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Why 70% Of ARV Will NEVER Work For Wholesaling Real Estate

by Marcus Maloney on July 4, 2014 · 9 comments

  
Why 70% Of ARV Will NEVER Work For Wholesaling (And Finding out What Will...)

The reason investors use real estate as an investment vehicle is to become financially secure. I believe this statement encompasses 100% of the investors purpose for investing. That’s simple enough to understand now lets go a little deeper.

Emotions!

What if I can outline the psychology of how to use your seller’s emotions to put more money in your pocket would you use it?…Of course you would.

I have learned when buying or selling high ticket items emotions play a big part in making the final decision… Hint… for example the strategy of letting your seller do all the talking when you have them on the phone.

Related: Check Your Emotions At The Door, Newbies!

You are listening for motivation which is an emotion. Psychology says special organs within the limbic system recognize the patterns of events in ones life and respond.

Their signals trigger emotions, which instantly decide  attitudes and modify behavior(psychology today). By learning how to tap into the power of sellers emotions is a wonderful way to add… you guessed it more $$$ to your bottom line.

Psychological Detachment

One technique that is great (i’ll give you just one because this is my tool for leverage) is using the Psychological Detachment Technique (not a scientific term) or as those in my circle of influence call it PDT. By learning how to use this tool effortlessly during negotiations you will blindside the seller every time.

Using PDT will help you make more money on each deal. When introducing PDT, the emotional compass of the seller is turning in all different directions and during this time you must capitalize on every opportunity.

This technique turned a dead deal into an $11,000 gross profit in 1 phone call.

Right now you maybe asking yourself…

  • How is this possible?
  • How does a seller take an $11,000 hit?
  • This is impossible right?
  • What is PDT, and how is it used?

To answer these questions is simple leverage the seller’s deadlines.

As investors we are aware of all the moving parts there are in a single transaction. We are aware of the ins and outs of the transaction but many sellers are not. By being informed you are in a position of authority and you must exercise this authority. By leveraging deadlines it places a sense of panic on the seller and makes him/her less likely to challenge you during negotiations.

Going Deeper

Alright lets go even deeper, if you don’t know there are 2 major times of negotiating when dealing with a seller. The first opportunity to negotiate is when you are putting in your initial offer.

Related: BP Podcast 077: Negotiating Your Way to 1000 Wholetail Real Estate Deals with Michael Quarles

Wholesalers love to get the property under contract at the magical number 70% of ARV minus fees, repairs, and holding cost. Which I agree that is the magic number however, this number should not be your initial offer. WHY? because you are less likely to get the property under contract if your not a great negotiator. Try offering something closer to 80%, this will show the seller that you are putting a good foot forward and you guys are not just hung-up on numbers.

WOW!!! is right 80% of ARV will never work for a wholesale deal, and you are absolutely right, this is when you start to leverage your deadlines.

Ok, normally you will immediately want to market the property because you are on a deadline with the inspection period, but you have to remember usually you are not working with someone that is savvy about real estate so you can have a lengthy IP.

Use the first 2 or 3 days to bring  ANY traffic through the house your plumber, roofer, your business partner ANYONE (and it would be good if the seller is home). When walking through with your contractor you can point out flaws in the roof line, or some other possible damage.

This strategically places doubt in the mind of the seller, and you are starting to initiate PDT. A day later you can call the seller and make them aware of some of the concerns and inform them that you will have other contractors coming through the property to look at the areas you are concerned with.

For those who may think this is not showing integrity, you are honestly showing the seller things that you have concerns with and you are evaluating the cost.

Once you have firmly set those concerns in the sellers mind then you can  begin to re- negotiate and drive the price down. The PDT begins to set in and you are able to lock the property up below your 70% ARV and get rid of it to one of your cash buyers.

Do you have some interesting strategies to get more out of every deal.

I shared a tool in my tool box can you share one of yours? We would love to hear examples of how you were able to turn a dud deal into a diamond winner.

Be sure to leave your comments below!

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{ 9 comments… read them below or add one }

Winston July 4, 2014 at 1:13 pm

@Marcus Maloney

I don’t agree with situations where the investor purposely tries to get the seller to lower their cost. It would be one thing if there is really something wrong with the house, but to bring contractors with the seller there to intentionally lower the price is when integrity in real estate is gone just to make a buck. If the best excuse you have to is “For those who may think this is not showing integrity, you are honestly showing the seller things that you have concerns with and you are evaluating the cost.” Most times the seller already knows what the wrong with the house, shoving contractors in their doesn’t make it better.

Reply

Marcus July 4, 2014 at 4:51 pm

Winston,

Your sentiments are well taken, we do all deals with the highest level of integrity. I was highly aware that some people would oppose of this approach this is the reason I added the following statement “For those who may think this is not showing integrity, you are honestly showing the seller things that you have concerns with and you are evaluating the cost.”

We do not embellishing the cost of repairs, we make the seller clearly aware of normal rehab concerns any investor would address during the inspection period. We normally get 2-3 bids on jobs regardless of the degree of difficulty of the job. If the property is the primary residence the owner has to let us in the property, so they will be on sight during the walk-through. The psychology behind this approach is; the seller has detached themselves from the property once they sign the contract. Their focus is now on packing and finding another place to reside. The emotional attachment is little to none at this point, which is an excellent opportunity to present your concerns and reduce the acquisition cost.

Thank you for your feedback it’s always welcomed.

“Enjoying the Journey”

Reply

Kyle Hipp July 4, 2014 at 9:33 pm

Marcus, Do you do a number of properties in the same area? It would seem that you would auickly get a reputation of coming in at a higher price to get rud of competition and then talking them down with these repairs. Do you really not have a good idea of what the costs are on most things or is this primarily to affect the emotions of the seller? I think it would take away from your credibility if you didn’t know pretty close to most rehab costs…

Reply

Marcus July 5, 2014 at 7:49 am

Kyle, we have a general idea of the cost of rehab and we know what number will work for us, and we use this number as a negotiation tool. This approach is will not work for everyone, you have to be an excellent negotiator. The biggest part of negotiations after making sure it’s a win-win for everyone is to read the emotions of the seller or buyer.

We have a high close rate which helps the seller meet their need, we are a me to provide deals to our cash buyers at a great price which helps them, and our phone are continuously ringing because of the rate which is excellent for us.

“Enjoying the Journey”

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Dante Nava July 4, 2014 at 9:53 pm

I’m still a newbie, but one of the things I’ve learned to ask, pretty much always, is if they would be willing to sell for what they owe. I don’t present it as my offer, unless they say yes, but I always ask, unless it’s free and clear.

-Dante

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Marcus July 5, 2014 at 7:53 am

Dante- that is a great question to ask. You want to know if there is equity in the deal and you can start from there. Also when mailing this should be one of your criterias for your demographics 80% equity or higher is what I use and when the phone rings you basically are aware that there is possibly equity in each call.

“Enjoying the Journey”

Reply

john arpee July 5, 2014 at 4:48 pm

i tend to perceive this approach like a bait and switch. I’ve had my personal encounter with a customer representative of a financial institution when I was applying for a refinance on a mortgage.

I loved the initial offer, but then after all was said and done, he calls back to say the rates have changed. i hung up after i gave him a piece of my mind.

this post reminds me of that encounter and i promised never to do that to anyone.

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Jennifer July 15, 2014 at 4:19 pm

This article is shocking. How sad that you would instruct people to prey on people who are already struggling or in a difficult situation – why would you ever want to stress them out even more? We are in the business to help people – make their lives better as well as our own. We don’t mess with peoples minds to get what we want. Instead, we are honest, in our integrity and really walk the walk with our clients, from start to finish to ensure that they can get on with their lives with dignity. We are wildly successful and well known in our area. I sleep well at night.
I really hope that folks who read this article and are new to the business can see through your ‘method’ – I wish you the strength and courage to reconsider your approach.
Lets live in a world where we help one another – lift one another up. Not kick’em when they are down.

Reply

Marcus July 15, 2014 at 6:22 pm

Jennifer,

Thank you for your response, is it safe to say every wholesaler is looking to the property to the 70% ARV? Yes, some may do this in the beginning with their initial offer, then they bring their contractor in and then they negotiate other possible repairs, we do the exact same thing but at a higher initial offer and then during the ip we identify all repairs outside of our original scope. Which get us to the 65-70% of ARV. Same goal different approach

You ask where is the integrity? The sellers are aware that we will have our team to evaluate the work and if adjustments are needed then we re-negotiate as any investor would do. The sellers at this time is emotionally detached which making it easier to reach the number we are looking.

We do things in reverse which is a non traditional approach which creates a win-win for both parties.

We are able to communicate with all our sellers after each deal and receive referrals from them as well. We all sleep well at night and we are as well as our clients are pleased with our service. We are very transparent in all business transactions. Gauging sellers emotions are essential in negotiating.

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