Monday, December 28, 2015

Making Offers

Once you have a motivated seller respond to your marketing campaign, what do you offer?

Typically, I ask a lot of questions when I get a seller call: tell me about this house; what work have you done to the property? does it need any repairs? why are you thinking of selling? what will you do with the money from the sale? etc. At this point, I thank them and offer to get back in touch.

Depending on their answers, I may offer them different options. For example, if it is a listed property, I am likely dealing with a real estate broker. In this case, I may offer 10% down (to cover Seller's closing costs and real estate commissions), with payments over 120 months (assuming I believe I can cover these payments out of rental income).

If I am dealing with the Seller directly, my first offer might be 0% down, with payments over time. I might make at least three offers, if the Seller is willing to negotiate. See how this might play out below.
Mindset is important: Remember, we are not real estate investors, we are problem solvers. Zig Ziglar says, "Help enough people get what they want, and you get what you want."  Help solve the Seller's problems with your offers.

Before I make any offers, I might follow this seven-touch approach advocated by real estate guru Chris McClatchey. 50% of Chris' completed deals are done without advertising that he will be using creative financing. Here is his approach:

7 touch approach
  1. Gather info. why are you selling? Thank you very much I'll be back in touch.
  2. Set appointment; 
  3. Call to confirm appointment.
  4. Visit the house; speak with familiarity.  Let them lead the tour.  Make them feel in-control. Ask open-ended questions: "Tell me about..."  Ask what they need. Do not talk about price. Don't make an offer. Don't ask about seller finance. Do state: "I'm willing to give you more of what you are looking for if you can take some of the payments over time."  Make it a statement.  Redirect immediately to next question.
  5. After leaving call to ask a question.
  6. Set an appointment to discuss a "few options".  Don't do it over the phone.  The Sellers get choices, and it is much better to do in person. All people on deed must be there.
  7. Present three offers, if possible.
Here is an example of a 3-offer proposition, using $100K as the market value:  
1. low cash offer 65% After Repair Value (ARV) less repairs: $60,000
2. Small down (10%), 0% interest and balloon payment. $75,000
3. Full price.  No money down.  0% interest, balloon at 10 to 15 years. 
Here is another example of how this might work on a $100K deal:
Buyer to pay seller $500 per month for 120 months, on the 121st month buyer to pay seller $30,000 as payment in full.

As I mentioned, the monthly payment needs to be covered by cash flow. Average rents for similar properties in the area can be found using websites such as Typically, your first offer is a lower amount  so you have room to negotiate a bigger percent if needed. For example, you might offer 60-70% of Net Operating Income (NOI) for cash flow; 70-80% of NOI to pay off the loan quicker,

Make your offer what you want, not what you think the seller will accept.  Never assume what a seller will and won't do.  Ask for what you intend to have.

Here are some good scripts for your presentation of offers:
  1. I know this isn't what you're looking for.  Banks aren't lending, cash is at a premium, we have to be careful where we spend our cash. (Shake head no during this discussion.)
  2. I can give you a little more of what you're looking for, if you can take some of the payments over time.
  3. I can give you exactly what you're looking for if you can take payments over time.
  4. Which option works best for you? 
  5. I am sure you can appreciate that I make several offers every week. If another offer is accepted before this offer, then I may not be able to honor what I can do today. (Both deals). 
Offer deadline is the next day.  $500 to escrow as earnest money. 

1/3 of your prospects will accept an offer on the spot.  Leave the three offers behind for all of the prospects.

If you agree to a higher counteroffer- propose that the increase in purchase price is the interest, just simply rolling it into the purchase price.   

There are at least four ways to cover balloon payments at the end of a cash-out period.
  1. Refinance with a conventional mortgage at this time.
  2. Ask the seller to extend payments and payoff, with interest.
  3. Bring in a private lender.
  4. Sell the property and take a big profit.
There are some extra tips if you are purchasing multifamily apartments. As buyer, you should negotiate to close the transaction on the 7th of the month.  Here's why.

The Seller collects the rent that month.  

Let's say rent is $28,630 per month, prorated at $954.33 per day.  Times 23 days.  Equals $21,949 credit at closing to the Buyer for rent collected.  Then negotiate first payment due in 60 days.  $28,630 x 2= $57,260 rent collected before first payment to Seller;  equals $79,209 credits in the first couple months after purchase. Nice way to build up some cash reserves!

Tomorrow's blog will continue with tips on Negotiation.

Happy Holidays! Happy Investing!

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