Being active on the BiggerPockets Forums, I see many different investors with many different strategies. I think most of us have seen those investors with one post who try to justify a clearly illegal or unethical strategy, get railed by members and then disappear. There is also a wide range of active members on the forum from the “squeaky clean” to the “do anything to get a deal as long as it’s technically legal”. I tend to be on the squeaky clean side for multiple reasons. I won’t debate ethics in this article, but I will discuss why I think being squeaky clean is more beneficial than being on the edge.
How to Invest in Real Estate While Working a Full-Time Job
Many investors think that they need to quit their job to get started in real estate. Not true! Many investors successfully build large portfolios over the years while enjoying the stability of their full-time job. If that’s something you are interested in, then this investor’s story of how he built a real estate business while keeping his 9-5 might be helpful.
Should You Ask For a Discount After the Inspection?
The tactic of using the inspection to get a lower price is used by many investors. When you buy a property off the MLS with a standard contract, I believe every state offers an inspection contingency. The inspection contingency allows the buyer to ask for repairs to be made, cancel a contract or make other requests of the seller. If the buyer cancels within the allowed dates, they get their earnest money back from the seller. There are always exceptions and HUD will not give the earnest money back to investors when they cancel due to inspection. Sometimes investors will offer more on a house then they want to pay for it, knowing they will ask for a price reduction after the inspection. Sometimes investors will actually find serious faults in a property after the inspection and have a legitimate reason for the price reduction or requested repairs.
I understand why investors use the inspection clause to try to get a better deal, but if it is used too much I think it can seriously hurt your reputation. I work in a suburban area with about 120,000 people within 10 miles; not huge, but not small either. I have been a Realtor for over ten years and most agents in the area know who I am or they know my father who has been an agent since 1978.
They also know that when we write a contract as ourselves or our corporation as the buyers, there is a 95% chance it will close with no issues. That means we don’t ask for inspection repairs, price reductions or try to sneak extra seller costs into the contract. It think we may have had an inspection issue on one house last year that we made an offer on. We found water in the crawl space that we didn’t see before we offered and we could not figure out where it was coming from. We told the seller we would have to cancel and they asked us if a price reduction would satisfy us enough to continue. We gave them our number, they declined and we both went our separate ways. That was a serious issue and both sides understood that with no hard feelings.
The cases where investors can seriously harm their reputation is when they make ridiculous requests on inspection items or always make a request. I know a few investors who will always ask for a price reduction after the inspection and I will tell my seller this information. I deal with many REO sellers and they hate it when people ask for price reductions after the inspection, even if it is a valid reason. When they see an investor ask for a price reduction we did highest and best with eight offers, guess what their response is? “Cancel the contract and go to the next highest offer”. Most of the time the buyer that asked for the price reduction will remove their request and the seller will continue with the contract. However, REO contracts/addendums almost always state the seller can cancel at anytime for any reason. If the seller wanted to, they can cancel that contract, even if the buyer decides to move forward without any price reduction.
What is a Ridiculous Request?
- I have had buyers ask for $20,000 price reduction and then give me a list of 50 items wrong with the house. All the items are extremely minor and it is obvious the buyer is trying to make as long of a list as possible to try and make his request credible.
- I have buyers list paint, carpet and appliances missing as inspection issues. Did they not look at the house before they made an offer? Did they wear a blind fold? If an item is clearly visible during a showing as being defective it should not be listed as an inspection item.
- I have had buyers use items that were clearly disclosed before they made an offer as reasons for a price reduction. If I tell you a house has an issue, you make an offer based on that info and then want the price reduced due to that issue, it makes you look very bad.
- Like I mentioned already, I have had investors who make a price reduction request on every offers they get accepted. Agents catch on to this, will tell their sellers and it may make it difficult to get offers accepted.
- I have had buyers make up things on inspection reports as well. Sometimes I will question a repair item, because I know there is something fishy. I ask for the inspection report to show what the inspector found and the buyer won’t give me the report. In some cases they do give me the report and there is no mention of the damaged item or the inspector states something like “furnace works fine, but needs cleaned”. Buyer interprets that as needing a new furnace.
It Doesn’t Hurt to Ask, Right?
In most cases it does not hurt to ask, but in some cases, like with inspections, it can hurt. As a listing agent, nothing bugs me more than thinking we have a done deal and then seeing a ridiculous inspection request come through. In our market (a serious seller’s market), sellers usually have more than one choice of buyer and asking for ridiculous items can make the seller mad. It can also make the listing agent mad and you want listing agents to think good thoughts about you as an investor.
Many people mention that their relationships with listing agents gets them a lot of deals. Those agents may send pre listing information or try to get an offer in for you before anything else is accepted. One way to stop any chances of that good relationship continuing is to make ridiculous or excessive inspection requests.
Excessive Complaining and Threats
I work with REO and there are always issues coming up with title or unknowns that can delay closing. I hear complaining and whining from agents all the time and I know some is coming from the buyers and some the agents. Some agents seem to think they are doing their buyers a favor by constantly complaining and bugging the listing agent. Please know we are doing the best we can and an agent calling us every day to say the same thing over and over does not improve the situation. In fact, it lessens the chances of us going out of our way to help a buyer or agent.
I know one agent who loves to threaten a lawsuit as soon as anything goes wrong. On one deal. she emailed me three times threatening a lawsuit in every email if the seller didn’t close by the contract date. I had mentioned to her when she made the offer that the seller usually does not close on time and it could take months (reverse mortgage foreclosure). She ignored those emails and continued to use the lawsuit card.
Finally her buyer decided to walk and we ended up getting a new buyer at a higher price who closed a month later. Did this tactic hurt her buyer? It probably did not hurt him in this deal, although I think he missed out on a great deal. If ever have that agent make an offer on one of my properties or a property I have listed I will remember the lawsuit talk. That is not something to be thrown around lightly as lawsuits cost time and money. It is wise not to use those threats unless you mean it and there is a valid reason.
If an agent who has used these tactics presents an offer to me, will I ignore it?
It is my job to present all offers and do what is in the best interest of the seller. If I think a certain offer has a better chance of closing than another offer, then I will disclose all information to the seller. Your offers may not be ignored, but I know the listing agent won’t push for your offer to be accepted either if you are known as a difficult buyer or a difficult agent.
I have had many offers pushed through by listing agents because they knew I would close. Many times those offers were lower than other offers or they had other offers they knew were coming in, but they got mine accepted first.
I was able to purchase a flip last year for $125,000 that was listed at $149,900, they had issues with closing on previous contracts and I promised them I would close. They knew my promise was good and I got the deal. I am not saying don’t ever ask for repairs or a price reduction, but make sure you have a valid reason. If you start to get a reputation for being difficult, it will cost you deals.
Photo: Jan Tik