?Negoatiation Question/critique

5 Replies

So I've been negotating with a FSBO seller over the past few days and I wanted to

get some constructive feedback on things I could have done better.

Here's the story:

Seller posted house on Craigslist, looking for a quick sale. I got the address from

him by email and told him that I'm a hard money buyer and can close in 2 weeks

without an inspection contingency (but that I did have a financial contingency),

then I called him to find out what he was looking for, how much work it needed,

etc. to see if we were in the ballpark. On the phone I learned that he's a previous

investor, this is one of his last properties, and he owns the house outright. He

bought the house 23 years ago for 70k. It's gone well, but he's been trying to sell

off his properties as he's getting older and doesn't want to deal with it - it was

a good time for him to sell now because he's finishing evicting a family currently

renting. I asked him how much he thought it was worth, and he said he didn't know.

I was however able to find out that he was willing to part with it for 70-75k

without losing too much sleep over it. We talked for a bit more on the phone and I

feel as though we had good rapport at the end of the call. He invited me to come

see it the next day to assess the repairs necessary.

I showed up on time, another cash buyer was just leaving when I arrived. We walked

through the property and continued talking - I now know about his kids, and his

life, etc. - we continued building the relationship / trust. I estimate that the

place just needs cosmetics - about $15k in work. I left without giving him an offer

on the spot, since I still wasn't confident in what it was worth. He understood. I

said I would have an offer for him in the next two or three days once I had a

chance to have a realtor run comps for me. After I left he had a realtor come see

the property to get a feel for what it would be worth if they were to list it.

After another brief phone call the next day he sent me some comps that his realtor

sent him. Note: This property is hard to price (as are most I assume) because it's

on the boarder of this not so nice town, and a nicer town. That said, based on my

relatively inexperienced review of the comps, I estimate that the property would be

worth about 70k. It's worth noting however that should an appraiser pull comps from

the next town over (which I understand has happened on more than one occasion with

my realtor in that area) the place will more likely be valued at upwards of 100,

maybe 120+, it's hard to say. My realtor sent over comps last night, reflecting the

same.

So today I call him back and ask him if he's had a chance to review the comps, he

said yes. So I asked him what he thought the place was worth now (I just listened

to the Michael Quarles podcast so I was trying to implement some of those

strategies). He was reluctant to put out a number first since he said that was my

job, (he chuckled). I awkwardly talked him into giving me his estimate by saying

something along the lines of, I want to make sure that he's getting the most he can

- if he think he can get significantly more than I'm going to offer him, I didn't

want to insult him. He understood and said that he'd be willing to accept 75k again

(which isn't far from the comps, but it's also what he said he'd be willing to

accept before we knew what the place was valued at). So I repeated this number back to him, trying to do the "so you'd accept 75k...hmmm..." sort of in the way that Mike does it in the podcast, disapprovingly. I was quiet for a bit and let him keep talking. "Well I know that I can list it and maybe pull some comps from the next town over and maybe get 85k - after closing costs, I'll pocket about 80...so I'm happy to accept 75k cash right now" So I said, ok, so how important is it to you that you can close in 2 weeks with me, versus the property sitting on the market for an average of 150 days? He said it's important to him, that's why we were talking in the first place. I don't quite know how I got to the next point (I wish I recorded the conversation!) but somehow I didn't know how to move the conversation forward with him reducing his price, so I told him my strategy. As I write this I realize I shouldn't have done this, but I didn't know how to proceed. So I told him that at that price I'd only get $48k in hard money, and it wouldn't make sense to me to put in the extra 22k to close and another 15k to repair the place. He understood but didn't budge. We ended cordially - he said he'd call me if he changed his mind, but he'd rather just hold onto it and list it, but to call if I change my mind.

So about 2 hours later I thought about seller financing. The deal WOULD make sense to me at 70k if he held a note for 70 and I paid whatever closing costs there were, with a balloon payment of 70k in 2 years (after a refi). We'd had the conversation before and he said he wasn't interested in seller financing - he just wanted to be done with it. So I brought it up again as a way for me to offer him the full amount he was asking for. He sounded not ameneable to it, but I tried to explain it positively. "I know you said you weren't interested in seller financing, but it was my understanding that you don't necessarily need the money, you just want to be done with this now, and you don't want to worry about it anymore..." I told him that we could structure it however made the most sense to him, but it would make sense to do a 70k note, interest only, with full principal payment in 2 years (or sooner). I also said, if he really wanted to be done with it, he could then turn around and sell the note on the market (for a bit of a discount since it wouldn't necessarily be seasoned yet). The end of the conversation went that he'd rather wait the 3 months to get 75-80k outright, then get 50 now, or 75-80 in two years. I think in his situation seller financing would have made perfect sense to him but that I didn't explain the benefits well enough because I didn't want to seem pushy when I handled all of his objections. The one thing that I think would have helped would be to have this conversation in person, slowly to make sure he understood, but in the interest of time, I didn't do that.

At the end of the day, we hung up again on good terms and he said he'd call if he changed his mind.

Ok - that was way longer than I thought it would be. Any suggestions on how to do that better?

@John Matthews  

This as you know is a cash and/or terms offer business.

One of the terms offers might include a JV with the seller

You buy the house private 1st mortgage no payments for 4 months, then a payment of 400 PITI or so. Sales Price is $70K.

You get private money for the $15K rehab.  Interest might be $1000.

Costs to sell = 10% = 120 x .10 = $12K

JV fee of $10K

Sell for $110K 

- (16K rehab) 

- ($70K profit to seller) 

- ($10K JV fee to you)

- $12K costs to sell) 

= $2K wiggle room

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Negotiating Terms Deals - see http://www.biggerpockets.com/blogs/3-reiskills-and...

What was he getting on it as a rental?  It seems fixing and selling to a buy and hold investor might be an exit strategy.

I think if you can get that 75-70K in his head as a basis for a potential exit price, you might end up at a price that is low enough might work.

He doesn't seem motivated/distressed enough that it will get the deep discount to make it work as a flip.

One thing that might make the property attractive to a landlord is the potential for the neighborhood to take a turn for the better - assuming it is really there.

  

@Jesse T.  So I'm actually the buy and hold investor. The plan is to cash out refi in 6 or 12 mo. (I already have a lender in place.)

Though I agree, he doesn't seem motivated enough - but I do think I could have done a better job at figuring out why he wasn't interested in seller finance and addressing that issue, but I was afraid of being pushy.

At the end of the day, we ended on good terms, and he said he'll call if he changes his mind - not as good as getting the deal, but better than burning the bridge.

@Brian Gibbons  Thanks for the link, I'll be checking those out tonight or tomorrow.

One benefit is that he might be able to stretch out the recognition of the capital gains via an installment sales contract.  If he is selling off his portfolio the ability to spread the sale over several years might help keep from pushing him into a higher tax bracket.

I think you've done a really good job so far. Everything you've said about him to me makes me believe his hot buttons are to be done, hands washed of the property in no more than 3 months. He's said one of his options is to just list it and be done with it in 3 months, I think that is a telling piece of info. I believe at this point any strategy you approach him with must allow him to be done in no more than 3 months.

Next conversation you might want to pursue learning more about his time frame for washing his hands of the property so quickly, I'm sure he has a reason. Also focus on his alternative plan of listing it, is 3 months a realistic expectation? Can you shed doubts that 3 months really is realistic? If so this might give you leverage in your strategy.

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