Real estate can be a competitive industry. Depending on the property type and location, bidding wars can quickly get heated and emotional.
Because of this, many investors can make some missteps in the bidding process, costing them valuable time, resources and property deals. To help you avoid a similar fate, we asked a group of Forbes Real Estate Council members to name some common property bidding mistakes. Here’s what they said to watch out for:
Members discuss a few things to avoid when competition develops.
Photos courtesy of the individual members
1. Getting Caught Up In The Hype Of Quick Buying Trends
Low-interest rates, lower inventory and a surplus of buyers have changed investors’ buying habits. We have seen more and more waived appraisal contingencies and buying of houses unseen based on price point and geography. The important buying principles still apply: Do your research on that home, especially on comparable homes that have sold in the last 30 days before you make a bid. – Ralph Dibugnara, Home Qualified
2. Assuming That Sellers Are Desperate
Don’t assume that sellers are desperate, and will accept an offer below fair market value. Most home buyers have educated themselves on making their offers competitive by offering waived or shorter contingency periods and faster closing dates so investors no longer have the advantage in that way. – Beatrice de Jong, Open Listings (YC W15)
3. Agreeing To A Higher Price Than You Can Afford
I underwrite a project pretty thoroughly before going in to contract, so I know what I can pay for the land. I start lower and don’t get beyond that number, no matter how much I like the project or get into negotiations with the seller. You have to be very careful in this market because sellers want top dollar for their dirt and can be unreasonable about expectations. – Meg Epstein, Ca South Development
4. Ignoring The Municipal Side Of Things During A Bidding War
You found the perfect piece of real estate, but months of searching have come to a bidding war. Now what? The one area that is often overlooked when we become enamored or drawn into a real estate bidding war, because emotion steps in, is regional or municipal by-laws, city work orders or zoning issues. Always check with the local authorities what is the story behind the real estate. – Frank Deluca, DCL Healthcare Properties Inc.
5. Focusing Too Much On The List Price
I buy a lot of properties from the MLS and many investors focus too much on the listing price. The listing price is a great indicator of the seller’s motivation. I am more concerned with the value of the property to me when making my offer. I could offer 20% less or 10% more than the list price depending on the deal and how much it is worth to me. – Mark Ferguson, InvestFourMore
6. Not Studying Lease Terms
Pay attention to lease terms. If leases expire in less than 18 months, know that you might be searching for a new tenant in 12. A renewal option isn’t a guaranteed extension. The tenant may not renew. Negotiate with the seller to extend leases prior to closing. Also, check that leases don’t expire at the same time and leave you with the potential for 50% vacancy on the same day in the future. – Kristin Geenty, The Geenty Group, Realtors
7. Failing To Research Property Taxes
One of the most significant operating expenses in any real estate investment is property tax. Investors frequently get this wrong in their underwriting, as there is no universally consistent treatment of how taxes will change once a property is purchased. If you are not familiar with what is customary in a particular market, do your homework, as this can help avoid future surprises! – Gary Beasley, Roofstock
8. Not Doing Research Up Front
We always take the time to educate ourselves on issues with the property upfront by hiring experts and gathering bids. As such, we submit our offers to sellers with a list of required capital improvements, proposed costs, a letter of explanation and investor profile. Showing we have done our research tells sellers we are more likely to close so they will often choose our offer over others. – Catherine Kuo, Elite Homes | Christie’s International Real Estate
9. Not Having A Solid Exit Strategy
Don’t get caught up in “auction fever,” especially when capital is easier to come by. Thorough due diligence, a solid exit strategy for the property and a hard limit on the amount they are willing to pay is key—and don’t go over that, despite the exhilaration that comes with the auction process. The numbers that support the exit strategy should drive the investor’s participation in the bidding. – Ross Hamilton, Connected Investors
10. Not Factoring In Your ‘Hold Time’ Expense
Remember to factor in the hold time expense of getting a property stabilized. Chances are that an investor is buying a property that needs at least some repositioning. Renovation expenses tend to be accounted for but don’t forget hold time expenses like taxes and insurance. Expenses without income add up fast. – Beth O’Brien, CoreVest Finance