How Much Should You Offer For That Property?

One of the most important questions you’ll ever have to answer as a real estate investor is this:

“HOW MUCH SHOULD I OFFER FOR THIS PROPERTY?”

It’s a very important question, because your offer price has everything to do with your ability (or inability) to make money on a real estate deal.

Offer too much, and you won’t have a large enough profit margin.

Offer too little, and the seller won’t do the deal.

Considering how important the offer price is, I’d like to provide a bit of explanation on the basic math I use to come up with this number for any given property.

The Importance Of Price

No matter how you slice it, your offer price is going to play a major role in the overall scope of any transaction.

With the right number, you’ll have a grand slam deal on your hands. With the wrong number, you can lose yourself a lot of money in an instant.

There’s a saying that a lot of real estate investors like to throw around. Perhaps you’ve heard it before:

“In real estate, the money is made when you buy.”

It’s a true statement. If you make the right assumptions about a property’s market value and have an accurate idea of what your closing costs, holding costs and improvement costs (if any) will be along the way, you can essentially write yourself an enormous paycheck, simply by choosing an offer price that allows enough room for your profit margin… however big or small you’d like it to be.

How Most Investors Think

Most of the people who flip houses and buy investment properties use something called the 70% Rule – perhaps you’ve heard of it.

It’s a simple mathematical equation where you take the anticipated value of a property (ARV or After Repair Value), multiply it by seventy percent (0.70), and subtract ALL costs along the way, which will give you your “maximum offer price” that you should consider for your subject property.

As an example, if you think a property will eventually sell for $100,000, and you estimate that you’ll have to pay $10,000 in various costs along the way, your equation would look like this:

$100,000 ARV x 0.70 = $70,000 – $10,000 Costs = $60,000 Offer Price

Since you’ll be paying $60,000 for the property and another $10,000 for various closing and improvement costs, your total investment will be approximately $70,000. However, since you’re planning to sell it for $100,000 in the end, this means you’ll have a net profit of $30,000.

Want to run the numbers yourself? Give it a shot with this calculator.

Of course, if you make any errors in your assumptions along the way, your net profit is also your margin of error.

Fore example, if you end up selling the property at a lower price than planned, or if you fail to account for some huge costs along the way, those errors will eat into your profit margin, and could even cause you to lose money if your assumptions are wrong enough.

The equation makes sense on paper. It’s not a bad framework for making offers IF the market is trending upwards, IF your assumptions are perfect, and IF you really are able to sell the property immediately, it could work… but personally, I don’t think it offers nearly enough certainty.

How I’m Different

When I was living through the great recession from 2008 – 2013, when real estate values in the United States were absolutely sabotaged, I saw too many people lose their shirts using this “tried and true” 70% rule.

There is always an element of uncertainty with any real estate deal, and with all the wild cards that can come up in a real estate deal, 30% just isn’t a big enough profit margin to make me comfortable. I need more.

You see… a lot of the properties I buy are vacant lots, raw land and housing in C-class neighborhoods. When a real estate recession hits, these types of properties don’t tend to sell quite as quickly when they’re listed at “full retail value” (which by the way, is an incredibly subjective number to begin with).

Unless I’m offering some kind of crazy incentive in the form of:

  • A very low asking price
  • Seller Financing
  • The #1 most desirable property in the neighborhood
  • All the above

…I just don’t think it’s wise to rely on the 70% rule, because there’s not enough profit and protection built in.

To put it another way… I don’t want to leave ANY possibility of getting hurt, regardless of whether the market changes or I’ve made some kind of judgment error on the property’s fair market value.

In my mind, the only way to get around this is to make offers that are way, WAY below market value. I’m talking 30%, 20%, even 10% of market value.

You might think this kind of offer is crazy, but it’s not a pipe dream – trust me. I make offers like this all the time and when you’re reaching out to the right demographic of property owners, many people are happy to accept them.

RELATED: Understanding the Motivated Seller

It’s just a matter of knowing how to find motivated sellers (which is a topic for another blog post).

If you want to see my take on how I run these numbers, this video explains my approach.

As you can see, it follows a different logic than the 70% Rule.

Rather than giving me a wide range of percentages to base my offer on, it forces me to stay FAR below 70% (and frankly, I think 40% is too high for most of the vacant land properties I purchase – I generally keep my offers within the 10% – 20% range, depending on the market value).

It’s important to note that the market value you determine for this property is a very, very important number.

If you get this number wrong (particularly, if you set it too high), it will completely screw up your results. As with any calculator, the quality of your outputs are only as good as the quality of your inputs, so make sure you have a reasonably accurate ballpark idea (at the very least) of what the property is worth. This is NOT the time to simply “wing it” and guess on the numbers without doing some research.

RELATED: The Real Estate Investor’s Guide to Valuing Vacant Land

The beauty of it is, if I know my goal is to make an ROI of at least 100%, or if I have a specific number I need to hit as my Net Profit, it’s very easy to adjust the numbers (whichever ones have the most flexibility) until those numbers fall where they’re supposed to… and if I can’t get the numbers to work, I walk from the deal. It’s that simple.

Base Your Offers On Math, Not Emotion

What I love about this calculator is that it tells me in very plain terms what the consequences of my numbers will be – for better or worse.

If I’m going to stick to my business model and keep my emotions out of the equation, I need to make sure my Net Profit and ROI fall in line, and this all starts with finding a reasonably accurate market value for the property, and keeping the offer price in the acceptable range.

This approach help keep my emotions in check, so I can make my decision based on what the data says.

Am I going to miss out on some opportunities because my offer prices are too low? Absolutely.

Am I willing to compromise my business model just because I’m worried a seller might not accept my offer? Absolutely not.

Am I going to break my own rules and bump up my offer price just because I “fell in love” with a particular property? Um… are you kidding me?

YES – I have to play the numbers game and send out a lot of offers. Do I hear the word “No” a lot more than I hear “Yes”?  Of course!

But what do I get in return? I get peace of mind.

When someone does accept my offer – I get to be 1,000% SURE I’m holding the deal of a lifetime in my hands. And it’s worth the effort! When we stick to our guns and make data-driven decisions, we can reap some huge benefits. If there’s anything I’ve learned about real estate investing, it’s that data-driven decisions beat emotion-driven decisions every time.

The Best Real Estate Investing Strategy I’ve Found

I'll be completely honest with you. The most powerful strategy I've used to build my real estate investing career is probably NOT what you might guess.

Land investing (that's right, buying and selling vacant land) is a massive opportunity that most investors aren't paying attention to. For the few land investors who know how to pursue this business with the right acquisition strategy, it's an extremely lucrative and low-risk way to build serious wealth from real estate.

If you want to get the inside scoop on how to start and run your own land investing business, come and check out the REtipster Club – where I've put together a full 12-module course with dozens of videos, bonuses, downloads, group coaching sessions and a members-only forum (where we spend time answering questions every week). There is no better place to learn this business from the inside out!

About the author

Seth Williams is a land investor and residential income property owner, with hundreds of closed transactions and nearly a decade of experience in the commercial real estate banking industry. He is also the Founder of REtipster.com - a real estate investing blog that offers real world guidance for part-time real estate investors.

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  1. cliff daniels says:

    Tons of information on this site to use as resource. I am always seeking content (to direct as a link) for my Real Estate (residential) website blog http://actprop.com hosting RE related articles for my viewership to click through for their consideration.

    cheers-
    Cliff Daniels
    Active Properties
    Boulder Colorado

    1. Seth Williams says:

      Thanks Cliff, glad you stopped by!

    2. MB says:

      Seth, great info here. Thank you for putting this together. With that being said. I am under the impression that you are missing quite a bit of expenses in your ROI calculation. What about the Direct mail campaign, list costs, legal docs/accountant, etc.? I read your article about the basic costs to start this business, so shouldn’t we be including those expenses in this calculator too? Thanks.

      1. Seth Williams says:

        Hey MB – those are great points, thanks for pointing that out. As for the costs of legal docs (in the closing process), those costs are covered in the line items for “Purch: Closing Costs” and “Sale: Closing Costs”. When it comes to the cost of direct mail and lists… these costs are quite variable, and sometimes these costs may even be non-existent (e.g. – many of my leads come in from my website organically, which doesn’t require direct mail costs of any kind) – so it’s not always accurate to assume these costs should be factored into your offer price… it just depends on where your leads are coming from and how much (if anything) you’re paying for them.

  2. Ken Cardillo says:

    Seth – sound advice! If you are in this business, you should treat it like business and therefore, NO EMOTION.

    I wrote an article based on my experience about how much to submit a bid for at http://real-estate-rehab.blogspot.com/2013/12/how-much-to-offer-when-submitting-real.html. My number one rule is to “remove the emotion”! I also discuss how knowing the seller and your competition can help you develop a bidding strategy. Check out the article and post your thoughts.

    1. Seth Williams says:

      Awesome insights, thanks for sharing Ken!

  3. real estate pune says:

    emotions play very important if u r seller..if the buyer tells his tale a seller gets sentimental and gives away at buyers price..

  4. Elvis says:

    Seth
    Awesome material. I came to your blog thanks to the webcast on biggerpockets which I really enjoyed.

    My question..have you considered to make a detailed tutorial on how you determine the sell price of the land? Like showing the tools you use and how to come up with the potential sales price.

    Thanks

    1. Seth Williams says:

      Hi Elvis, thanks for the suggestion! I actually did come up with something kind of like what you’re suggesting (though perhaps I could go into more detail about that specific issue). Check out this post about determining the market value of land: https://retipster.com/valueofland (this is arguably what you could list a property for – though I’d suggest starting a bit lower to increase your chances of a sale).

      And keep in mind, a lot of a property’s value is in people’s perceptions. If you want to communicate this kind of value effectively (thereby allowing you to get a higher sale price), check out this post: https://retipster.com/howtowriterealestateads

      Hope that helps!

  5. Lisaan Derson says:

    Hi…thanks for sharing your suggestion. Please keep posting.

  6. Mike Scott says:

    Seth,
    Great blog! Lots of good information. When making a low offer on a house had you ever had anyone protest and say that the land alone is worth more than your offer and how do you respond?
    Mike

    1. Seth Williams says:

      Hi Mike! Absolutely – people are always entitled to their opinion (and in some cases, they may even be right), but this has nothing to do with the way I make offers. The offer-making process needs to remain 100% unemotional (which btw, is easier said than done). The fact is – I have a business model that I need to stick with, and if a seller doesn’t agree with the price that I NEED to have on their property – there isn’t much more to discuss, I simply walk away.

      This can be tricky to navigate in the beginning (especially when you don’t have the luxury of more leads than you can handle)… but it’s still important to use good judgment and buy at the right price because if you fail at this, everything else can fall apart later on down the road.

  7. Deb says:

    The more information you have about a property, the easier it should be to determine an offer price. Have you tried Housefax.com? Their property history reports include building permits, mortgage history, fire, flood, catastrophic history and other specific property details. The first report is free, additional reports are only $9. Visit Housefax.com and check it out!

    1. Seth Williams says:

      Thanks for the heads up Deb!

  8. Ryan says:

    Hi Seth,

    Another awesome post! Any chance I get hold of your offer generator worksheet? I tried downloading, but I received a “page not available” message.

    1. Seth Williams says:

      Thanks Ryan! I’m not sure what happened with the offer generator worksheet. I just tried downloading it myself and it worked no problem.

      You might try downloading it one more time and if it still doesn’t work, shoot me and email through my contact page and I’ll send it to you manually.

  9. savannah says:

    Seth, I really liked your site, for two reasons
    1. I use to do residential appraising in the 80’s and one thing I learned is Banks have NO concept of value. At that time they wanted you to make sure you came in for loan amount or you could say goodbye to them as a client. It was so skewed towards their criteria, it made me cringe because it is opinion, but you better have the right one.
    2. I have mountain property that I bought WAY back when. I toured the state, I was looking for EXACTLY the criteria you mentioned here. I wanted protective covenants, so my neighbors wouldn’t BE the issue with how they used their acreage-decreasing my value. I knew if I bought cheap, then it would appreciate if I was careful with the purchase. It has. In CO it was all about water, because you can have gorgeous views, but if you are not allowed to drill a well. Really how do you USE the property, that is expensive camping land. I wanted tap available because in more rural areas, it COSTS lots to bring in electricity on acreage if it isn’t available. So I found the parcel in a mountain subdivision that was small, had wells, electric, good access roads, and great views.
    Circumstances have changed and I have to sell. But finding comparables are difficult. The ones in the area are NOT like mine. I have a well on a good aquifer (the parcels available don’t and can’t get a permit), a combo of pines, aspen, rock outcroppings, meadow . But I am one of the few in this area that hasn’t built. I am surrounded with VERY nice homes/cabins. The last really NICE parcel in a well maintained mt. subdivision. The ones that haven’t sold are flat, covered with prairie grass and the views aren’t as nice and the winds are an issue, can’t have a well. But people COMPARE those with mine, and it isn’t an apples to apples comparison. Wells here go for 12 to 14,000 in this area IF you can hit a source, and IF you could GET a permit.

    How does one CREATE value for this parcel? I think I am asking a fair price, not an inflated price. But offers are ridiculously low. And if I sold at a loss, I know the buyer would turn around and make a killing flipping it. It has to sell for cash, I can’t offer financing.
    Any thots?

  10. Residential Property and Flats for Buy / Sale in Pune says:

    RELIABILITY MUST RULE REALTY: Unauthorised construction is a major challenge for the organised real estate players and liveability index of the city

  11. Cal says:

    Hey Seth,
    Soaking in all your good information, I’m a total newbie and have a newbie question for you. I am about to send out my first offers, I’m assuming I need to sign each one (by hand or docusign) or do I just not sign them and wait for them to sign and send it back? silly question perhaps, but I’m very much into the nitty gritty details of the basics at this point.

    Thanks for all you share!

    1. Seth Williams says:

      Hi Cal – that’s actually a great question! Personally, I sign mine before I send them out. This shows the recipient that I’m serious, I’m onboard with the deal, and I’m ready to rock if they are (if anything, it may give them a little subconscious encouragement to accept and reply).

      Does that make sense?

  12. Jocelyn Thomas says:

    Hi. I am new to this. So I may have questions that a lot of you know the answers to. Anyways, I’m trying to wholesale… and I have seen your numbers for the prospectus report (the assignment fee section) and I have seen this offer generator worksheet video posted here. What is the difference between these two sets of numbers? Are these different numbers for buyers and sellers? Just confused as to what is what, and how much would I really profit if this applies to wholesaling?

    1. Seth Williams says:

      Hi Jocelyn – the offer generator worksheet was created with the assumption that I would be buying the property outright and selling it to a new buyer (so it’s not quite the same as a wholesale situation). With a wholesale deal – you would simply get it under contract (and you can use the same offer prices generated by this worksheet if you want), but the difference is – you would find another investor and sell the paper to them for a fee… so you would generally make less money, but you also wouldn’t have to take on any of the risks of ownership. Also, the selling costs wouldn’t necessarily factor into the equation, because those would be your third party buyer’s problem to pay in the future.

      Does that make sense?

      1. Jocelyn Thomas says:

        Yes, Thank you. It makes sense.

  13. Annabelle Dilworth says:

    Value may be in people’s (buyers and sellers) perceptions but learning rudimentary measures (measurements; units of measure such as price paid per square foot and value projected per square foot, etc); actually evaluating real estate and land would make sense to mention. Such as counseling readers to take elementary courses in real estate appraisal, and to have access to prices paid for similar properties and land in any area in which buyer/investor/speculator is interested in buying — how to check and further verify (confirm) public record information and information in real estate data bases, etc. How to assess (evaluate) “condition” and learn how local county property assessors assess (evaluate) “condition” of existing improvements to the land (to parcels).

    1. Seth Williams says:

      Thanks for sharing your thoughts Annabelle – those are some great insights, I can see how those things would fit well here.

      I do have some other blog posts that discuss those things in greater detail… perhaps I’ll include some “related” links to those blog posts at the bottom of this one as well. Thanks gain for your input!

  14. will B says:

    Hi Seth, great content. I could not find the excel template that you used. Any help would be greatly appreciated.

    1. Hi Will – you just have to subscribe to the email list in order to download at the bottom of this blog post (above).

  15. Lance says:

    Hey Seth! I am new to the blog, but I am really enjoying it and I appreciate you sharing all your experience and insight with us. I noticed in your video you indicated you had a potential deal in Alabama. I have also read your state by state guide to the attorney requirements when closing deals and Alabama was one of states in that second tier of difficulty. How has closing deals in Alabama gone for you? What legal huddles did you have to overcome?

    1. Hey Lance! Yeah man, when I worked in Alabama, I had to use a title company, which was owned by a real estate attorney – so it definitely wasn’t one of those states where I closed the deal in-house. In some ways, this actually made the process a bit easier (because I didn’t have to monkey with all the details), but it also cost me a bit more and the process went slower. I think as long as the deal has enough of a profit margin, and you’ve got the time to go slower, then this isn’t necessarily a drawback… it could even be seen as more of a benefit.

  16. Adam Chefitz says:

    Hi Seth, Thank you so much for this content. I’m a pre-newbie, reading up. Very elementary question: in this video, i’m pretty sure your ROI comes from selling the property at full market value. But isn’t the idea to sell more at something like 50-80% market value, just to make sure you really do get it sold, and fast? Still makes for fine returns..
    I was just surprised that the assumption in the spreadsheet was a 100% market value sale.
    Thank you!
    Adam

    1. Hi Adam. You’ll notice that the first line items says “Estimated Market Value (Anticipated Sale Price)”.

      “Anticipated Sale Price” is key here. This is where you would put whatever number you think it will sell for (whether that’s 100%, 80% or 50% of market value). It will use that number as the basis for everything else – so it’s up to you to choose a number that isn’t too pie-in-the-sky overly optimistic. Make sense?

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