Real Estate Investment: Getting the Good Deal

I am working with some clients right now who have been mentored by another investor to cast a broad net over the market to find bargains.  Their methodology is to follow a specific formula to derive an offer price and then submit that offer regardless of list price. 

My experience has taught me that even though a property may be worth of a specific value, the list price for that same property may or may not reflect its value.  In many cases, the list price may be too high.  Does this mean that a low ball offer should be submitted to such a property?

A couple of years ago I wrote Blacklisted at 10%: Betting Against The Seller.  The article has a very interesting chart showing you the List Price-to-Sale Price rations for single family home transactions in Davis County.  What we discovered was that back then most transactions happened at 90% of list price of above.  Therefore, the chances of success offering a price below that threshold were very small...something we discovered to be on the order of a 1-out-of-33 chance.   My advise then: Don't low ball because it's a waste of time.

In light my new client's methodology, I wanted to revisit the data and see if there were any new trends.  I also narrowed the focus to the multi-unit market in Weber County.  I present you with today's chart:

 What we see here is interesting. Surprisingly, given market conditions, we discover that 13% of all transactions are occurring ABOVE list price.  How can this be?  Well, remember that list price and sale price are not necessarily the same thing.  If a property is listed lower than its current value, which happens 13% of the time according to this chart, then the price will be bid up. Nearly half of all transactions are occurring between 90% and 99% of list price.  16% of transactions are happening between 80% and 89% of list price.  And finally, only 8% of transactions are happening below 80% of list price.  That means you have to submit over 10 offers at 80% or less of ask price to get one to stick.  That is a lot of offers.

So, is it worth the time and effort?  That is up to the agent and the client to decide.  My preference is to be more analytical and hone in on the deals based on experience and subjective research.  However, some folks do things differently. 

So, whatever it is you choose to do...happy bidding!