To Lowball or Not to Lowball – that is the Question

What I have learned through experience, and what I teach, is that purchase price is only one of many negotiable terms which establish the validity of the investment and the magnitude of the investment returns in real estate.

What is a real estate deal? It is a meeting of the minds – an agreement which answers the needs of both sides to a satisfactory degree. This sometimes lends itself to lowball offers, but many times it really does not. This is why, for a sophisticated real estate investor, it can be dangerous to allow yourself to get into a frame of mind whereby the purchase price is the only factor that establishes whether you do the deal or not. At times it is the highest price that drives the seller’s decision-making process, while other times it is the residual cash flow, tax implications, feelings, etc. If all we know is to place low offers, we will need to place 1000 of them to find Waldo who finally bites on one. We must have more tools in our tool-bag.

While I’ve bought property for 30 cents on the dollar, and I’ve also bought property whereby I knew that I was paying more than the market value at that time. This is because in my opinion, some of the other elements of the structure of those transactions were beneficial to both sides.

For example, which would you chose: an opportunity to purchase a tri-plex for long-term hold for $110,000 but requiring 25% down, or an opportunity to purchase the same property for $125,000 but requiring $0 down-payment? I would hope that you would choose the latter – pay $15,000 more on the purchase price, but no cash out of pocket! Why? Because even though your cash flow would suffer a bit due to financing an extra $15,000, by having no cash in the deal your Cash on Cash return is infinity. You are making cash flow without any cash investment.

This is just one example where paying more on the purchase price actually garners higher ROI. There are many other negotiable terms and conditions of a purchase which can gain the upper hand over the purchase price when structuring a real estate deal.