Getting a seller to accept an offer for his house that is lower than another offer can be done with a little pre-planning. Sellers are not always looking at the highest possible price for their house, despite their telling you that from the time you meet them. You must determine what type of offer to make the seller based on how you will sell the house later.
This "exit strategy" is critical to your offer because you may be able to combine your exit strategy with a creative method of giving the seller what he actually wants more than his price (i.e. knowing you will close, staying in the house for a number of months, cash to move, etc.). You can determine his true motive for selling if you listen carefully to what he says.
Sometimes an excited newbie investor will offer too much and have second thoughts, especially when he has been guru-trained to get the deed or contract above all else. Other times the perspective buyer will put a house under contract knowing he is not going to buy it, but rather wholesale it during the inspection period and not lose his deposit.
Clearly you need an exit strategy before you look at buying a property; otherwise you will be wasting your and the seller's time. As an investor you have choices, including:
Purchase as a rental property. If this is the reason, there is little decision about the offering price because the property will trade at a price to yield a minimum net rental income and return on principal to the buyer. The price constraint here is income on the property when rented.
The property can be wholesaled and in this case it is critically important to determine all the associated costs with rehabbing the property. Even though you won't be rehabbing it, your buyer will be and he needs to know he can make money, which limits the "spread" or dollar profit you can make. The price constraint here is about a 10% spread that the buyer will not "miss" if he purchases it from you to rehab.
The property can be rehabbed and sold to a retail buyer. With this exit strategy it is even more critical that the repair costs and true ARV are accurately determined. Also a rehab budget must be fixed so you don't over-rehab the house and not get a reasonable return on your investment of money and labor. The price constraint here is you can pay 5% more than a wholesaler would and still save money doing it.
The property can be chosen so that it can be wholesaled to a retail buyer which allows you to bid over every other investor. The guidelines are the property must not need more than two weeks paint and patch and you must have a strong marketing strategy to minimize your holding costs. The price constraint is very interesting because you have the ability to offer as much as 80% of Fair Market Value (FMV) and still make an excellent profit on the sale.
The last example for wholesaling to retail buyers is not for the faint-hearted until you learn the entire process of how to sell within a couple of weekends and have a buyers' list with motivated and pre-approved buyers ready and waiting. The true pros are using this method in these extremely adverse markets and making profits like in the hay-day markets of 2005.
In summary, to be continually successful, the investor must have an exit strategy based on repair estimates, what market he is selling to, and most importantly a sure-fire method of determining FMV. The usual methods of comparable sales, appraisals, Broker Price Opinions (BPO's), Comparative Market Analysis's (CMA's) no longer are accurate in many parts of the country and the method we use to overcome falling markets will be discussed in future articles.
The methods above are the primary methods to actually purchase the property and not discussed are lease options, options, and equity agreements.
