Make money when you buy.

From: Apprentice Millionaire


Paul Zagoridis, in an excellent post, wrote: "Make money when you buy. Realise that cash when you sell."

That's something that I have heard many times, and something I believe in. But as a newbie, I still have to learn how to make sure I offer in the right bracket. My understanding is that if I make an offer and it is accepted immediately, I am offering too much. If my offer is rejected, then I am too low. If my offer is met by a counter offer, then I am in the right ball-park.

But how do the more experienced property investors pick their price?

One strategy I heard was: know what yield you want (assuming you are in a good growth area, of course), find out the going rental level in the area, and then work backwards to find your price.

Another one I heard was: just offer 10% (consistently) below the asking price.

I guess the basis would be to know the market like the back of your hand, and then you know where to place your offer for any particular IP, but I would be interested in learning how others determine their price.

Cheers
Apprentice Millionaire
(aka Jacques)
 
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Reply: 1
From: Paul Zagoridis


Thanks for the positive reaction.

Offers accepted quickly does not necessarily mean you offered too much.

Most people are not professional negotiators. So the rules of thumb are developed to deal with average cases. You have no idea why an offer was accepted. Maybe the vendors just had an argument over in-laws, each is privately thinking of divorce and you got them at a good time.

I know people who hate counter-offering. I made no counter-offers in my recent sale. Deal with what is directly in front of you, then shake it off and move on.

I've used %off asking, I've also used % yield. Again these are rules of thumb. Don't be a slave to them.

Example:
Would you buy a property in East Sydney that was negatively geared (yield = 6.0%)? If not how about if it was $80K below FMV? I'll normally take instant equity and worry about cashflow later. Yes that's despite my protestations to never negatively gear!

Do the numbers for each property. The only way to stay sane is to work out what an investment is worth to you. Ignore what the vendors and the agents are doing (it's all mind games and psycho-babble).

Knowing a market well is important but not essential if it leads to analysis paralysis. You'll make mistakes, how you overcome them and learn from them is more important than theoretical knowledge. Donald Trump still makes mistakes.

Regards

Dreamspinner
 
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Reply: 1.1
From: Owen .


I've been thinking about some of the ideas brought up in this thread too and you are exactly right Paul.

I initially work out a properties value by the rental return and a little spreadsheet. Simple stuff that says rent x 52 must be greater than the interest costs. This returns a figure that is generally a percentage of the asking price. I then check the other costs, compare this figure with the recent sales stats to see if it is in the ballpark and make an offer based on this.

But sometimes the return is so great that I could pay more than the asking price and still be making money. A studio in Darlinghurst may return $250pw and only be asking $160k. I could pay more and it will still cover the costs but studios in Darlinghurst may only be worth $140k regardless of the return. Got to look at the big picture.

As you said, these numbers are just the starting point.
 
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