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In this Episode of the Discount Property Investor Podcast David and Mike talk about negotiating with motivated sellers. They give lots of time and tricks to getting the deal done. Negotiating with motivated sellers can be fun and easy. Don’t overthink it. Keep it simple and be yourself
Things you will learn in this episode:
- Software that Dave and Mike use to run comps and pull-list
- Negotiating with Motivated Sellers
- What to do when you’re talking to the seller
- How to sound professional when it comes to negotiating
- Ways to build the seller’s trust
- Determine the level of the seller’s motivation
- The When reveals the why
- Tricks to getting the deal done
- How to ask the seller why they are selling
Links mentioned in this episode:
David: Back. We’re back We are back. Hey Mike, good morning
Mike: Are we back?
David: We’re back
Mike: Alright let’s do this
David: Yeah we’re back
Mike: What are we talking about today, Dave?
David: We are going to talk about negotiating with sellers
Mike: Ooh, I like it
David: Let’s jump in, we haven’t done a podcast on negotiating with sellers
Mike:Alright, so let’s talk about when you are initially on the phone with the seller first. Ok so what do you do when you’re initially on the phone?
David: When you are initially on the phone you want to- I always start with getting their name and a good call back number because sometimes people will hang up, sometimes calls drop and often whenever somebody is calling us, we’ve spent money to get that phone call.
Mike: Oh, 100%
David: We spent money to get the phone ringing, so we want to capture the name, phone and address. Number one every time
Mike: And most likely you’ve spent money on them as well. Again these are leads coming into your business. First of all, first and foremost, new investors, pick up the phone that’s the most important thing
David: Yeah, pick it up and if you are not, you’re throwing money out the window
Mike: We are throwing your hard earned money out the window and you’re potentially losing out on a deal. So what you’re doing when you’re talking with the seller-
David: Try to get their email address first too, just cause that way you can send them an offer later. And sometimes they may not like it but you still want to send it, if you have the email in advance before you give them the offer amount, you’ve captured it
Mike: That’s right
David: Doesn’t have to be right away but make sure you get the email before you send the offer or make the offer verbally, I think
Mike: So the other thing is, you sound a little bit more professional or more like a company if you’re asking for those things right away too. So you say: “hey what’s a good call back number, if we got disconnected” You sound professional, again it sounds a little bit more like oh this is a person that’s serious about this, like I didn’t just call some random guy who’s looking to buy my house. This is somebody who is, again, a little bit more seriously interested. So these things, they’re very very minor and they’re very little things but your attempt is to build rapport. You’re trying to start a relationship with the seller at this point, most likely this seller has a secret and they don’t want to tell you, and most likely the secret is: they’re in trouble or the house is in trouble and people are not forthcoming with that. They don’t want to be, so you have to create a friendship, create a relationship with this person. Figure out what their secret is and figure out how you can help them. So that is my painting your first objective when you’re on the phone is to make a friend, so get their contact info, gain their trust, make a friend. That’s really what you’re trying to do when you are first on the phone and this puts you in a better position to then negotiate with the seller. Again, that’s all what I was talking about kind of digress but that’s where I was going with that, is you want to create a relationship so that you can negotiate.
David: You have to, you gotta create a relationship. Well, you wanna make a friend. I always say that you wanna make a friend with whoever’s calling you. Again, you’ve spent money to get the phone ringing and you want to build trust with them because you want to be able to help them. I mean, that is the name of the game here. We’re not really buying houses, that’s actually a side effect of solving problems. So we’re trying to solve a problem for them, whichever that might be, and in return we get a great deal on home that we can either add to the rental portfolio, we can flip it, make 20/30 grand, wholesale it, maybe even go there sometimes and make a quick five or ten, lots of options.
Mike: I think what a lot of people miss in just business in general, is that your goal is to add value.
David: Oh man, people forget that
Mike: Yeah, no matter what you’re doing, if you’re not adding value to someone, they’re not willing to buy the service. They’re not willing to pay you, they’re not willing to sell you the house. In this case, buying their house is the service that they’re buying from you.
Mike: Or selling you their house is the service they’re buying from you. So, again you have to add value to that person in some way. You have to make it easy for them to sell or you have to make it comfortable. You have to, again you’ve got to- it’s a little bit different, most people don’t buy and sell houses that often.
David: That’s right
Mike: Most people don’t have experience with it so you need to be their guide. You have to be the expert voice for them.
David: You gotta. Okay so let’s talk about the leads coming in but I really wanna make this episode about the negotiating process. So when the leads come in, you wanna get their name, their phone number, their address or the address of the subject property, maybe an email, maybe not right then and there but get that later for sure and then you want to build rapport with them. You want to let them know that you are here to help, that you can solve a problem for them. Next, you want to figure out why they’re calling you. I think that’s really really important. Ask, you know, why do you need to sell? If they want to sell or there’s tire-kicking or shopping for offers. That’s fine
Mike: It’s such a simple question
David: Give them an offer range or an offer amount, but you really are there to figure out why they’re calling you. You wanna determine and this is really just a simple tool to determine their level of motivation. If you ask somebody: why are you selling? and they say that it’s not your business or they’re not comfortable sharing it. That’s fine, ask them when the wind reveals the why. I absolutely love that. The wind reveals the why. So let’s do a little role play. Mike, why are you selling?
Mike: I don’t really feel comfortable telling you that, Dave
David: Ok that’s fine, no problem. I’m here to help. When would you like to close though? When do you need the money? Do you need it next week?
Mike: We need to close by the end of next month because the estate has to be closed out by then.
David: Boom! There’s the why: because the estate has to be closed out. It doesn’t matter what it is, they’re basically going to tell you or you can just kind of dial down like: why do you need the money next Tuesday? And oftentimes you’ll hear something crazy like: I’m going to jail on Thursday so I need the money. So it’s like boom, now you have just identified their level of motivation. If it’s not high, maybe not spend a long time on it, but if it is high, drop what you’re doing and go look at the property, start analyzing it.
Mike: Yeah, so it can go another way too. Roleplay. So if Dave would ask me again why and I say I’m not telling.
David: Mike, why are you selling?
Mike: I’m not really comfortable telling you
David: Well, when do you need to close?
Mike: I’m not in that big of a rush, you know, sometime
David: Okay sure. Well, we’re typically buying properties in this neighborhood for between 80,000 and 95,000. Is that gonna be in your price range?
Mike: Oh man, that seems really low
David: Ok no problem
Mike: I saw one down the street that sold for 300
David: Oh wow, yeah well, that’s just not gonna work for us but if you like, I can call you back in a couple weeks and see if things have changed.
David: Boom, I’m not wasting time dealing with somebody that’s looking for retail. Guys, we are in the wholesaling niche in the real estate investing business and you have to buy right. What’s my favorite saying? You make your money when you buy, you get paid when you sell. So I’m going to keep reiterating that. You got to get a discount. But really though, simplify this again, somebody the other day said they really liked this, so I’m gonna run with this for a second. But what wholesalers do is they provide liquidity to the marketplace, that’s really the main thing that we do and how do we do it? We trade these owners, these property owners or these sellers, we trade them convenience for a discount. That’s it, that’s all we’re doing. We’re trading convenience to them, we can make their life easy meaning we’re going to buy it with cash, we’re going to close quick and they have to do no repairs so it’s gonna be an as-is purchase. That’s the convenience that we are offering, we don’t offer that convenience for retail. Why would we? There’s no money in that so I make it very clear when I talk to sellers that I can close quick and I can buy it as-is and I pay cash even. Right, which really just reiterates that I can close quick but I’m not going to pay retail and I can’t help them in terms of offering them that level of convenience for a discount. Well then, I’m not interested as the buyer, wanting to buy that property
Mike: And that goes back to the value proposition I had mentioned earlier. Again, Dave’s value is : I can close quickly, I’m a cash buyer, I can help you, I can help you sell this house fast.
David: Yeah, that’s the value
Mike: That’s the value and if that’s not a value to them, you won’t do the transaction.
David: It’s not worth it
Mike: So again, there has to be a motivation there for them to sell either quickly or as-is or whatever
David: Love it. So, build some rapport, ask them why. If the why doesn’t reveal the why, then ask the when which will then reveal the why, ok? And then next, what you wanna do is you wanna run comps. You always wanna run comps next and you want to determine the ARV, so we use a simple formula called the maximum allowable offer formula. If you’re familiar with it, it’s very simple: its maximum allowable offer = ARV x 70% which can vary a little bit minus your repairs and then minus your wholesale fee. So in order to get an offer, we gotta know what the ARV of the property is. So you want to run comps and determine what the ARV is. Again, you were looking for like properties when you’re doing ARVs, you wanna look for properties that are similar in size, very close in proximity and have the same number of beds and baths. Also you want to look at the updates on those properties, you can’t compare a newly rehabbed property to one that needs 50 grand again, after repair. So you want to find the ones that have already been repaired to determine your ARV. Next, we multiply that by 70%, again, that’s why you need to have a motivated seller. They need to be willing to sell knowing that they’re leaving 20/30 and sometimes even 40% on the table because they want that convenience that you’re offering. Again, we’re trading a discount for convenience so if you are not given a discount, why would you want to provide convenience to them?
Mike: Doesn’t make sense
David: Very very simple, alright so then next what we want to do is get our ARV x 70%. Next, we want to subtract our repairs. Now you may have to go to the property to get the repair estimate or you can just estimate. Typically we will tack on anywhere between 15 and 30 dollars a foot, depending on how good or bad the seller describes the property. And then last but not least, we subtract out an additional 5,10 sometimes even 15000 for our wholesale fee and then that is the offer that we make. Now, we have spent 10 minutes talking about getting to this point but this is about negotiating. So now that we have made our offer, we have to start negotiating. Sometimes, and this is a numbers game folks, sometimes your offer will get accepted by the way and there is very little negotiation. One thing I missed about the MAO is the M. You want to explain that? Maximum part? Good.
Mike: Absolutely, so the M is the maximum offer you can make.
David: Love that
Mike: So Dave walked through it for us, he said- and let’s do an example here real quick. I use round numbers so let’s say 100,000 dollars is our ARV, our after repair value, the property, the most it’s gonna be worth is 100,000 dollars. Let’s use our discount rate David mentioned you’re gonna multiply it by 0.7 or 70% so now we’re at $70000. Then we’re going to subtract our repairs, let’s estimate the repairs around ten thousand dollars and let’s add our wholesale fee of 10,000 as well. So we’re gonna take off another 20,000 dollars, so now we are at 50,000 dollars for the property that is the max you can pay guys. You cannot pay more than that or you will not make your wholesale fee. You will not be able to sell it to your cash buyer
David: Yeah, so basically what we do is we take our MAO, that max number and we subtract 10/15/20
Mike: Another 5, 10, yeah
David: It depends on the price, if the price is only 30 grand, you can’t take 10 off. It’s gonna be too low.
Mike: Exactly for a 100,000 dollar house, it’s gonna be less.
David: But basically we’re taking 5-10%, maybe more, off of that initial number because whenever we’re negotiating we don’t want to negotiate above that number, we want to negotiate to that number. So, look at it like this, let’s use a real world example here. Let’s say that we have a property with a 200,000 dollar ARV ok. We’re going to multiply that by 70% which gives us a 140,000. Let’s say that that property needs $30,000 in repairs so we want from 200 to 140, we’re taking 30 off, that puts us at 110 and we’re going to use 10,000 as our wholesale fee very simple. So we basically got our offer, I’m going to say this again, we got our maximum allowable offer- that’s a better way to word it- at a 100k. We’re going to go in and we’re going to offer 85 or 90, maybe less but 85-90 is where we’re going to start. Here is why guys again, this is all about negotiation. Nobody likes to negotiate with somebody that doesn’t have any wiggle room, that is going to be a rock and just stern and stubborn. Everybody wants to try to get a deal or feel like they got a deal and won in a negotiation, so let people think that. Why? because it makes them feel like they’re not getting taken.
Mike: Yeah so there’s psychology behind this too and Dave I know we’ve talked about it in the past. It’s something called price anchoring
David: Yes, explain that
Mike: You want to throw out a cent in- this is kinda my interpretation of it – you want to throw out an anchor of- again, this is a 200,000 dollar house. They know it needs work, they know they’re not getting 200,000. You wanna throw out an anchor of 80,000 as your initial offer . And then when you’re able to come back and forth and they say: oh man I was really hoping for 110, well if you can get to around 100, you’re happy.
David: You’re a deal. Love it
Mike: You came up 20,000 dollars
David: And when you anchor low, it gets in their mindset where you’re at. Right? so you always wanna anchor low. But even more importantly than that, or equally important, you gotta have some wiggle room right? but typically what you’re wanting to do is you want to negotiate to what I like to call the 25% mark. So let’s say that we’re 40,000 apart, I want you coming down 30 grand and I’m coming up 10 right so whenever I’m negotiating, I need to come up right I typically will but I’m not coming up 50%. I never meet people in the middle right what I’ll do as I’ll come up but I’m coming up 10,15 maybe 20% 25% at the very most and I want them to come down 70% or 75% alright. Therefore, you are going to be able to end up getting the deal at or hopefully below your maximum allowable offer but you still have wiggle room to come up and they came down. So everybody’s doing what happens in a typical negotiation.
Mike: This reminds me of a book we need to plug here “Never Split the Difference” remember reading that one
David: Yeah, I can’t remember the guy’s name. I’ve read it 6 times actually.
Mike: Neither can I. It’s a great book, I need to reread that one.
David: Yeah we’re not terrorists or work for the FBI, but there’s some good principles in there
Mike: There’s some really good principles in negotiating
David: Yeah, we’re negotiators in terms of that. We’re not dealing with lives, we’re dealing with other problems but very good book. Very very good book.
Mike: Yeah, so “Never Split the Difference” guys, if you’re looking for a great book on negotiation. It’s a very very interesting book and has a lot of really good ideas in it. So definitely check that one out. Dave, you’ve got anything else for them today?
David: Oh I got a lot of stuff man. I got all kind of stuff
Mike: Oh, let’s go. Let’s keep going.
David: So when you’re negotiating with these people, always discount your MAO because that’s where you want to end up. That is not the beginning number, that is the end number. I cannot stress this enough. Okay. Now when you are making offers on properties, sometimes we will get a property that’s, you know, kind of a deal but it’s not a great deal. It’s not a home run deal but we will still lock it up under contract for multiple reasons: one, the most important thing, if you don’t have any inventory, how can you sell anything? Like, you can’t sell deals if you don’t have properties locked up, so we are always leaning towards locking properties up, even if they are not exactly at the price. Reason being is: we can always go back and renegotiate those deals later. That’s why we have the inspection period, and the due diligence period.
Mike: Real quick comment on that we consider ourselves experts but we also recognize we are not perfect.
David: Yeah. Estimate repairs, we could be off by 20,30%, 50%.
Mike: A lot of times, there’s a buyer on our list who’s willing to pay more than we would have guessed.
David: Than we would pay for it. Right
Mike: So again, that’s why Dave says yeah, lock it up because you can go back and renegotiate, I love that
David: Well, you know you cannot wholesale a deal that you don’t have under contract. Period. Let’s just stop right there for a second. It is impossible to wholesale a deal that you don’t have under contract legally. You have to have inventory. How do you get inventory? you use contracts to secure properties. Now, another thing when it comes to negotiating and this is a great tool, right, is whenever you send somebody an offer on a property, they mentally think it’s sold, even though it hasn’t closed yet. So if you have to go above your MAO just to secure that property or use your due diligence period to maybe try to increase the amount of repairs or maybe you are just wrong and they are higher, try to use that period to lower your MAO and prove that to the seller. That it’s not going to be worth 260 when it’s all done, it’s only gonna be worth 240 which affects the entire equation right. So you want to increase the repairs, you wanna decrease the ARV of the property but essentially when you have it under contract and you come back and let’s say you can use one of those- great. If you can’t, well then just say: you know, I just can’t pay this much, the offer is too high and what typically happens I’d say at least 50% of the time, the seller already thought the property was sold in their head. They saw themselves mentally at the closing table, they visualized it and now you’re coming back and you’re saying: you know I don’t think this is going to work. So what ends up happening is they go into problem solving mode: Well man, I was really hoping that you’re going to buy this -Let’s role play for second- I was really hoping that you were going to buy this property from me Mike. What do we need to do to get this deal done, like, it sucks that you can’t pay the 80 grand that you had told me.
Mike: Yeah I’m really sorry Dave but uh-
David: How far apart are we, man?
Mike: Yeah, I mean again, like I said, the comps that we found is just not worth that to me and I just can’t do it. If you could come down, I mean I could pay 70,000 for the property
David: We could do 70 for it? I mean, I really was hoping to get 90 when we first started talking and we kinda met at the middle at 80
Mike: No, I understand that
David: But I do need to sell this because I’m getting relocated. Did I tell you that? I’m moving to Kansas City next week
Mike: I understand that Dave, I really would like to help you out but 70 is the best I can do. I can keep my closing date same time but we’re gonna have to come down on price if we can do that.
David: Well here’s the thing, I owe 72. Can you at least give me 72?
Mike: We can do 72, make this happen.
David: Ok boom. So we just got 8 grand off of the deal by just talking. We didn’t do anything more than speak on the phone to this person, right? So don’t be afraid to get properties under contract, you have to have inventory to do wholesales. If you want to do 8,10 deals a month like we’re doing, then you need to be locking up a lot of properties. You know, we typically close on 90% of the deals that we get at this point but there are some deals, several you know, sometimes two or three in a month’s time that we have to back out of because the numbers don’t work. And it’s not because we’re bad at what we do, it’s because we sometimes discover things along the process of due diligence that changes the equation.
Mike: That’s a hundred percent true and we make a lot of our deals subject to a sewer lateral inspection
David: Most of them are doing sewer laterals because that’s the one thing that you can’t inspect by yourself, you gotta have a camera go in there. I can walk around a property, Mike can walk around the property and determine if it needs siding or a roof or windows, those things are visible, they jump out at you but the sewer lateral is sometimes 12,15 feet deep in the ground and they’re very expensive too. So if we come across a property that has a crack through lateral, that might cause you know, three or four thousand just for a little bit. It could cost 10 or 15,000 to do the whole damn sewer lateral.
David: So we need to know that in advance because if we don’t know that, that’s how we will end up paying too much for the property. It also gives you leverage to negotiate whenever you have those things. It’s rare that Mike and I hire an inspector and pay 3,4, 500 bucks
Mike: Very rare
David: But sometimes people will do that too because the inspector’s job is to find every little thing. They’re nitpicky, that’s what you hire them for. They’re gonna give you a 70-page report with a hundred little things and you can take that back to the seller and you can also use that as ammunition to get a lower price because you’re repairs are going to be basically that sheet, or that 70 pages. Everything’s going to need to be addressed if you were to do it- the rehab properly. Lots and lots of tips and tricks here on negotiating with sellers. I think the main point that I want you guys to take away from this episode though is: don’t be afraid to lock up properties. You gotta have inventory, if you don’t have inventory, you can’t sell deals. If you go in over your MAO, not the end of the world, use your inspection period to try to get that property down. If you get it at MAO or even better below MAO, I don’t see why that’s a problem. That’s a win, that’s a home run, you should be able to wholesale that deal.
Mike: Yeah and it’s ok to be nervous about it too.
Mike: It’s totally okay to second guess yourself.
David: If you are brand new, don’t give the earnest money to the seller. Take it to a title company, that was the first mistake I made at wholesaling. Not the first, I have many more before that, but the first deal I did, I gave the seller a $10 check because I thought that’s what I needed to do.
Mike: Hey, no big deal man.
David: So if you are new and you find that deal, get the contract signed, take that to a title company or a closing attorney, depending on where you live and open your escrow account with that third party. Pro tip: some people are gonna say: that’s the dumbest thing I’ve ever heard but man, some people are gonna say: I did not know that.
Mike: Well, that’s the thing
David: I did not know that
Mike: Yeah, you don’t. You don’t know till you know.
David: You don’t know till you know. That’s right. So guys, when it comes to negotiating with sellers, don’t be afraid to get it under contract. Ask them why they are selling, try to get their level of motivation determined from the get-go and then offer them a solution. Also I don’t usually ask the seller what they’re asking for a property instead I reword it, then I say: What do you need? What do you need to get? I don’t really care and I’m not gonna say this to them but I’m thinking in my head: I don’t really care what you want, what do you need because that’s really why I’m here. I’m trading convenience for a discount, said it earlier so you know, what is that level of discount that you’re willing to give me for me to make your life easier? Right so figure out what they need for the property. There’s also a couple different techniques out there that we use to determine what a seller owes on a property so when we are negotiating with them, we can actually figure out what they owe on that property. So you know, we typically don’t like making offers 30, 40k above what somebody owes unless it’s still a homerun deal or below our MAO. One of the places that we love to use to run our comps is a PropStream and if you’re not familiar with PropStream, you need to check it out. It is an amazing place to go run comps and help determine those ARVs. I’m gonna actually put a link in the show notes for you guys to get a free trial with PropStream. We use the hell out of it so check out PropStream if you’re looking to run comps or need help with that but at the end of the day guys just make a friend, build some rapport, figure out why they need to sell, figure out what they need to make this work for both parties and lock it up, use the inspection period to make the numbers work if they don’t already. That’s it, don’t overthink it. You don’t need to go out and buy a 10,000 dollar course on negotiating with sellers. Just be yourself, anything you want to add Mike? I mean, it’s not hard. You just can’t be scared
Mike: It’s literally just talking to people.
David: That’s it. That’s all that it is.
Mike: So don’t be afraid to talk to people. Don’t be afraid to make offers, get properties under contract and go back and be honest with them. Say hey I thought it was worth more, I’m sorry I can’t pay that just like my contract said we’re gonna have to either negotiate or we’re gonna have to part ways.
David: Love it, love it. Guys thanks for listening. I love dropping these short podcasts with some gold nuggets in it. We will be back soon with more for you all. Signing off.
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