People often ask me how I am able to get deals at the numbers I do. There is no secret to it, beyond simply thinking of the transaction from their point of view. The more you educate, the less it leaves for them to decode, and the more likely it is you are to get the deal at the price you want.
I know some people will grimace at this, but I always lay out exactly what my projected profit is on any given house and show it to the seller. I have some colleagues who purposefully try and hide or bury the numbers so they don’t shock the seller. I will explain the how and why in more detail here in a bit. Whatever your exit strategy is, frame it in a way that makes sense logically for a potential seller, and you will be well on your way — but first you need to make sure you are the investor that motivated sellers want to contact.
Be Comfortable Being Uncomfortable
In real estate there is a saying if you don’t feel uncomfortable with your offer, then you’re offering too much. Heck, I know an investor who ran his numbers on a house, and there was a multiple offer situation. The seller ended up selecting his offer – but he felt so guilty about his original numbers that he bumped up the price by adding another $10k on top, even though he was now going out of pocket and well over his maximum bid.
I’m all for giving sellers a fair deal and doing business with integrity, but let’s just say this investor’s profit margins were razor thin to begin with. This goes hand in hand with the other saying in real estate that you make money when you buy. The important point is to not be emotional and overbid like my friend here. Let your numbers set your guidelines and set a maximum offer before you go on the appointment. If the numbers work, they work; if they don’t, there will always be another house.
Offer Presentation Sheet
When I go on an appointment, I always bring with me an offer presentation sheet. It summarizes the transaction in plain English on a single page, in big font with just the numbers. It’s very easy to read, and I don’t try to hide anything. I show how much money the seller could potentially make IF they wanted to put the time and money into the house to bring it up to retail. So things like escrow fees, repairs (itemized), realtor fees, etc. are all accounted for in the net profit.
It allows them to make a comparison: “I could make X today if I sell as is, or I could make Y if I wait several months and jump through all the hoops necessary to get this thing on market.” And if you are dealing with motivated sellers, guess which option they typically go for? On a side note, if anyone wants an example of the offer presentation sheet that I use, feel free to send me an email.
Napkin Math vs. Offer Presentation Sheet
You have to remember from the seller’s point of view, the average insight they have into our industry is having watched house flipping shows. These shows are highly scripted and dramatized to begin with, and they utilize what I refer to in this industry as “napkin math.”
This is how it usually goes on TV: Joe Investor has a property he bought for $50k, he puts in $20k in repairs, and then they just show a huge pay off at the end, like $70k. Of course, those of us who are more experienced just roll our eyes – even if this was real (and it’s not), none of this is accounting for any holding costs or any of the additional fees I mentioned earlier.
This is the impression the average seller has of our industry – and most of them don’t buy and sell homes regularly enough for this to sink in. If you don’t educate them, then this is the frame of mind they will have. Not only does this educate them, but laying out my offer presentation in this manner really helps bring down the seller’s expectations to reality from TV land and is just another tool in my arsenal that separates me from any other investor who comes in after me.
Another good tip is to show how your net profit is typically spread over 3 to 4 months. When you break up the net profit in monthly chunks like this, people see you aren’t just making a huge chunk of change in one go, but rather over 90+ days. It takes time, and the amount you earn might even be equal to or less than what they do at their full time job, and that really helps put things in perspective.
Take the time to educate your sellers and put everything out on the table — and you might be surprised.
Investors: How do you educate your sellers?
Let me know with a comment!
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.