I believe one of the toughest skills to master when you are a brand new real estate investor is negotiating. This is such a critical part of our business yet for most of us, it is a skill we ultimately master through trial and error. Can you learn to negotiate like a pro? Absolutely!
Typically when you have that initial phone contact with what you hope is a motivated seller, what you are likely to find is someone that has a preconceived notion of how much they want for the house. Whether or not this value they have placed on the property has any factual basis or not, rarely matters to the seller.
In most cases, your job as a real estate investor will be changing their expectations. So how do you do this?
Changing Their Expectations
You will need to get skilled at guiding them from point A which is “what they believe they are getting from the sale” of the house, to point B which is “the amount you are willing to pay”. There is usually a substantial difference between points A and B.
I have found that this is a process that generally happens over several different conversations. For instance, when you first speak with them on the phone this is when you usually get a feel for what they are asking for the property. It is during this conversation that I get all of the property information as well as detailed information about the condition of the property and the major systems.
If the sellers tell you an amount they want for the house, I always ask them how they got that price. My next question is always, “Is that the best you can do”? At this point I will remind them that the house needs a lot of work based on what they have told me, and I point out that I know they understand just how tough the real estate market is at this time. It’s also a good time to tell them that you are a cash buyer, not a Realtor willing to place a higher price on the property while “hoping it will sell”.
If after speaking with the seller I determine that I am interested in the property, I set up an appointment in the next day or two to take a look at it.
The Property Inspection
During the property inspection, you will have another chance to begin a conversation about the price and to change the seller’s expectations. If you have found additional items that need repair or replacement that weren’t previously mentioned, you will also be able to use these as a negotiating tool.
You should have already done your homework and have comps for the area for this meeting. It will help reign in their expectations if you know what homes are selling for both to retail buyers and also what investors are paying for houses. You just need to tell them this is the “range” in which they are selling. The sellers will realize that you are knowledgeable about home prices in their neighborhood.
I go over with the seller once again all of the work needed to get the house into the condition where it will sell quickly. At this time of year, I will also mention things such as the need to leave the heat on which will result in high utility bills. I have found times when this is the one thing that changes their mind and they lower their price. This is particularly true if they cannot afford to pay utilities for a second house.
Still no agreement on price. What’s next?
At this point I just shake hands with the seller, and I tell them I will go back to the office and look over the numbers once again and give them a call back. Then I wait a few days. I want them to “stew” a little bit; I want them to become more flexible on the price. Remind them once again that you are a cash buyer.
After a few days have passed, I give them a call with my offer. I always leave myself a little bit of “room to move” in my offer, so my offer will be a little below my MAO. The reason I do this is so that if they come close enough to what I want to pay but still want to have the last say in the negotiation, I can let them have this “win”. And a lot of times this is the way it ends. At other times they simply say OK to my offer, and I net a little bit more out of the deal. I’m happy either way.
Always Leave the Door Open
If you just cannot agree on a price that works for both of you, always leave the door open. Wish them luck and say that they can call you back if things don’t work out as planned. You will be genuinely surprised how often you will get a call at a future date if you exit the negotiations gracefully.
