Today is Day 36 in our drive for $60,000 in 60 days by investing in real estate. We are continuing to work out the details of our deal in Pontiac, and we are happy to report that this deal has been progressing very nicely. We are dropping the contract off to the title company today, and we need to check on the insurance property and followup with a few more inspections before we can set a closing date. So we’ll keep you posted on how we progress with this one.
For today, we are going to continue our series on the Anatomy of A Deal. To recap, we have talked about the following in the first 5 parts of this series:
For today in Part 6, we will talk about presenting your offer and negotiating the deal. When you reach this point in the deal, you should have a very good idea of the motivation level of the seller as well as a very good understanding of the numbers behind the deal. You’ve done your homework, and you have put together a price that you can offer. You will now need to sit down and structure your offer.
Through discussions with the seller, you should have tried to gather as much information about the seller’s situation as possible. Below are some very good questions you should know the answer to:
- How much does the seller owe on the property?
- What will the seller be doing with the money from the sale?
- How quickly does the seller need to sell?
- Why is the owner selling the property?
- Are there any problems with the property…are repairs needed?
- Is the seller willing to finance any or all of the deal?
With answers to these questions, there are really an unlimited number of ways to structure the deal. What you are trying to do is create a win-win situation. You want to structure the deal so that you are meeting the needs of your seller, but also meeting your need to profit from the deal. There are all kinds of strategies out there that you can incorporate, and rather than regurgitate them here, I will just refer you to some good resources on the subject. Please refer to the book list we talked about on Day 25 and check out the books I have listed under “Real Estate Investing”.
With any deal there are a number of things to consider that may be negotiable or offer you ways to profit on the deal. These include:
- Financing Options
- Tax Advantages
So, you can run through different creative financing techniques, and you may even make a few different offers to the seller using different techniques and let them choose which offer will work best for them. This can be a very powerful way to get a seller to say yes.
How Much to Offer?
You have fully analyzed the deal, and this analysis should show you the maximum allowable offer (MAO). Whenever you submit an offer you will normally want to leave yourself room for negotiation. However, you should also realize the power of presenting a full price offer. Many times you can make a full price offer on a property but include terms that are in your favor. For example, you could offer full asking price for the property if the seller is willing to finance 100% of the deal at 5%. With those terms you may even be willing to offer more for the property.
Put Your Offer in Writing
Putting your offer in writing can be done a couple different ways. You can write a formal purchase agreement or you can write a letter of intent. The method you choose will depend on the situation. For example, if you are putting an offer in on a bank foreclosure, you will want to write a formal purchase agreement. But if you are working directly with the seller, you may want to put your offer into a letter of intent. Generally a letter of intent really focuses on the details of the deal (price & terms) but does not include any of the “boiler plate” clauses you will find in a formal purchase agreement. This makes it much easier for the seller to read, and may be much easier for you to talk through. The letter of intent will not serve as your contract, but it can work much more effectively to get to the price & terms that are acceptable to both you and the buyer.
Present The Offer
If at all possible, you will want to present the offer to the seller yourself. This will give you the opportunity to explain to the seller exactly how you arrived at the price. Normally I put a presentation together that walks through the analysis I have completed on their property. Presenting your deal in this manner will provide credibility for the offer you are presenting even if it is a low offer. In many cases I will also put together an analysis showing the costs a buyer may face if they try to wait and get a higher price for the property. For instance, if a property sits on the market for 6 months, there are a number of costs the seller will face including mortgage payments, taxes, insurance, utilities, maintenance, and real estate commissions. If the seller doesn’t like your offer initially, this analysis will give them a better perspective that your offer is not that far off base when all of those additional costs are considered.
After you present the offer, it is up to the buyer whether they will accept, counter or completely reject your offer. Normally, if you present the offer in person you will get an immediate indication of how they are feeling about the offer. Even if they do not tell you, pay attention to their body language, facial expressions and demeanor when you present the offer. You can walk away from the table with a good understanding of what the seller is going to do next, and you can be prepared. If you’re sure that they do not like your offer, you can start to look at other creative ways that might create a win-win situation. Or conversely, if you feel they like your offer, you can be prepared to be a little more rigid if they do counter. It’s somewhat of a cat and mouse game, and there are a number of techniques you can use when negotiating. Again, I’ll refer you to my book list and recommend The Only Negotiating Guide You’ll Ever Need by Peter Stark & Jane Flaherty.