What I’ve learned in poker that I’ve applied to real estate
April 23rd, 2007 by KenricThere are times in poker where you are not sure if your hand is good. You want to know where you stand so you decide to lead out with a bet. Your opponent’s reaction will help you gauge if your hand is good. If your opponent raises you, chances are that you are beat and you fold.
Let’s say that you have a decent hand after the flop and the pot is $5, you make a bet of $5 and your opponent raises you $10 and you fold. Did you just toss away $5? Could you have bet only $4 to find out the same thing? Maybe you could have just bet $3. You can’t bet $1 because you know that your opponent will call or raise with anything. Betting $1 would give you no information. The point here is that there was a minimum amount of money that would have given you the information that you needed. You don’t want to bet above this amount and you certainly don’t want to bet less than this amount.
So what does this have to do with real estate?
When you make an offer on a home, you are essentially doing the same thing. You want to make your offer as low as possible, but still high enough to get some information. If you make your offer too low, the seller flat out rejects it and you’ve gain nothing. If you make it too high, you’re just tossing away money.
Poker is based on reading your opponent. Making offers in real estate is very similar. The problem is that the realtors keep you from direct contact with the sellers so your reads are only based on indirect information that you can gather. Information such as days on the market, price reductions, listing descriptions, seller paid price, seller mortgage balance and mortgage type, interactions with the other realtor.
I made an offer last month on a home and my agent asked me, how much earnest money do you want to put? To me, this was a classic case of how much should I bet? I had to put enough earnest money down to make the sellers know that I was serious about buying the house. However, I don’t want to put too much just in case life changes made me unable to close.
Let me preface this by saying that my offer was pretty low to begin with. So with a lowball offer, I knew I couldn’t couple it with low earnest money. The house price range was around $500,000. So, here are some standard earnest money choices, $500, $1,000, $3,000, $5,000, $10,000, $20,000.
I think we all know that $500 or $1,000 is way too low and that $20,000 is way too high. So I had to decide if $1,000 or $5,000 would make them take my offer seriously. My choices were $5,000 or $10,000. I concluded that anything over $10,000 would get my point across that I was serious. At $5,000, I wasn’t really sure.
So I went with $10,000 earnest money and the offer was accepted with no counters!
Posted in Gambling, Real Estate | 2 Comments »
Stumble it!
hmmm…so now maybe you’re wondering if perhaps your offer was too high!
Good post. My rule of thumb is that your initial offer should be low enough that you’re a little embarrassed to make it. This approach won’t work in a roaring seller’s market even in a buyer’s market it will kill a deal or two, but over the long run it will ensure that you enter the negotiation on the right foot.
And…the seller’s reaction, as you noted, will tell you a lot about his or her position/motivations.
By Christopher Smith on Apr 23, 2007
I thought about that. I was very suprised that they accepted it. I was fully prepared to come up. So I can’t complain.
By Kenric on Apr 23, 2007