How to Negotiate Great Real Estate Deals

[CashFlowDepot]

DISCOVERING AND SATISFYING "NEEDS" INSTEAD OF "WANTS"

For me, the single most important thing I can discover is the real motive for selling or buying. Sometimes sellers, when asked what they want to achieve, act like kids in a candy shop who want some of everything. Anytime I perceive that the most important motivation for sellers is to make a profit, I usually refer them off to a Broker or another investor and try to glob on to some kind of referral fee or a future "favor". There's no point in both buyer and seller scrapping like dogs over the same profit-bone.

On the other hand, when I can see that there is a real problem that the seller is willing to sacrifice to solve at the expense of his profit, I will work hand and glove with him or her to find a workable solution. In doing this, it's important to segregate WHAT sellers really NEED -- and WHEN it's needed - from what they merely WANT.

Only by getting sellers to trust you will they open up. When sellers begin to finally explain why they're really selling, it's crucial to be empathetic if you can, and non-Judgmental. Only after you understand underlying problems can you begin to solve them. People usually sell a home for a fairly narrow range of reasons:

1. Financial reasons: They can't make their house payments -- or payments on other things they prefer to own. Or, they need to raise cash to pay for pressing expenses. They either don't know how to borrow money, or because of job instability, poor credit record, or lack of income, can't borrow it. We're not talking about poor people here necessarily. More often than you might suspect, a fellow investor may have borrowed too much personally, at too high an interest rate, and promised to pay too much, for a house that he can't or won't manage.

It's important to know sellers' time frame and the unfavorable consequences to them if a problem isn't solved. To solve financial problems, you have to discern whether a sale with a series of payments, cash, or a short term loan would work best; then you've got to start planning how an offer you might make would give you and them the biggest bang for the buck.

The sellers of one house I bought insisted that they had to have $10,000 in cash. After analyzing their financial situation, I found that what they really needed was $2500 plus an additional $300 per month for one year to clean up credit card debt. My offer was to give them $2500 in cash, take title subject to their current loan, take over their current monthly $440 loan payment and to lease the property back to them for one year for $140 a month rent. Afterward, they had the option of continuing to rent at fair market rents, or to move out. They stayed for 14 years.

2. Personal reasons: As Psychiatrists (and Bar Tenders) have known for years, sometimes, what people with personal problems really need is for someone to listen to them and point them in the direction of a real solution. In my experience, divorce is most prominent reason for selling, but death of an owner is also quite common. In almost every situation in which personal reasons are the motivation for selling a house, emotions can run high, so you have to be extremely careful to tiptoe through the mine-field of inter-family politics.

Associated with an unhappy event, the home becomes an obstacle to a cash settlement, requiring time and money that is in short supply. Sometimes, a neighborhood dispute or a barking dog triggers the desire to move. Or, school district lines are re-drawn; or a kid is promoted into a different school - or enters private school - creating a transportation problem that moving will solve. Or the family needs more room caused by the birth of another child; or the move-in of a returning adult child; or a parent. An accident can create the need for wheelchair access that the home can't provide.

In these situations, you need to be the soul of tact and discretion. You dare not be judgmental nor take any sides between the parties. You have to exude ethical and moral behavior because you'll be dealing with the deepest family and personal secrets that people have. Sometimes cash is an essential ingredient of any solution, but, where children are involved, being able to continue to occupy a family home rent-free can be just as important as income. This can easily be accomplished by giving a pre-paid lease to a seller as a part of the purchase price.

3. Professional reasons: A job change or promotion requiring relocation of a wage earner can create the need to sell a home. Sometimes, as a result of a promotion, higher level city employees must reside inside the city limits. People who are beginning to telecommute from their homes require space for a home-office, and access to cable internet. In some instances, zoning prevents operation of a home business, so people must move out of PUDs into other areas.

To the extent that you can provide a secure income stream sufficient for those who are leaving a home to be able to buy or rent another, when time is a pressing factor, sellers who must relocate are receptive to lease/Options, zero interest loans, single payment notes, etc.

By pre-paying an annual lease a year in advance, you not only confirm your bona fides as someone who is solvent, but also remove any uncertainties as to whether rent will be paid as promised. You also are providing money that can be for moving the family, making a down payment on a replacement house or paying rentals and deposits.

We live in a "now" vs. "later" society in which some sellers feel that they need all of the equity out of their homes before they move out. Often this is more a "want" than a "need", but sometimes the thought of leaving one home and not being able to find another within their means goes to their feeling of insecurity. In this situation, the deal you negotiate will depend on what you can do to allay these fears.

4. Social Reasons: A neighborhood's crime rate is increasing. Teenage gangs are forming-Closing of streets has created isolated pockets with poor access; or they may have turned serene neighborhood streets into high traffic throughways. A biker might have moved in next door and started making eyes at a teenage daughter. Perhaps their kids can't cope with school-ground toughs who extort their lunch money from them.

The techniques used to solve these problems where the seller needs to relocate to another neighborhood in the same city are similar to those used for out-of-town transfers. Sometimes I've had to help the seller negotiate for a lease/Option on a house in the new locale where he intended to relocate in order for him to accept my offer.

In another case, I created a single payment, non-recourse, zero interest Note for the purchase of a free and clear house; then I negotiated with a different absentee owner to accept the note in payment for a house that the original seller was willing to move into in the new area. A lot of work, but certainly well worth it by any account.

My negotiating objective is to always come away with a binding contract, or to refer this opportunity off to someone else and move on to another situation. It has been my experience that a decision that is delayed is a decision that isn't made. Beware when unsophisticated people depend upon others, no matter how ill qualified, for advice. Often, young couples want to talk to parents. Elder parents want to talk to kids. Naive people want to talk to their- lawyers.

Sometimes, when using cooperative negotiation techniques, sellers are influenced by other parties. You often discover this long after you've invested time trying to work out a deal. It pays from the very first contact to point out that you have the power and means to make a binding agreement and to confirm to your own satisfaction that the other party can do it too before proceeding further.

 

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[Frank C. Parker]

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