If you’ve been trying to purchase rental properties in Central Indiana for the last couple of years, then you know how tough the market is.
From multi-family to single family, from turnkey to rehabs – the competition is stiff.
Buyers know it, and so do Sellers.
With multiple offers submitted (many above list price) being the norm, Sellers have certainly gotten a taste of the good life.
Beyond the crazy offers, appraisal gap coverage, and sometimes what seems like having to give up your first born to get a deal, another aspect of real estate transactions have seen a shift.
In a “normal” real estate market, Buyers and Sellers generally negotiate two major issues: price and inspection responses.
And while we all know Sellers have all the leverage in terms of price, they also have power during inspection response negotiations.
As an investor-focused brokerage, we thought we would share some insight into what we’re seeing to hopefully help you avoid pitfalls and blindsides when making an offer.
The bottom line is that you need to be prepared to have few to no concessions made during price and inspection negotiations.
Items To Consider:
Inspection Period Length: Just a few short years ago, 14 to 15 days for an inspection period was the standard. In the current market, most sellers simply don’t want to wait that long to see if the deal is going to fall through or not. The reality is that they have several backups waiting in the wings, some of which may not contain any inspection contingency at all.
When submitting an offer, I suggest asking for a response period in the 7 to 10 day range to make your offer more appealing. With most inspectors returning reports the same day or the very next morning, it’s usually feasible to get your due diligence done in that amount of time.
As-Is: Another common theme you will find in today’s market is “As-Is” listings.
If they aren’t listed “As-Is”, you usually have to offer it up to get your foot in the door. Almost every Buyer is doing some form of “As-Is”, completely waiving inspections all together, or an inspection request limit.
An inspection request limit is typically verbiage you would put in further conditions stating you will not ask for any inspection repairs less that $X. This lets the seller know you are not there to nickel and dime them.
Negotiating Concessions or Repairs: Perhaps one of the most frustrating and stressful portions of a real estate transaction is inspection negotiations.
It’s bad when conditions aren’t extreme, but even more so now that we are in such a Seller’s market.
A common occurrence we are seeing right now, is that Sellers are very unwilling to negotiate.
In many cases, it’s take it or leave it.
Another common occurrence is hefty inspection reports.
In a normal market, Sellers would often work hard to ensure their property was in good shape before listing it for sale.
That’s no longer the case.
I believe this is happening due to the sheer level of competition and lack of inventory. Sellers know they are going to have multiple offers and also know someone is probably willing to buy the property As-Is.
So, they don’t feel the need to do any work prior to listing and once it’s under contract, they don’t feel the need to make concessions because they can try their luck with the next person in line to get the best deal for themselves.
This, coupled with paying a premium for properties, makes it really hard as an investor right now.
How Should Buyers Proceed In This Market?
I’ve seen deal after deal fall through due to inspection responses. After paying list or above list price for a property, many investors cannot rationalize putting an unexpected $10,000+ into a property, and I can totally understand that.
However, from a buy and hold perspective, I think there are many cases where unexpected costs shouldn’t deter investors from a purchase.
Sometimes you have to look past your immediate short-term returns, and look at the bigger picture of what the asset will provide you long-term, i.e. principal paydown, appreciation, tax benefit, and eventual if not immediate cash flow.
Obviously every property and transaction is different and there is not a one-size fits all answer, but if you want to compete in this market, you’re going to have to be ready for the possibility of spending more than you originally wanted.