It is important to learn and stay sharp as a real estate investor. Learning theory is great, but applying by doing is the best way to learn and retain. Here is the 1st of a series of exercises that new and existing real estate investors must do to hone their craft.
Your exercise is to Buy and Sell something on Craigslist and post your results in the comments of this post. Not just Buy and Sell, but to do it right. You are looking to buy the diamond in the rough and get people to fight over the item you are selling. In this article we will be looking at buying an item for 50% of its value.
Buy – Select a normal item that will have some demand such as a TV, bike, laptop, electronic, etc. I did it with a TV, laptops and even bought a car. We are trying to simulate buying an investment property at an extreme discount so pick an item that people want not an obscure item that has little to no demand. If you can’t think of anything pick an item in your home you want to upgrade for a discount. Buy something at around 50% or less of what it is worth and do not buy unless it meets your criteria. If you do not know what it is worth, look at similar for sale items. Call and find out what they sold for so you have comparable sales.
What do you have to do?
- Play the numbers game – the more prospects that meet your criteria the better the deal. Get as many motivated seller leads as possible into your pipeline and cherry pick the best one until you find that diamond in a rough.
- Find out if they are motivated and what that motivation is – If they are not motivated, pass and move on to the next one. Motivated sellers will sell at a discount. Always find out why they are selling as they will give you a great reason why they should discount the price such as they need the money today.
- Do not deviate from the criteria of 50% of value – Never ever pay more than your criteria dictates. Pass and find another. Remember, this is a numbers game so the solution is to get more leads not compromise and overpay and take on too much risk with lower return. By doing this, you will avoid huge mistakes that investors make all the time.
- Do your due diligence – Make sure if it is a larger item like a car to do your due diligence and get an inspection. Investment properties always require an inspection and thorough due diligence to mitigate risk and likelihood of unpleasant surprises.
- Negotiate down every chance until you get a no – Give reasons why it is not the best fit or point out flaws without offending them. Tell them you are still interested but want to reflect it in the price and ask for a reduction. Do this until they say no. Then you have found their bottom line lowest they will take. Do this every chance you get. Don’t forget to negotiate terms. If they say no, maybe they will drop it off to you to make it easier for you.
Here are my results:
- TV – 1 year old 52 inch HD tv for $500 selling for $1000 and $3500 brand new. The seller had it playing Gladiator when I showed up so that was just an extra bonus. 3 years of use and zero issues.
- Laptops – 2 laptops and a nice laptop bag for $50 worth $200+. Used one for a year then gave both away but still use the amazing laptop bag.
- Car - A 2001 car that will last 5 years bought for $1K worth $3K. There are some dents which is OK, when fixed the car is worth $5K. Just like buying a rehab. I first negotiated it down from $2700 to $1800. Then got an inspection and negotiated it down to $1400. Then after test driving it negotiated down to $1200. Then got it down to $1000 at the purchase meeting. This is where I got the ‘No’ that told me it was the absolute mimimum sales price. This is a larger item so I made sure I got a full diagnostic inspection. I passed on 3 other cars that I had inspected. It has already been driven for 2 years with zero issues just routine maintenance.
What will you learn:
- Find motivated sellers – They will sell at a discount and you can often negotiate terms like get them to drop it off at your location.
- This is a numbers game – Maximize your leads then lowball enough sellers and you will find your diamond in the rough.
- Learn to talk directly with motivated sellers without any competition - They are likely more motivated and will give you a better price.
- Negotiation skills – It never hurts to ask. Find their motivation. If they need to sell quick, say you can only do $X if you buy that fast. Negotiate the price down first before seeing the property and at every meeting or conversation negotiate down more until they say ‘No’. If they are asking $300, it is worth $400 then you will only pay $200. The $200 you will pay should be exactly in the middle of the current asking price and what you will pay. First ask what the lowest they will take and maybe they will drop to $250, then ask for $150 since $200 is in the middle. It is a psychological thing that the seller thinks he is also winning by getting you to come up and meet in the middle.
- Ask for reductions without offending the seller – Anytime you see the item, have it inspected or talk to the seller mention a flaw or something that makes it not the best fit. Then say you are still interested but you want to reflect it in the price and ask for a reduction. Again worst case is they say no.
- Learn to get comps – Look at comparable for sale items and call if necessary to find out the sales price.
Post your results as comments so we can all learn from your experience. Also post any questions before, during and after. Happy Buying!