In mid-2016 my educational coaching and mentoring business had been in existence for just under five years. At first, my team and I were seeing growth every year, but around the beginning of the fourth year, we started to plateau. By the end of the fourth year, we were declining. It was becoming very apparent that the pool of interested people we’d been able to cultivate was stagnating.
Undoubtedly, one of the trickiest things a real estate investor must master is the art of winning over a home seller. Both parties want to win, but a win-win situation isn’t always easy to achieve when you are working with an individual who is motivated by some external pressure to sell rather than their own personal preferences. Embrace the difficulty; fail to do so and you will soon learn that lesson the hard way.
In 2015, I was just beginning my post-military career with a major home builder in Houston after serving a six-year career in the army. Around the same time, my old buddy Corey contacted me to catch up and, in the process, introduce me to the world of professional real estate investing. Houston was experiencing a major housing boom due to the steady climb of oil prices and rise of urban development, and this was the perfect opportunity for us. At least, it was the perfect opportunity once I got out of my own way when I was working with sellers!
I remember losing a potential $35,000 profit over a $2,000 negotiation difference during my very first negotiation. That stung me, but I didn’t let my first failure affect us permanently. I did not give up, and neither did Corey, now my business partner. Instead, Corey and I learned from our experiences. Since that time, we’ve done a lot more deals (more than $3 million’s worth), both residential and commercial. At the end of the day, our success hinges on our ability to work with sellers productively.
Review the case study of our very first deal to get a crystal-clear glimpse into three lessons we learned the hard way.
Case Study: Betty’s “Better” Offer
Lesson 1: Trust, but Verify
My very first investment lead was an elderly lady named Betty. She wanted to sell her home, pay off her reverse mortgage, and move to a smaller house. To do that, she needed $220,000.
Corey reached out to a national home investor franchise to ask about exit strategy prices for properties in Garden Oaks. The franchise representative insisted that they would not be able to offer more than $220,000 for the property. We wanted to help and at least make a relatively small profit, however, so acting on that single representative’s information alone, we made Betty an offer for $218,000. She adamantly declined. Not long after, the home investor we contacted swooped in and closed the deal at $225,000, and he paid her moving expenses as well! We had basically been his unwitting “wing men” to make his offer look more appealing to Betty.
Here is our mistake: we neglected to verify and compare information from multiple sources. The next day, Corey called around to several local Houston investors to see if he could find a buyer who would take the house for more than $220,000. He acted as if we had the home under contract for different prices from $225,000 to $280,000 just to gauge each investor’s appetite for the home at specific price points. To our collective surprise, the house was a “screaming deal” at $265,000. When we tried to contact Betty to make a better offer, she was already signing a contract with the home investor franchise.
Lesson Learned: Real estate investment is a cutthroat business and investors who know the market area will always have the upper hand in finding opportunities and securing deals. Check with multiple sources to verify that the information you believe to be true is actually correct.
Lesson 2: First to Deal, Wins
While we were the first to contact Betty, we lost to the home investor because I did not have enough data already on hand. I was unable to haggle or meet the demands of the home seller because I did not have a broad enough frame of reference. Betty’s asking price was only enough for her to purchase her new home, and not for profit, so she should have been an easy seller to work with. I was not an easy buyer, however, because I did not realize how much “stretch room” I had to work with in order to make the offer attractive for her. I could have offered her what she needed, closed the deal on our first meeting, and both of us could have gotten “the win.”
Lesson Learned: Once you are “at the table” with your seller, find out the real reason behind the seller’s price. Then, work to find a way to accommodate it. Treat the negotiation as a dance, rather than a tug-of-war, and it should end with the seller feeling that they have won. Remember, second chances are rare, and there is always somebody ready to pounce on the deal you are looking at and offer a sweeter deal.
Lesson 3: Never Leave Without a Signed Contract
Always keep in mind that you do not have anything until the contract is signed. The seller can change their mind or someone with a better offer can call them up, and if you don’t have a contract in place, there is nothing to safeguard against this. We were ready to give Betty a better offer with the new information we gathered, but the home investor beat us to the punch and had a contract ready for her before we could make the counter offer.
Lesson Learned: Fill in the contract as soon as you finalize the deal. Move quickly to minimize the window in which your seller might use your offer to get a counter offer.
Successful residential real estate investing hinges on your ability to provide attractive solutions to home sellers. Keep your focus on the seller rather than on the property, or, as I like to say, “It’s not about the property until it becomes about the property.” Win the seller’s trust, do your homework, and close the deal fast before competitors get a chance to slip counteroffers into the mix. These are the cornerstones of successful residential real estate investing.