A major difference between purchasing an investment property and personal property is the due diligence process. Typically, when buying personal property due diligence consists of hiring an appraiser and a home inspector. Personal home buyers depend upon other general experts to ensure their purchase matches its general description. An investor’s due diligence process should go much further.
Investors must verify cash flow. Remember investment properties are valued based on Net Operating Income, which is essentially income available after all property related expenses have been paid, and the Capitalization Rate (cap rate). The cap rate represents the risk adjusted expected growth rate over time. Older properties in secondary neighborhood would command higher cap rates because they have more risk and lower expected growth rates.
With that in mind, verification of Net Operating Income will directly affect the price that should be paid for the asset. In this vein, investors should look to understand and check every line item in detail.
Revenues
Rent receipts should be compared against actually bank deposits. Any unscrupulous landlord can produce receipts, but it is important to verify that the cash was collected and specifically when the cash was collected. This should then be compared to the in-place leases to understand if tenants are paying rent on time. These record should be easy to produce and easy to check. If you have problems at this stage, be very suspicious of the seller.
Don’t forget to verify ancillary income as well. Any cash collected from washer/dryers on site or use of specific facilities like a weight room or pool should also be verified against bank deposits.
Expenses
Like revenues, expenses should be verified with bank statements or cancelled checks. Unlike revenues, there is no rent roll to check expenses against. The only way to verify that all property expenses have been accounted for is to check against tax filings. For larger properties, investors will probably incorporate each building, making it easy to verify tax records. Smaller properties will require looking at the owner’s tax records. Some make balk at this request, but be firm. This is the best way to verify the income on the property.
Landlord must figure out a way to keep a tenant full invested in the property. The perfect tenant treats the landlord’s investment property like it’s their own personal home. Even if tenants pays the rent on time every month, how they treat the property can still make them very bad tenants.
The standard way to mitigate tenant damage to the property is to collect a security deposit upfront, typically one month additional rent. This deposit serves as insurance against property damage when the tenant leaves. Unfortunately, with this method, how much rent landlords collect directly correlates with how much insurance they can secure. Furthermore, the less a tenant pays in rent, the less invested a tenant will feel.
Landlords can turn regular paying tenants into perfect tenants with some create leasing agreements and good maintenance habits. As a caveat, always consult a lawyer before adding non-standard provisions into lease agreements. Assuming a state or city allows the landlord to put in minimum maintenance provisions, these can be extremely helpful.
Some landlords have even charged a below market rental rate, but required tenants to do all maintenance on the property. This strategy works well with established, responsible tenants. Be careful using these provisions with first time tenants because this gives tenants much greater incentive to simply defer maintenance. Landlords are often surprised by the conditions tenants can live in when they have to maintain the property themselves.
In the absence of any maintenance provisions, it helps to show an interest in the property. Being responsive to maintenance calls and checking in on a monthly basis to perform standard preventative maintenance shows tenants that a landlord is very invested in the property. Most tenants will value this and help maintain the property. Landlords should be eager to provide tenants paint and other light working equipment, if a tenant expresses interest in doing some upgrades to the property.
Some landlords offer bonuses to tenants that add additional value to their property. If a tenant consistently keeps the property in great condition or upgrades appliances, carpets or fixtures, that tenant has added significant value to the property at no cost to the investor. Encouraging this behavior with a gift card to Home Depot or Lowe’s makes the tenant feel great and further enhances the value of the property.
Regardless of the method, moving a consistently paying tenant to a true property asset pays significant dividends. With a very small monetary investment and a lot of thoughtfulness, landlords can improve their investment tremendously.
Investors that focus on long-term hold periods must become experts in tenant selections. Great tenants add tremendous value to a property, while poor tenants not only detract from the property valuation, but will also take years off of your life. Every investor that has been in the real estate business for a while can share a tenant nightmare story. Tenant selection is a mixture of art and science, so here are a few quick ways to stack the odds in your favor.
1. Standardize the Process: Start with a basic tenant questionnaire. Focus on questions like employment history and rental history. Before conducting any tenant interviews, familiarize yourself with the tenanting laws of your state. A variety of questions are illegal to ask and could potentially open you up to litigation from rejected tenants. Additionally, familiarizing yourself with landlord tenant laws of your state will make you a better landlord. Regardless of the area, always assume tenants know their rights. Many lawyers specialize in finding tenants with the sole purpose of suing landlords.
2. Credit Checks: Always run credit checks on your tenants. If you have a mortgage broker, they can traditional run credit checks for you for a nominal fee ($15-$30), which should be passed on to the applying tenant. Credit checks should not be solely used to approve or deny a perspective tenant, but they should add to the overall tenant story.
3. Rental History: Be careful when verifying rental history. Bad tenants will often get excellent reviews from their current landlords. Think about it. If you have a nightmare tenant that is looking to move to another location, would you do anything to prevent them from getting out of your property? Get around this by asking for their past three landlords or more.
4. Employment History: Look for patterns in employment or any major gaps. Great tenants keep jobs for long periods of time, have no employment gaps, and work for strong industries. Be wary of tenants in bad industries (e.g., autos) or in commission-based jobs. These types of jobs layoff often and traditionally these people have fewer savings.
5. Financial Statements: Secure monthly income and expenses. The most important items to note are the credit card bills. Watch out for tenants with significant revolving debt, even if they pay it off regularly. Factor in what rents you will be charging and the expenses that will be passed through to the tenant.
Tenants should not be approved or denied on any one factor. Perfect tenants are tenants that value your property as they would their own. The best tenants not only have strong scores in the factors above, but also have strong character.
For novice investors, a No Money Down strategy will look very different than it will for an experienced investor. The risks of a true No Money Down strategy are too high for investors just getting into real estate investing. While many novice investors started with this strategy in 2003 – 2006, 2009/2010 will not be a great time to secure these mortgages. Additionally, the high costs and high risks of this financing strategy make it a poor fit for the novice investor.
So what is a novice investor to do when they are short on capital? Take the traditional fundraising approach: Family, Friends, Investment Clubs and well wishers. Fundraising in this manner not only gets a novice investor much needed capital, but it forces him/her to critically analyze their investment opportunity because they have to present it in a compelling manner to their future investors.
There are critical rules to working with friends, family, investment clubs, etc. First, an investor should prepare clear terms and spell out exactly what will be done with any funding received. For example, if an investment property will be purchased for $100,000 and the money received will go towards the down payment that should be clearly stated.
Next, an investor should create a simple return structure. It’s easy for non-real estate people to understand a monthly cash flow and it’s easy for an investor to manage. Returning to the $100,000 example, if friends or family members commit $20,000 for the down payment, an investor should promise a fair return. Assuming a 10% return on $20,000 ($2,000/year), an investor should commit to paying $167/month and returning the full principal upon the sell of the property.
These agreements should always be in writing. This is a best practice for any investor and should be no different with friends, family, etc. The more structure and professionalism an investor brings to the deal, the more credibility he/she will have when pitching their investment. Be detailed about the role of the general manager and the role of the silent investment partner. It might be worth having a lawyer draw up a very basic boilerplate contract to use for future deals.
Investors should also try to under-promise and over-deliver. Never promise unrealistic returns or understate the risk of an investment to secure funding. This only serves to ruin your credibility and cut off future funding sources when the road gets rough. Real estate investments carry inherent risk that is only compounded by limited experience in real estate investing. Being honest and regularly providing information to financial backers helps the novice investor stay abreast of the market and their investment.
Friends, family, investment clubs, etc. offer great opportunities to connect with other real estate investors and secure additional investment funds. This No Money Down strategy provides capital and important relationships to help grow a successful real estate investment business.
“No Money Down…” A phrase widely used in infomercials and by many proponents of real estate investing. Does it exist; certainly. Is it a good idea; sometimes. Will it work for you; almost certainly not.
After 2007, many zero down financing programs dried up, making the possibility of purchasing an investment property with no money down challenging. Traditionally, no money down financing was reserved for investors who planned significant renovations to their property. For example, if an investor wanted to buy a $50,000 home, and then perform $20,000 of renovations, it would be possible to get a loan for $55,000 or more. The interest rate on these loans was usually significantly higher than a traditional investment loan, but it provided many buyers the advantage of securing property with no upfront equity.
Hard money lenders also filled the cash void for many investors before 2007. If an investor identified a good investment opportunity, they could secure a traditional investment loan (80% Loan to Value) and then get a hard money lender to supply the 20% down payment. Hard money lender traditionally charge rates above 10%, but again, they provide a way for an investor to secure an investment property for little or no cash equity.
While this strategy is high risk, it has significant advantages. First, none of these loans are recourse. This means that the only recourse the banks and the hard money lender have is the underlying property. This will certainly do a number on an investor’s credit rating, but their home, other investment properties and personal possessions will remain secure. As a quick aside, every investor should read every page of every document they sign. Never sign up for recourse debt, ever. Second, this strategy allows an investor to expand quickly. Depending on the investment strategy, this can be a great means of securing multiple properties fast.
Numerous risks exist with this financing strategy as well. Investors traditionally have to hit a homerun with a property to make this financing worthwhile. At a 12-15% interest rate and a short term maturity with stiff penalties, any hiccups in the project could totally derail the investment. In a rising market, this risk might be very manageable, but in a falling or even a steady market, this risk can overwhelm even the most experienced investor very quickly.
Like all financing, a No Money Down financing strategy is a tool. This tool is very dangerous, even in the most capable hands. Before an investor jumps into the No Money Down market with both feet, he/she should be well aware of the risks and expect to hit a homerun on their project.
For Sale by Owner (FSBO), a concept few sellers attempt, holds many potential rewards for the savvy seller. Unfortunately it also holds many perils for the seller solely attempting to cut out a perceived middleman. With the tactics any investor can learn from this very website, it should be easy to find a realtor worth their 6% fee. Before an investor decides whether or not this method of selling would work best for them, they should consider the following analysis.Strongly consider the value of your time and the expected cost savings of not using a realtor. On a $100,000 home, an investor will avoid costs of approximately $6,000 or 6% by not hiring a realtor. However, the investor will incur numerous additional costs that would be traditionally born by the realtor. Marketing fees can be substantial. After printing signs, flyers and putting ads in the paper a seller could be down $500 - $1,000.
Next, the seller must put an hourly wage on their time. As an investor, a generous number of $50 per hour is appropriate. Doing some very simple math, after marketing a seller can afford to spend about 100 hours of their time on the sells process. While that seems like a lot, its about 12 eight hour work days. The most basic property will require a minimum of two to four weekends of showings. After four days (2 weekends) of showings at six hours a day (2hrs. prep time, 4hrs. show time), an investor only has about 76 hours left. Add 5 -10 off hour showings and the time really starts to add up. This is before the buyer’s realtor begins requesting documents from you and the banks start calling. It’s very easy to spend 12.5 eight hour days selling your home. Most realtors spend the equivalent of that amount of time or more on a transaction. And remember, they do it for a living so they are much faster and generally better at it than you.
Consider the market you are selling into. FSBO properties work very well in strong markets when the seller has the upper hand. Conversely in a buyers market, the negative perception of an FSBO property alone could cost an investor 2-3% of the property value. Think about it from the prospect of a buyer. Owners typically know much less about the real estate market, have very little access to current market comparables and have completed far fewer transactions than an experienced realtor. That’s worth a 2-3% discount in most buyers’ opinions. Additionally, so many FSBO properties are poorly managed. Many realtors farm FSBO markets for this very reason.
Investors should also understand the scope and the value of their network before attempting a FSBO transaction. Realtors know buyers, sellers, other realtors, investors and other interested parties. They employ their entire network with the goal of selling this particular property. If an investor can’t think of at least 10 people to pitch their investment property to it might be time to call a realtor. Smaller networks mean it will take longer to sell the property. During this time an investor could be missing numerous investment opportunities.
FSBO transactions can work, but investors need to understand the risk and rewards.
Real estate can be an excellent buy and hold investment. Provided rent covers a substantial portion of the mortgage payments and operating costs, investors can simply hold a property and wait for leveraged appreciation to make them wealthy. While this seems like a deceptively easy strategy, buy and hold investors need to have a good understanding of finance and the market to maximize their investment.
Buy and hold investors make money on the buy. Since these investors are much less sensitive to short term market movements, these investors should try to locate up and coming neighborhoods. Neighborhoods with significant construction represent great opportunities to get in on the ground floor and wait. These investors should absolutely avoid the flavor of the month or locations that have experienced unexplainable appreciation.
Investors with a little more experience should consider major markets in a down cycle. Many major market experienced 40%+ declines in real estate valuations, with very little change in the economic fundamentals. Areas like Las Vegas and Florida in 2007, 2008 and 2009 could be prime targets for smart buy and hold investors. Investors that understand where the fundamental value in these areas is could purchase new homes at deep discounts with a great deal of seller concessions. These opportunities may help investors minimize the upfront costs and provide them with properties that pay for themselves. Again, buy and hold investors in major markets need an in-depth understanding on the historical market rent trends, economic/job growth trends and real estate pricing trends.
Another area that traps buy and hold investors is the holding period. Typically, these investors are overly concerned with selling at the height of the market. This presents two problems. First, many times investors wait too long and miss great buying and selling opportunities. Second, investors do not remember to maximize their interest and tax deductions.
Sellers should not try to time the market. Buy and hold investors should look to maximize the value of their property and then locate their next investment. As the market trend higher, sellers should begin to look for great buying opportunities. When an opportunity is located, the investor should considering selling or refinancing their original buy and hold investment. Buy and hold investors should be very familiar with 1031 Exchanges. Remember, buy and hold investors can cash out of their investment with a refinance or with a sell. Refinancing allows investors to maintain control of the property, increases their tax deductions and frees up cash to make additional investments.
Buy and hold investing should not be a passive pursuit of wealth. Actively managing a buy and hold portfolio yields more investment opportunities and the potential for much higher returns on investments.
Like marathons, real estate transactions seem to never end. Even at the closing table, the deal could be derailed by a myriad of issues. Despite these potential challenges, buyers need to stay focused until they take sign the papers and take the keys to their new investment property.
Before you get to the closing table all buyers should do a final walkthrough to ensure that any requested repairs have been made and that the property is in the expected purchase condition. Ideally, the premise will be unoccupied and you will be able to see the property free of furnishings and other miscellaneous items. However, if this is not the case, you should go through the property with a fine tooth comb. Remember, this is your last chance to save precious capital. Come prepared with a checklist of all of the negotiated repair items and the inspection report if available. Make a thorough list of items that have been neglected or items that seem to have fallen into significant disrepair since you last saw the property. The goal is not to be nit picky, but rather to ensure that the deal you negotiated for has been executed.
Your list should be hard and fast. While it may not be possible to repair all of the things you mentioned, the seller should be willing to negotiate a reduce purchase price based on the items that where not repaired as agreed to. At this point in the deal, your real estate agent will not be your friend. Remember, they are compensated based on a percentage of the selling price and their commission check is less than a day or two away. They will do everything in their power to bring you to the closing table, so stick to your guns if your needs have not been met. If the seller thoughtlessly left two garbage bags in the basement, that should not be enough to keep you from closing. However, if the seller said they would bring all electrical outlets up to code and those have not been fixed, that should be enough to take a step back. Again, it may not be necessary to hold up the closing, but it will certainly be necessary to get additional compensation in the form of a reduced purchase price. Use 0.5%+ of purchase price to decide if something is worth mentioning. This should include the time it will take you to get the item fixed as well. If it’s a small item that takes 5+ hrs of your time to get fixed, it’s worth mentioning.
Never be eager to close. It’s fair to be excited about the deal, but always remember that an honest penny saved is an honest penny earned. Don’t let your hard work go to waste by being too eager to get the deal done. Sellers are notorious for promising to do an enormous amount of work and then doing nothing because they know buyers and their agents make arrangements to move into the property immediately.
When everything is finally over, remember to send thank you notes to all the parties involved. Relationships are important and despite the challenges of closing a real estate transaction, business is business and people are people. Don’t mix the two up. Always remember, negotiate everything and do it hard, but fair.
After the first offer has been submitted, sellers will most likely come back to buyers with a counteroffer. Sellers will typically only not counter offers if they see the offer as being egregiously low (or high). In down markets, sellers may also be more likely to accept a well crafted first offer for fear of losing even more value while waiting for the next one.
If you have followed this guide and made a fact-based offer based on your returns and constrains as an investor, the counteroffer process will be fairly straight forward. Start the counteroffer by giving on some of the less important contingencies (i.e., shorter due diligence period, seller financing, etc.). Note, never give up the financing contingency. No matter what anyone tells you, bank supported financing is never a guarantee and even if you can cover the entire purchase price, your return on investment will be significantly negatively impacted. Again, NEVER give up the financing contingency.
Next, consider the price that the seller countered with. Is this is hard counter or a soft counter. Many sellers will try the nibble, countering with a 1-5% increase in price. Don’t fall for that. If a seller will sell a house for $105,000, they will probably also sell that same house for $100,000. Buyers should be looking for specific selling price increases because it might not be possible for a seller to sell below a certain price. There could be a recent second mortgage or refinance that you might not be aware of that has to be paid off at closing. While the seller and their agent will probably not tell you this, their counteroffers might betray some additional information.
After giving on a few of the lesser contingencies and double checking your original offer price against market comparables, consider putting up additional earnest money. Sellers will value a firm slightly lower offer with a strong closing potential higher than they will a high priced offer with a small earnest money deposit and heavy contingencies. Additional earnest money costs a small amount in forgone interest payments, but could save you 1%-5% on your purchase price.
When instructing your real estate agent to send your counter offer, ensure that he/she sends the market research that you have done as well. You want to communicate that your offer is fact-based and fair.
This strategy will vary based on the market conditions. In a buyers market, buyers should be prepared to give very little and expect to receive three or four counteroffers. In a sellers market, buyers should be prepared to ditch more of the contingencies (never the financing contingency) and do more market research. Avoid getting so wrapped up in the negotiation process that you fudge the numbers so that you can offer a higher price. Stick to your guns and wait for good deals.
Remember, not every seller or buyer is sophisticated and many make a lot of mistakes. If something seems to rich, it probably is. Stay fact-based and unconnected.
Many buyers solely rely on their real estate agents to negotiate their real estate deals. Regardless of how well a real estate agent performs their job; their financial interest does not align with the buyer. Real estate agents often argue that they have a fiduciary duty to the buyer and that their reputation is too valuable to sacrifice by not representing their clients properly. If this were truly the case, they would change the compensation system. The system has been designed to keep real estate prices high and all parties benefit financially, except the buyer writing the check, from higher pricing.
With that understanding in mind, the buyer should drive the negotiations. Start by arming yourself with market data. Many of these items should be provided by the real estate agent, but be sure to do your own research on/in the neighborhood. Potential investment buyers need to know what comparable properties sell and rent for. Next, they need to understand the current inventory and the average days on the market. Then, they need to figure out the trend of the neighborhood (new retails, more jobs, new developments, etc.). Finally, buyers need to try to understand the motivation of the seller. This is the hardest piece of the equation because many buyers never meet the seller or never get straight answers from the seller’s agent.
The information above should be used to determine a fair price for the property. Once an investor gets the value of comparable properties, these valuations should be adjusted for positive and negative trends in the neighborhood. If market rents seem to be declining or retail sectors seem to be trending down, comparable values might be too rosy. Additionally, if inventory in the market is high and days on the market have been increasing, potential buyers should take this as a sign that they have the upper hand in the negotiation.
Once a buyer develops comfortable around a potential offer price, they should verify their potential return on this investment. Investors looking to purchase stable properties should be looking for a return of 5-10% annually. If you buy a $100,000 home today, assuming no positive or negative cash flow, and sell the home in a year, you should be able to sell it for $105,000 to $110,000 (in two years, $110,250 - $121,000, etc.).
Buyers should also be generous with earnest money deposits. Sellers equate the size of the earnest money deposit with the seriousness of the buyers. Be sure before you send a check for the deposit, the contract contains the appropriate contingencies.
Finally, buyers need to consider what additional terms and contingencies they need in order to secure a painless (and costless) exit if they decide not to buy the property or to maximize their investment. Buyers should consider asking for seller financing, a 30-day due diligence period where they verify the financials of the property and the soundness of the physical structure, financing contingencies and anything else they can think of to address potential concerns. Even if these needs are not presented, they can serve as an alternative to price, should the seller prove unwilling to accept the initial offer.
Consumers have a variety of misconceptions around appraisals. The most important misconception is that appraisals represent a factual value of the worth of your home. Your home is worth what someone is willing to pay for it, period. Appraisals remain an important tool in the world of real estate because banks rely on that valuation to determine how much they will lend against the property. Following a few simple steps will ensure that you get the maximum value for you home.
Appraisers are certified to value properties. They go through fairly arduous training to understand how to ferret out the nuances that make each house unique, and therefore adding or subtracting from the home’s value. Despite all of this training, appraisers will not be able to see every piece of value you have added to your home. The first rule of dealing with appraisers is to be present during the walkthrough. You will be pleasantly surprised at how many questions they ask you and how helpful you can be in describing the cost of additions and upgrades that may not be apparent to the naked eye.
Before the appraiser gets to your property, prepare a simple list of any recent (past five years) upgrades or modifications you may have done to your home to add value. This can either be given directly to the appraiser or used as a guide when you walk through your property with the appraiser. Be sure to have accurate cost information because that does make a difference. A bathroom renovation that costs $5,000 will be more valuable than one that may have costs only $2,000.
During the walk though, politely point out areas that make your property unique. Only note items of significant value, as the appraiser will not be interested in the fact that your property has ceilings that are 1 inch higher than your neighbors. Note items like original hardwood floors that have been refurbished or new windows throughout the property. These items add real value and should not be missed in the appraisal.
Don’t forget to ask the appraiser questions as well. Appraisers are an excellent source of market information because they typically work around a few neighborhoods. Ask how your property compares to the average properties he sees and ask if there is anything you can do to add a significant amount of value to the home. For example, the appraiser may ding your home for having a roof that is 20+ years old and he may suggest a cheap alternative to a full tear down that could add significant value. This can be used later to bargain with potential buyers as they consider purchasing the property.
Think of the appraiser as a free resource or a guide to help you maximize your properties value. Not only should you be eager to help them maximize the value of your home, but you should seek information from them as well. Appraisers can be a true value added resource and cost you only a few hours of your time.
Sellers will make a lot of decisions when it comes to selling their home. The pricing of a home is probably the most important decision. Pricing is rarely as simple as looking at comparable properties and pricing your home accordingly. Pricing should factor in the sellers motivation, the market trends and potential buyer’s highest and best use of the property.
First, pricing should be considered in the context of why the seller is actually selling the home. Sellers looking to cash out of an investment to move to a new investment area with better growth potential have the option of refinancing. Rather then price a home on the lower end of the market; it would be an excellent opportunity to test the higher end because of the refinance alternative. On the other hand, if an investor plans to move across country and would like to liquidate their portfolio locally, it would be smarter to price the property more conservatively. This places a higher value on a quick, sure-fire sale and hopefully ensures you a worry-free move. By understanding your alternative to selling your property, you can make a smarter pricing decision.
Second, pricing should factor in market trends. Many times realtors will show you comparable properties currently on the market and suggest you price your property at the midpoint. Pricing is far more art than science. Before considering comparables, you should have a view on the market pricing trend. If the market is strong, shoot for a price on the higher end of the neighborhood and let the market catch up to you. Aggressive pricing is a good strategy in a strong market. Conversely, a declining market is the seller’s enemy. In this market it is often wise to price your home 2-5% below the comparable average. Many times sellers will begin lowering their prices in a race to attract buyers, often times well after the market has passed them by. Avoid this problem altogether by sacrificing a small profit for a quick sale. Chasing the market will ultimately result in you getting far less than the original perceived discount you are offering.
Last, consider the best use for your property. If you have been using your property as a rental home, but you notice a mix of new home buyers and investors coming to your neighborhood, cater to the buyer group that will pay the most money. While this seems obvious, it is often not an easy task. Investors traditionally want a blank canvas to work with, while new home buyers are drawn to homes with a bit of character. If you notice investors paying 5-10% more, remove all the furniture, paint the walls white and provide pertinent information on the rental market in your area. If new home buyers seem to be paying a premium, consider a simply staged home with a few local touches. Every little detail adds that much more to the offer price you receive.
Pricing is far more than looking at comparables. Realtors are out to close a transaction, so consider your motivation and drive the pricing process. Ultimately, it’s your bottom line.
Real estate transactions slant in the favor of the seller. The seller pays both agents commissions and both agents are rewarded for transacting at the highest price possible. Given these incentives many sellers select the agent that offers to list their home for the highest price, and then simply waits for the offers to come rolling in. Sellers employing this tactic are making a big mistake, particularly investors looking to sell their investment property.
Sellers should first understand that time is money. Even the best realtor will only dedicate two or three months to actively selling your home. Furthermore, realtors want to get paid. Commission based employees love to see a big check. From a realtors perspective, selling a $100,000 for 6%, nets them a commission of $6,000. Increasing the price by $10,000 only nets them an increase of $600. Given the challenges of getting to the closing table, most realtors value a quick closing more than they value getting the extra $10,000 for their seller that could take months to materialize. What means a lot to you, really only means a little to your real estate agent.
Always remember that you as the investor should drive the process. Hire great professionals and let them work for you. After selecting the best realtor a seller must prepare for the negotiation. Start by understanding your potential pool of buyers. Is your neighborhood an active investor community or should you position your property for new families? By understanding your potential buyer, you can shape your property into a blank slate, with subtle hints of character that might appeal to your audience. If you expect to have a lot of investors coming by, it might be helpful to do some research on rental rates and neighborhood occupancy details. Young families might enjoy a list of local parks and recreation activities gear towards family.
Sophisticated buyers will be armed with facts about the neighborhood and property values. You should know your property and know your competition as well as or better than the buyers. Shop your competition. It’s always helpful if you are able to comparatively list off details that make your investment property unique. These unique items should increase the value proposition of your property. While your house may be the only one on the block with a bird feeder, that will not drive traffic or stop a buyer in his/her tracks. On the other hand, if you can say my house is the only one in the area with newly refurbished hardwood floors, buyers might certainly take notice.
Check your emotions at the door. Creating a value proposition for the buyer means offering a superior product at a competitive price. Don’t be offended by low offers. Even low offers tell you something about the market and potential buyers mind sets. Getting more than one might suggest you are in a buyers market. Take every opportunity to seek to understand the value of your asset.
Real estate negotiators achieve their optimal outcome when they understand their needs and the potential investment opportunity. Negotiations should never be emotional, but rather they should always be rooted in tangible data.
Fact based negotiations keep everyone focused on the numbers and helps the buyer formulate an investment basis for the property. If you are seeking a 20% return on an investment property and you know based on the current rents and projected selling price, you can only pay x for the property, make sure that you can justify x is the appropriate price. If it’s lower, than this could be an excellent opportunity, but if it’s higher, then you have already set your maximum bid price. Stay focused on the numbers and never bid more than your research suggests you bid.
Novice investors also miss the opportunity to increase their market knowledge through their negotiation sessions. Sellers typically have a very good grasp on what is going on in the market. Regardless of the outcome of the negotiations, understanding where the seller feels the market is head in the next five years could provide value insight into future investments. Obviously sellers will be overly optimistic to achieve the highest selling price, but by probing a potential buyer could find out about potential new developments, retail or residential units coming online or going offline and a variety of other neighborhood specific items outside buyers might not be aware of.
While buyers should come prepared to negotiate based on facts and market research, they should also be prepared for a seller negotiating solely on emotion. Sellers have invested time and money into the property they are currently marketing and will always believe that they have the best property on the market. Many times sellers feel like a low offer is a reflection on their management skills or their skills as an investor rather than simply the prevailing market price. Never take anything personal and always stand behind the research.
Buyers should also avoid being overly concerned about what the seller paid for the property, but should request this information from their real estate agent. Buyers need to know what a seller paid for a property (public records that any realtor can provide) because it can help them understand if a seller might be holding a mortgage worth more than the property or if they might be underwater after paying commissions and other selling costs. Furthermore, sellers will be much more eager to provide financing if they receive a large settlement from selling the property.
Always keep the end goal in mind when negotiating. Buyers should consider price and terms when considering purchasing a property. Market customs vary, but always remember, everything is negotiable.
A strong return on investment starts with achieving the lowest purchase price with the best terms. Novice investors spend too much time solely focusing on price, at times to the determent of an excellent real estate investment. Real estate negotiations tend to be a zero sum game when the two parties solely focus on price. However, when consider items like seller financing, capital improvements, tenant removal, and others, both parties can come away from the deal better off.
Before thinking about negotiations from a buyer’s perspective, it is important to understand the motivations of the seller. A majority of sellers would like to get the best price from a buyer that can close quickly and without any major issues. Veteran real estate buyers can do their due diligence, secure their financing and close on a simple real estate transaction within 30-60 days. Sellers also prefer no contingencies, clauses in the offer contract that allow buyers to walk away from the transaction with their earnest money.
On the other hand, buyers want the lowest price and the ability to have the property under contract for as long as possible before closing. Additionally, buyers would like to be able to walk away from the transaction and receive their earnest money back if there is anything wrong with the property, their financing falls through or they simply find a better deal. This additional time also allows the buyer to shop the property. In extremely hot markets, it is not out of the ordinary for a buyer to put a property under contract, find another buyer at a higher price and flip the property before they even purchase it.
Buyers need more than the right price. Seller financing can be an excellent way to increase the return on your investment and conserve much needed capital for future investments. Seller financing is a deferred payment to the seller with interest. Since 2008, seller financing has been on the rise and should be a potential negotiating point for any real estate transaction.
Negotiations should always be fact based and unemotional. Buyers should enter negotiations with the seller armed with market data and a clear understanding of neighborhood fact patterns that justify their bid price. If all the comparables from the past six months show decline property values, then it is fair to say based on the trend in this neighborhood, your property appears to be worth x, not y. During the due diligence process, a buyer discover the tenant has been late with multiple payments or worse, the seller can not produce an accurate payment history, it is perfectly fair to say, due to concerns about the current tenant on the property, your property is worth x and not y.
Over prepare for the negotiation process. Do not solely rely on a real estate agent, whose interest is not aligned with yours. Remember, they are compensated as a percentage of the selling price. The higher the price, the more they get paid. Remember, the buyers perspective is more than just a low price.
Real estate is a relationship business. Investors work with a tight knit community of professionals that provide access to numerous on and off market deals. Novice investors rarely have access to the best deals until they have proven they can be reliable, knowledgeable and trustworthy.
A strong, constant flow of investment opportunities allows investors to focus on managing their current real estate portfolio. Creating a team of professionals that understands your investment criteria and provides you constant opportunities saves investors time and opens up potentially high return opportunities not available to the general public.
Investors should seek deals and deal makers everywhere. As a novice investor, it is extremely important to establish a niche and communicate that to all the professionals you encounter. If you want to specialize in single family rehabs in a specific area, let every investor, real estate agent, accountant, lawyer, etc. know that space is your focus area and that you are actively seeking investment opportunities.
Novice investors must establish a good reputation for deal making as well. By establishing a reputation for sound investment principles and fair dealing, an investor can build a solid standing in the real estate community. Traditionally, this takes time and commitment to an investment strategy.
Fair dealing does not mean being a soft negotiator, but rather it means doing what you say you will do. Every investor seeks to maximize their own returns and expects others to do the same.
Local investment clubs and real estate planning board meetings provide additional forums to meet investors locally. Networking with local professionals keeps you top of mind when investment opportunities arise.
