My team and I are currently in the middle of selling a few of our “fix and flip” houses.
Therefore, I thought a timely subject to share for the week would be home buyer motivation. Not all buyers are created equal and it goes well beyond the price and terms they offer you for your property. I hope to shed some light on what we have found to be the real motivators for home buyers to benefit all our fellow flippers out there.
First, let’s talk about why it’s important to have a motivated buyer. Listing a house and accepting a fair price is half the battle. Now you have to get it to closing. Un-motivated buyers can do various things to drag things out or take some money out of your pocket before you close. In my experience this shows up in two ways. Here they are…
(1) Cold Feet – In this scenario, the buyer will have a change of heart or they will get nervous about half way through the transaction. You will notice this scenario when the buyer becomes non responsive or they ask for extensions. Bottom line – they will find a way out of the deal. Most real estate contracts allow for the buyer to get out of the deal and get all their money back if they are not satisfied with the home inspection or they can’t get a mortgage. A buyer that has changed their mind will use either one of these clauses to their benefit to get out of the deal.
(2) Beating you up – Other un-motivated buyers will start to lose faith in the deal after the home inspection and instead of using it to exit, they will use it to try and get something out of you before closing. Don’t get me wrong, I understand the value of a home inspection and fully support home buyers doing what is necessary to avoid buying a lemon. That being said, home buyers that are un-motivated will not be willing to overlook anything in the home inspection report and will push for a financial concession over minor items. As a flipper, you are faced with two options – negotiate a concession or make the minor repairs. Both of these options will cost you money.
So now that we have established how an un-motivated buyer can drag down your deal, let’s talk about things you can do to make sure that your buyer is motivated and ready to move quickly to closing.
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Motivator One – Money
This is the most obvious factor and I would say it’s actually the least important. That being said there are a few things you need to look out for.
First off, get a prequalification letter from a potential mortgage lender. If you have a buyer that hasn’t bothered to speak with a mortgage broker yet, don’t waste your time. In this mortgage environment, there are too many factors that come into play in getting qualified for a mortgage for you to evaluate the buyer’s financial position on your own.
You need a mortgage loan officer to quantify things like credit, cash on hand, and income before you take a buyer seriously. Most realtors have these relationships in place so if you are going through a real estate agency they should be willing to get the buyer prequalified for you.
If you are a flipper and market houses without a real estate agent, get yourself a strong mortgage agent in your corner to vet out potential buyers before you spend much time with them.
The next money related item to consider is the deposit the buyer is into the deal and their willingness to increase it if asked. When I get an offer, if the deposit offered is less than 5% of the asking price I will ask them to at least double the amount of the deposit.
I am not so concerned about actually getting the request; I am looking to see how they react. If the buyer offers $2000 as a deposit, I will ask for $4000. I want to see if they are at the end of their rope in cash on hand and it’s also a good indicator as to how serious they are.
I will even do this for low money down buyers because if anything changes in their financial situation between now and closing they will be bailing out on us and using the mortgage contingency as an out. Most serious buyers will be willing to produce a few more percent of the purchase price to get your property.
Motivator Two – Current Living Situation
Buying your home is creating a huge shift for the buyer – they will be moving from their current location to your home.
You have the right to know their current situation, so don’t be afraid to ask your realtor of the buyer directly if need be. Knowing this information will give you a feel of the buyer’s sense of urgency to get into your house.
It answers two key questions – how much motivation do they have to move and how easy would it be for them to back out of my deal? We do business in Pennsylvania and New Jersey, where it is very hard to keep the buyer’s deposit without getting the courts involved. Making sure there are factors that keep them into the deal are very important when you can’t hold the deposit over their head.
If they are on a lease, ask when the lease expiration date is and if they have given their landlord notice. Even month to month lease contracts require the landlord to be given notice, so don’t assume that they can move in 30 days if they are on a month to month agreement. If they have not given notice, then your closing could be delayed depending on their lease terms.
If they own their home currently, you need to find out what they plan to do with that home. Are they selling and is it listed? Even better, it could be already under contract for sale which means they have a HUGE motivation to find a new place to live.
We had this come up just recently. One of our properties we are selling went into a bidding war between two buyers. They both landed on prices within $1,000 of each other, with closing dates around the same day. I did some digging with my realtor and found out their current living situation to “break the tie.”
Buyer A was living in a home they owned which was listed for sale. They had several offers on it but were not able to get to closing due to some repairs the house needed and were considering lowering the price to sell it quickly.
Buyer B sold their home 6 months ago. They were sitting on all the cash from the sale, and were living with a friend. The friend had 2 teenage children in a three bedroom house, and Buyer B was dying to get out of there. Sold.
As you can see, where they live and what the factors are in their move are extremely important.
Motivator Three – Why are they Moving
Finding out why someone wants to move is a harder factor to get out of people, but it’s best to start by just asking outright.
You may not get the real answer the first time so you may need to probe a bit to get to the real motivator. Things like we like this neighborhood or we wanted a house with a bay window are not the real whys.
The real answer to why they are moving should have a real impact on their quality of life. In addition there may be a time factor associated with their true reason for moving, which is all the better for you. Here are some real why’s I have heard when selling a house to a truly motivated buyer:
“I am from out of state and got a job transfer to this area” – probably a time motivator in there for when the job starts, and maybe a relocation allowance depending on the company. Sold.
“We have a child that we want to get into the local school system in this town” – We normally choose areas with good schools when we look for fix and flips for this very reason. I am a parent as well and I understand willingness to sacrifice for a child’s education. Sold.
“My spouse and I are getting older and we wanted a house that was all one level” – The US has a population that is aging and house flippers should consider that older generations don’t want to climb stairs all the time in their house. These buyers probably bring a large amount of equity to the table also as they are selling their large home that is no longer practical to them. Sold.
“I am from this area and all my family lives within a few miles of this house” – There is nothing like some family around the corner to some people. If they have children, there is an additional motivator in there also. Sold.
Some of the worst home buyers to deal with are ones that don’t have a solid reason why they are moving. The most common reasons that I believe are inadequate are:
“We just got / are getting married” – Sorry newlyweds. I don’t like selling houses to them for two reasons… First, they don’t have a real motivation. They can wait until they find something they like, live in an apartment, rent to save money, etc… Their situation typically allows for flexibility. The second reason is it is most likely their first time buying a home and they will bring in the family “expert” to help them evaluate the home. I have had more deals killed by the handyman father in law or plumber uncle than I care to remember.
“It is a good investment at this stage in my life” – Beware of the buyer looking to buy because of the financial benefit that comes with owning real estate. I have found these buyers to request the most repairs after their home inspection and ask for concessions right up until closing, all because they want that good deal. Their emotional tie is to the deal not to the house. You want a home buyer that is attached to your home and how it will benefit their life first and foremost. Financial benefits should be a far second to that.
In conclusion, I hope I have given some food for thought. The next time you get a buyer for one of your fix and flips, be sure to look beyond price and see what is really motivating them.
To your success!
Thanks for reading,