Real Estate Investing - Tips For Negotiating With Motivated Sellers
It's been said - often - that the best seller, from the perspective of a real estate buyer, is a motivated seller.
Now, anyone who puts their home on the market is motivated to sell - that's why they're selling! Some sellers, however, have extra incentives to sell quickly, and may be willing to give significant concessions in order to close a sale, and it's these sellers that are referred to by real estate professionals as "motivated sellers.
" For instance, sellers may be in financial difficulty and facing foreclosure.
These sellers are extremely motivated, because if they can close before the sheriff's sale they can avoid a host of problems! Other common motivating factors in residential real estate sales are death, divorce, and relocation.
Knowing that you're dealing with a motivated seller, however, doesn't automatically close a sale.
While it's true that you may experience less haggling over minor details from these sellers, don't assume that because they're motivated that they're going to be pushovers.
In today's market, especially, most motivated sellers are aware that they're a highly-sought class of sellers, and they'll be on guard against potential buyers trying to take advantage of them.
Remember that your objective in negotiating any deal - not just with motivated sellers - is to craft an agreement that's a "win-win" proposition for all parties.
Buyers who approach motivated sellers rapaciously, seeking to force them into a bad deal because of the pressures motivating them to sell, will earn themselves a bad reputation in a business where reputation is crucial to success.
The importance of due diligence A good investor will perform all proper due diligence prior to negotiating with a motivated seller - more, perhaps, than s/he might do for a traditional market-value sale.
To present a motivated seller with a win-win deal, you must know the motivating factor(s).
If your plan is to make an offer that includes 20% cash and 80% seller financing, for example, it might be perfectly acceptable to the seller whose motivation is his relocation to California, but the seller whose motivation is imminent foreclosure isn't going to be in a position to accept your proposal.
Part of your research should include determining not only the nature of the motivating factor(s), but also what will happen if the seller doesn't close the deal and how much money (realistically!) the seller expects to take away from the sale.
Thus, your offer and accompanying financing proposals must be attractive to the seller and must be tailored specifically to meet the seller's situation and needs.
At this point, I'm going to pass by the usual discussion of things like establishing rapport with the seller, making a lowball first offer, asking plenty of questions and trial closes.
These things are covered in excruciating detail elsewhere.
Likewise, my examples will be restricted to mortgage payoff and what's due to the seller.
Let's look briefly at some different possible scenarios associated with two types of motivated sellers: Foreclosure The seller facing foreclosure needs to get the mortgage paid as quickly as possible.
Putting together a proposal that will satisfy the seller should include exploring the possibility of a short sale with the bank.
There's a better likelihood today of getting the bank to approve a short sale because of the economy - it makes financial sense for a bank to take a loss on a property to get it off its books and eliminate the ongoing costs associated with vacant property.
From the bank's perspective, a short sale before foreclosure also avoids those costs as well.
This doesn't mean that banks are automatically accepting short sale offers, but they're more likely to entertain them.
Depending on the bank and their REO policies, you may be able to put together a good deal.
A problem with short sales is that in recognition of the fact that they're taking a loss, most banks won't enter into any deal that puts any money at all into the seller's pocket.
You're thus going to have to find creative ways to pay the seller, ways that won't violate the agreement with the bank.
A colleague in this position told me she advised her seller to have a yard sale, and then she had someone come along and buy everything on the lawn for $5,000.
If the bank won't take a short sale, then that portion of your offer is set.
The balance of your offer represents cash to the seller - some at closing, and some in the form of seller financing (that is, you pay off the mortgage, give the seller a lump sum at closing, and sign a note for an additional sum to be paid over time).
Here you need to take the seller's equity into account, but you can likely seriously discount it, based simply on the overall decline in property values.
The more of this amount that you can pay in cash, the greater the discount you can expect to take.
The less cash you can bring to closing, the greater the seller takeback (that is, a seller may be satisfied with $25,000 cash to him at closing, but if you can only bring $10,000 to closing, you may have to agree to having the seller take back a $20k note, meaning a total of $30k to the seller - because some of his proceeds are being deferred.
One of the main advantages you bring to the table here is speed - a quick closing.
If you cannot put together the deal quickly, it might be better to back out of the deal and let someone else take it - if the sellers wind up in foreclosure because you couldn't put the deal together, it will damage your reputation and you may miss out on other good deals down the road.
Divorce and Death (Probate) Whether the motivating factor is death or divorce, such sales usually are required to settle other financial obligations.
A divorce settlement may mandate the sale of the house to satisfy marital debt, with the balance being distributed between the parties.
Likewise, a probate judge may order the sale of a house to satisfy debt, with the balance being distributed among the heirs (from your perspective, this is called "probate investing.
").
In such a situation, the bank may or may not accept a short sale, but it's always a good idea to include that in your checklist of considerations when crafting your offer.
In negotiating these sales, don't concentrate on the overall offer, concentrate on how much the people involved will receive.
Especially in probate investing, there may be quite a few heirs, which means that by reducing the amount each one will receive by a relatively small amount, you can reduce your overall offer by a large amount.
For example, if an offer of $150,000 on a probate house consists of $100k to pay off the mortgage and $50k equity to be divided among twelve heirs (a not uncommon number), each heir will receive $4167.
If you reduce the offer to $140,000, each heir's share is reduced to $3333, a reduction of $834 apiece.
In exchange for being able to sell the house and settle the estate quickly, many executors will accept the offer.
Likewise, even though the proceeds of a house sale will only be distributed between two people, in many cases there might not be much left over after satisfying the mortgage and other marital debt.
It's always beneficial to keep your sellers aware of how they personally are affected.
Again, in all cases where you find yourself dealing with a motivated seller, part of your due diligence includes three critical questions: What is the motivating factor, what will happen if the property isn't sold, and how much money does the seller hope to gain from the sale? The answers to these three questions should provide you with sufficient information to craft a successful negotiating strategy.
Now, anyone who puts their home on the market is motivated to sell - that's why they're selling! Some sellers, however, have extra incentives to sell quickly, and may be willing to give significant concessions in order to close a sale, and it's these sellers that are referred to by real estate professionals as "motivated sellers.
" For instance, sellers may be in financial difficulty and facing foreclosure.
These sellers are extremely motivated, because if they can close before the sheriff's sale they can avoid a host of problems! Other common motivating factors in residential real estate sales are death, divorce, and relocation.
Knowing that you're dealing with a motivated seller, however, doesn't automatically close a sale.
While it's true that you may experience less haggling over minor details from these sellers, don't assume that because they're motivated that they're going to be pushovers.
In today's market, especially, most motivated sellers are aware that they're a highly-sought class of sellers, and they'll be on guard against potential buyers trying to take advantage of them.
Remember that your objective in negotiating any deal - not just with motivated sellers - is to craft an agreement that's a "win-win" proposition for all parties.
Buyers who approach motivated sellers rapaciously, seeking to force them into a bad deal because of the pressures motivating them to sell, will earn themselves a bad reputation in a business where reputation is crucial to success.
The importance of due diligence A good investor will perform all proper due diligence prior to negotiating with a motivated seller - more, perhaps, than s/he might do for a traditional market-value sale.
To present a motivated seller with a win-win deal, you must know the motivating factor(s).
If your plan is to make an offer that includes 20% cash and 80% seller financing, for example, it might be perfectly acceptable to the seller whose motivation is his relocation to California, but the seller whose motivation is imminent foreclosure isn't going to be in a position to accept your proposal.
Part of your research should include determining not only the nature of the motivating factor(s), but also what will happen if the seller doesn't close the deal and how much money (realistically!) the seller expects to take away from the sale.
Thus, your offer and accompanying financing proposals must be attractive to the seller and must be tailored specifically to meet the seller's situation and needs.
At this point, I'm going to pass by the usual discussion of things like establishing rapport with the seller, making a lowball first offer, asking plenty of questions and trial closes.
These things are covered in excruciating detail elsewhere.
Likewise, my examples will be restricted to mortgage payoff and what's due to the seller.
Let's look briefly at some different possible scenarios associated with two types of motivated sellers: Foreclosure The seller facing foreclosure needs to get the mortgage paid as quickly as possible.
Putting together a proposal that will satisfy the seller should include exploring the possibility of a short sale with the bank.
There's a better likelihood today of getting the bank to approve a short sale because of the economy - it makes financial sense for a bank to take a loss on a property to get it off its books and eliminate the ongoing costs associated with vacant property.
From the bank's perspective, a short sale before foreclosure also avoids those costs as well.
This doesn't mean that banks are automatically accepting short sale offers, but they're more likely to entertain them.
Depending on the bank and their REO policies, you may be able to put together a good deal.
A problem with short sales is that in recognition of the fact that they're taking a loss, most banks won't enter into any deal that puts any money at all into the seller's pocket.
You're thus going to have to find creative ways to pay the seller, ways that won't violate the agreement with the bank.
A colleague in this position told me she advised her seller to have a yard sale, and then she had someone come along and buy everything on the lawn for $5,000.
If the bank won't take a short sale, then that portion of your offer is set.
The balance of your offer represents cash to the seller - some at closing, and some in the form of seller financing (that is, you pay off the mortgage, give the seller a lump sum at closing, and sign a note for an additional sum to be paid over time).
Here you need to take the seller's equity into account, but you can likely seriously discount it, based simply on the overall decline in property values.
The more of this amount that you can pay in cash, the greater the discount you can expect to take.
The less cash you can bring to closing, the greater the seller takeback (that is, a seller may be satisfied with $25,000 cash to him at closing, but if you can only bring $10,000 to closing, you may have to agree to having the seller take back a $20k note, meaning a total of $30k to the seller - because some of his proceeds are being deferred.
One of the main advantages you bring to the table here is speed - a quick closing.
If you cannot put together the deal quickly, it might be better to back out of the deal and let someone else take it - if the sellers wind up in foreclosure because you couldn't put the deal together, it will damage your reputation and you may miss out on other good deals down the road.
Divorce and Death (Probate) Whether the motivating factor is death or divorce, such sales usually are required to settle other financial obligations.
A divorce settlement may mandate the sale of the house to satisfy marital debt, with the balance being distributed between the parties.
Likewise, a probate judge may order the sale of a house to satisfy debt, with the balance being distributed among the heirs (from your perspective, this is called "probate investing.
").
In such a situation, the bank may or may not accept a short sale, but it's always a good idea to include that in your checklist of considerations when crafting your offer.
In negotiating these sales, don't concentrate on the overall offer, concentrate on how much the people involved will receive.
Especially in probate investing, there may be quite a few heirs, which means that by reducing the amount each one will receive by a relatively small amount, you can reduce your overall offer by a large amount.
For example, if an offer of $150,000 on a probate house consists of $100k to pay off the mortgage and $50k equity to be divided among twelve heirs (a not uncommon number), each heir will receive $4167.
If you reduce the offer to $140,000, each heir's share is reduced to $3333, a reduction of $834 apiece.
In exchange for being able to sell the house and settle the estate quickly, many executors will accept the offer.
Likewise, even though the proceeds of a house sale will only be distributed between two people, in many cases there might not be much left over after satisfying the mortgage and other marital debt.
It's always beneficial to keep your sellers aware of how they personally are affected.
Again, in all cases where you find yourself dealing with a motivated seller, part of your due diligence includes three critical questions: What is the motivating factor, what will happen if the property isn't sold, and how much money does the seller hope to gain from the sale? The answers to these three questions should provide you with sufficient information to craft a successful negotiating strategy.