 |
|
|
In this lesson, you will learn:
- The basics of real estate negotiation.
- How to make offers.
- The basics of financing.
- The role of the appraiser.
- Seller financing.
Step #9 - Negotiate The Deal
The fun starts now because the real potential for making money starts now. The difference between a good negotiator and a poor negotiator is thousands and often tens of thousands of dollars. Good negotiators are prepared. They know exactly what they want to accomplish. They know their limits financially. They know which points they can bargain and which points they can't. As a buyer, you negotiate from a position of strength. You don't have to buy this property. Compromise is your option. If the deal is not to your complete satisfaction, there will always be new opportunities.
|
Master's Tip: There will always be other deals.
You have to know what you want. You have to know what you will and won't
accept. You have to be willing to walk away.
|
Why will you succeed as a negotiator? You will be prepared and organized. You will be realistic and fair.
The Andersons
I had been running a small display ad in the local newspaper: "Cash for your house. Immediate closings." I was averaging one to two calls per week and one good lead per month. My objective was to find people who wanted to sell their home quickly without using a broker. I received a frantic call from a Mr. Anderson asking me to meet him at his house. He owned a big colonial house in a good location. The house was worth about $225,000. It needed a new roof. It needed to be painted. The inside was a mess, but mostly cosmetics.
Anderson himself looked haggard and disheveled. He
appeared to be distraught. He wanted cash immediately. He needed money
to move immediately. Within the last two months, his wife had left him,
his son had been arrested and his daughter had quit high school and run
off. While we were sitting in the kitchen, the family dog was running a
mile a minute in a circle trying to catch its tail.
I asked Anderson what he was looking for and he said,
"I have no mortgage. Give me a hundred thousand and the house is yours.
I want to be out of here in a week." I was going to offer $160,000 and
hope to get the house for $175,000. I told him that the house was worth
a lot more than a hundred thousand. I advised him to take a few days to
think things over but that I was definitely interested in buying the
house. I told him to speak with a lawyer before making any big
decisions. I called him back the next day and guess what? The lawyer
bought the house!
The point is not that I should have bought the house.
Although, I should have made the offer of $160,000. At $160,000, this
would have been a win-win deal and fair under the circumstances. There
is right and wrong. As you buy and sell and make lots of offers, you
will find people who are not in a mental state to negotiate fairly, you
must make a moral judgment. Again, there will always be other
deals.
|
Start with a new folder. Put the address of the property on the front and use the cover of the folder to log your daily activities. The folder will contain the following:
1. Copy of the listing sheet
2. Property inspection report
3. Any photographs of the property
4. The four repair and improvement lists
5. The evaluations of the property on paper
6. A list of comparable sales
7. If available, a plot plan which shows the boundaries of the property
8. Property projection information. What do you feel this property will be worth in 1 year, 3 years, 5 years, 10 years?
9. Your mortgage pre-qualification or pre-approval letter.
With the folder, you have a basis for discussing your offers with Nardo. Nardo's job is to present the seller with your offer in an honest and straightforward manner. When you make an offer, it will be in writing on a standard Offer to Purchase form. Nardo will have these forms.
Nardo may be your friend, but if he is working for the seller, he has a fiduciary (trust) relationship with the seller. For example, if you say to Nardo, "I want to make a first offer of $200,000, but I'll go as high as $230,000", Nardo has an obligation to the seller to share this information with the seller. So, unless Nardo is a Buyer's Agent, keep quiet.
Listed here are just a few general negotiation guidelines:
1. You'll never pay less for a property than your first offer. You may think you've made a low offer and then, you're surprised when it's accepted. Well, it's too late to offer less.
2. You may never really know a seller's motivation or circumstances. The seller may have paid $125,000 for a home that a listing agent now tells the seller is worth $280,000. The seller may have thought that $280,000 was a crazy price which no one would pay. When you happen along and offer $200,000, he or she is delighted and accepts. Conversely, another seller, when told a property is worth $280,000, may think that $280,000 is much too low and will hold out for every cent until a satisfactory price is reached or they take the property off the market.
3. A first offer is exploratory. Don't load down a first offer with a lot of conditions. Work on the price first and later, you can use your conditions as bargaining chips. There is not a mandated time limit between offers. You can follow a first offer with a second, third, tenth in one day.
4. If your first offer is refused, the seller will often make a counter offer. Most list prices have some play in them. The seller expects offers and so raises his real price accordingly. You now have to react to the counter offer. A good method is to go to your folder and list every deficiency and drawback to buying this property that you can think relevant. Nardo will communicate this long list of work and expenses to the seller. Nardo will then tell the seller that in spite of all this, you, the buyer, agree to pay slightly more than your first offer. Now, you have put the seller on the defensive. He not only has to justify the price he or she is asking, but also has to justify the costs of all the work to be done. The negotiating process proceeds with new offers. Each time you offer more money, throw in a few conditions. Will the seller pay for a new roof? Will the seller pay for new carpeting? Will the seller pay for landscaping? Of course, the seller doesn't want to pay for anything. The seller wants to sell and to move on to something else. Condition the seller. When the seller says to Nardo, "Listen, Mr. Nardo, I don't know if this person is crazy or what, but I have no intention of painting this house. I know there's a lot of work to be done around here, but $240,000 is as low as I go and that's it!" Now, you have found the low price. Make a decision.
5. The negotiating process can take as long or as short a period of time as you decide. If you really want the property, make the deal in a few hours. If you're on the fence and looking at other properties, take your time. When you've completed negotiations, you and the seller will sign a form called the Purchase and Sale Agreement (P & S), which will specifically set the conditions for the sale. Nardo will have a standard P & S form or your lawyer can draft one.
Some investors get so good at appraising properties in their specific areas and at negotiating that they specialize by buying property and quickly selling it at the profit. Profits of thirty and forty thousand dollars per transaction are not uncommon. Real estate investment offers many opportunities for even the part-time local investor. You'll decide where your expertise lies.
How To Make Offers
If there's one thing that separates beginning
investors from seasoned pros, it's an ability to make offers. You can
translate the word ability to mean willingness. Beginning investors are
usually willing to make offers only when all their questions have been
answered and the answers verified and re-verified. In contrast,
experienced investors are often willing to make an offer on almost every
property they review. Because they are prepared and confident and can
make offers quickly, experienced investors often make the best
deals.
Experienced investors act under the assumption that
almost all real estate has worth. For instance, if an experienced
professional investor knows that over the past few years, income
properties have been selling for $40,000 to $50,000 per unit in a given
area, then he or she has a pre-established price guideline for making
offers on comparable property in that area. Armed with this research, an
experienced investor probably wouldn't hesitate to make an offer of
$35,000 per unit.
The experienced investor also knows that if there are
any unresolved questions or concerns, he or she can make an offer with
contingencies. The contingency offer provides the investor with more
than sufficient protection, while keeping the negotiating momentum
alive. If the offer is accepted, the investor's made a very favorable
acquisition. If the offer is not accepted, the seller may make a
counteroffer. Then the give-and-take of negotiating will begin.
You are cooperative. "You are an Action
Principles® Champion." You get the job done. Let's call this The
Tao of Real Estate Success.
By starting with a low offer, the investor draws the
seller's true price out into the open. The investor knows that he can
stop the negotiating at any time he desires. The investor also knows
that by making a lot of offers, he or she will sometimes hit a home run
on price or terms or both.
|
Master's Tip: This is business. This is a
business involving tens and hundreds of thousands of dollars. Plan
accordingly. You don't need to be an amateur psychologist trying to
figure out the seller's motivation to sell. Know what you want. The
Anderson Story above is a rare exception. Most sellers are perfectly
capable of representing their own interests or hiring competent
assistance. You are not in this deal to make friends or to impress
anyone. This is business. Act professionally. Let the Action
Principles® be your guide.
|
|
|
