The best opportunity comes around every 24 hours.
That’s the mindset I have when it comes to buying houses, and it keeps me from making non-profitable acquisitions.
When you have to struggle to make a decision on a purchase, you really have to take on the position of a “don’t wanter.” That’s right, a “don’t wanter” isn’t going to push the purchase price just to get involved in a transaction.
The key for me is to have enough opportunities to review and then select the best one. Another factor that is critical in any decision-making process is to know your exit plan for the deal.
Know your exit plan for the deal
In my business model, we have several exit plans after we acquire a house and we always know which direction we are going when we sign the contract. The negotiation for a property in part determines your exit plan. Currently, here is how we view our exit plans:
- Buy and hold for a long-term rental
- Buy, rehab and sell to an investor and then we manage the property
- Buy, don’t perform any work and wholesale “as is” to an investor
- Buy, rehab and sell retail
Recently I acquired a property located at 55 Bonds Court in Hiram, Georgia. I’ve copied the RealQuest report right here so you can readily see the initial information I had prior to negotiation.
Click here to view the RealQuest Property Report I had on this property.
The seller contacted our office and my knowledgeable personal assistant was able to obtain good information for us to make a decision.
It’s really important to let the seller come up with a price before making any type of offer. The first person who mentions numbers usually loses.
In this case, the bar was set at $55,000. The seller was hoping for this price with a property in bad condition. The house was currently occupied by a non-paying family member and I must tell you, the house was in pretty rough shape.
Here’s our pre-rehab video so you get the real picture of this property.
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After seeing the video, you know what I mean when i say “rough shape.” It needs a roof, A/C unit, kitchen, bathrooms, decking, landscaping, pool liner, septic tank inspection and everything else in between.
The best news for the negotiation was that the seller did not owe any money on the house. This is important because they can be flexible on price and the price is not limited by a mortgage balance. Also, they had no funds to repair the house, thus could never sell the house to a home buyer who required financing as the house would fail inspection..
So, when I met the seller at the house I had to determine my exit plan. Since the house had an above ground pool that looked like we could repair it for $5,000, we decided to sell this house retail. We don’t like to have pools in our rentals for liability and maintenance reasons. By looking at the comparable sales on the RealQuest report, we knew our ultimate sales price would be approximately $130,000 due to comparable sales and the extent of the rehab. You see the first rule for a retail sale is to determine what you can sell it for and reduce your gross profit by an commissions and all expenses of rehab. This is the only way you can formulate an offer that makes sense to you as the buyer, and also solve the situation for the seller.
As we walked through the house I asked questions that got the seller involved emotionally.
In sales—whether you’re buying or selling—it’s always smart to push those emotional buttons, good or bad, to lead the person to a decision.
Asking someone who is broke about how they are going to fix the house is a good start. It doesn’t hurt to point out damage and ask things like, “When you saw all this damage, how did that make you feel?” Of course they feel terrible, abused and used. But it’s important to drag this out of them, especially when you are the “solutions expert” who can solve their situation and make all this go away for them.
Upon reviewing the house and sitting down to discuss the situation, I made two offers:
- $30,000 cash
- $40,000 with $10,000 down and the balance payable at $350 per month until paid in full, payments starting June 1st.
I want to point out some important features of the second offer. This is a non-interest loan as we never mention interest, only equal monthly payments! It was also an unsecured note so no lien would be placed on the property.
I put language in the contract that they agreed to clean the entire house. They accepted my second offer and never cleaned the house out. Oh, she got a dumpster delivered but never put as much as a dirty dish in it. This cost will be deducted from the note amount that is due once I get my final cost to remove all the trash. I expect the cost to be between $3,000 and $5,000.
When I initially evaluated this opportunity, we started with a sales price to an end user (homeowner) of approximately $130,000 as follows:
- Acquisition cost $40,000 (less $3,000 for cleanout) – $37,000
- Rehab cost $40,000
- Closing costs on purchase and sale $2,000
- Commission (3% to selling agent) $3,900
- Miscellaneous (just in case) $5,000
- Total cost of purchase, rehab and sale $87,900
- Sale price $130,000
- Estimated profit $42,000
This estimated profit does not take into consideration any negotiation with the seller on their unsecured promissory note without interest. I expect to get an additional $5,000 discount as I assume they will have a greater need for a lump sum payment instead of payments over a long time. That’s a good reason for obtaining seller financing as you hope for the opportunity to continue to negotiate the transaction.
There is a good chance we will close this without the Realtor and save an additional $3,900.
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Anytime you can put up approximately $50,000 to make another $50,000- that’s a good day!
You can follow this transaction in my upcoming blogs as we will show the completed video as well as the outcome of the sale. More featured transactions are upcoming, so stay tuned. It’s a hot buying season so far.
If you’d like to see my actual contract to purchase, email me here.
RJ Palano
RJP@BuyCashFlowProperties.com
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