purposes at a lower price. On the other hand, so what if you have a lot of rejected offers. Isn't a bit of rejection worth it to get really cheap real estate?

Note: remember that if your plan is to simply buy for a low price and immediately sell the property, you should carefully consider the transaction costs and holding costs. Transaction costs include all the costs of buying the property, as well as all the costs of selling it, and can easily top 10% of the sales price if you pay a full sales commission.

The holding costs include property taxes, insurance, utilities, and any other ongoing costs while you own the property. Estimate the monthly costs of these and multiply that figure by an estimate of how many months it will take to sell the property to arrive at your total holding costs. Leave lots of margin for error if you want a safe investment.