Thursday, February 26, 2015

Investor Offers Are Low-Ball!

Everyone wants the best price they can get.  Investors are no different.

But neither is the homeowner.

So investors often get accused of "low-balling" the seller with their offer.   A significant reason for this is investors fail miserably in presenting the offer.  This is another reason investors are often seen as "taking advantage" of a seller's poor situation (deferred maintenance, pending foreclosure, etc.).

But the fact is, the cash offer we make is the offer we make because we HAVE to make that offer.  There is a tried and true formula in real estate for quick-close cash-offers that significantly reduces (although does not eliminate) the possibility of losing money on the deal.

The Formula

Most investors are familiar with this formula... (ARV * .70) - repairs.

Let's break that equation down.  ARV is an acronym for After-Repaired-Value.  I think this is a misnomer as I'm not only interested in the repairs to a property, but also updates and aesthetics, but regardless, you get the idea.  What will the home sell for after we make it look brand-new?

Let's say we pull-comps (we compare the subject property to other recently sold and rehabilitated property) and determine the ARV is $200,000.00.  We then multiply that number by 70% and subtract out the costs we are going to incur to make it look new.  If that numbers is $40,000, then our MAO (Maximum Allowable Offer) is $100,000 ($200,000 * .7 = $140,000 - $40,000 = $100,000).

That formula will save you thousands as even surprise repairs won't mean losing money on the project.

Making the Offer the Wrong Way

Most investors will do this math and then present the offer to the homeowner.  "Mrs. Homeowner, I can offer you $100,000.00 for your property."

It's no wonder investors are accused of "low-balling".

You have to understand, there is no more price-sensitive market than real estate.  The homeowner already has a good idea of what homes sell for (granted, fixed up pretty homes) because they drive through their neighborhood every day.  And when a home goes on the market in their neighborhood, it's a good bet they have pulled a flier, looked on Realtor.com or Zillow, or otherwise determined what the asking price is.

The homeowner probably understands their house isn't as "pretty" as the neighbor's house that has been listed for $200,000.00.  But when you offer $100,000 for the house, that must sound really low!

You have to remember, the homeowner isn't an investor.  They probably haven't thought through issues like carrying-costs, upgrades, age of roof, etc.  And they know it's not going to cost $100,000 to fix their house!  So why are they taking (in their mind) a $100,000 discount on their property?!

Presenting an offer in this manner significantly increases the odds you are about to get kicked out of the home, accused of being a "low-baller" who is trying to "steal" their home.

Making the Offer the Right Way

A better approach is to offer an explanation of your offer as you present it.  This is how I present the offer:

"Mrs. Homeowner, I love this home and I am excited that I can make it look and fresh and let a brand-new family move in here and enjoy it for years.  But, I'm an investor, and there is a tried-and-true formula investors have used for decades when making a cash-offer on a home.  All investors use this same formula.  I look at the price I think I can sell the home for when I am done doing all the updating that it needs... in other words, I want to make this home look like 2015, using all the modern and fashionable colors, schemes, trim, fixtures and such.  I want it ready to compete with the brand-new homes down the street.

"I think after I do all that, I can get $200,000.00 for the home.... would you agree?

"I take that number and multiply it by 70% and then subtract out the cost of the updating.  I know that 30% sounds like a wide margin, but I am going to lose 18% on the buy, carry and sale of the property, so that allows me to make roughly 12% for my time and money.

"So $200,000 times 70% is $140,000.  I think its going to take me about $40,000.00 to bring it completely up to date and make it look brand new.  Therefore, the cash-offer for this property is $100,000.00"

Breaking down this speech

I want to break this down as there is a lot of nuance in this speech.

"Mrs. Homeowner, I love this home and I am excited that I can make it look and fresh and let a brand-new family move in here and enjoy it for years."

People love their homes.  I do too.  They love the idea that someone is going to get to enjoy the home as much as they did.  I want to start the speech by putting that image in their mind.

"But, I'm an investor, and there is a tried-and-true formula investors have used for decades when making a cash-offer on a home.  All investors use this same formula."

This serves several purposes.  First, it let's them know I'm here to make money.  They already know that, but this puts that in the front of their minds.  It's fair that I make money on this deal.  Second, this is not a negotiation, it's a formula.  I'm not starting with a number to reach an agreeable "middle".  I'm letting them know this is THE number.  Finally, I'm letting them know they won't do better elsewhere.  This is the formula every investor they could potentially talk to uses and it's just THE cash-offer, not MY cash-offer.

"I look at the price I think I can sell the home for when I am done doing all the updating that it needs... in other words, I want to make this home look like 2015, using all the modern and fashionable colors, schemes, trim, fixtures and such."

I never use the word "repair".  If I do, the response from the homeowner is typically, "well everything works just fine", even if the house looks like the Brady Bunch still lives there (or worse).  Stick to updating, its less offensive.  Use the "2015" (or the current year) as it establishes that, while the home may be beautiful, styles change.

"I want it ready to compete with the brand-new homes down the street."

Bringing the home up to date is not a choice.  If its not up to date, KB Homes has another buyer and I don't.

"I think after I do all that, I can get $200,000.00 for the home.... would you agree?"

I want them to agree.... and they usually do.  After all, they know what houses sell for in the neighborhood.  But I am establishing that to get that, the home needs to look like 2015.   Its not the current price of their home.

"I take that number and multiply it by 70% and then subtract out the cost of the updating.  I know that 30% sounds like a wide margin, but I am going to lose 18% on the buy, carry and sale of the property..."

Here's THE formula.  And here is WHY it's THE formula.  Its NOT a low-ball offer.

"...so that allows me to make roughly 12% for my time and money."

It's fair I make money.  But 12% might still sound like a lot for someone who currently is probably making 1.5% in their mutual fund or 401k (or less).  However, this is for my money, but its also for my time.  Now that sounds like a fair and reasonable amount (because it is).

"So $200,000 times 70% is $140,000.  I think its going to take me about $40,000.00 to bring it completely up to date and make it look brand new.  Therefore, the cash-offer for this property is $100,000.00"

I let them know how I arrive at the offer and what the offer is.  But I reiterate that this is THE cash-offer, not MY cash-offer.

Conclude

I don't want to just wait for them to say "yes" or "no".  I've hit them with a big bombshell.  So, at this point, I think its important to let them know you understand this may be less than what they were expecting.  I care about how they feel about it.  So I conclude with, "How do you feel about that price... was that more, less or kind of what you were expecting?"

This allows them to raise objections.  But because you've established that this is the tried and true cash-offer formula, I've opened a dialogue without getting kicked to the curb and called a low-baller!

Wednesday, February 18, 2015

Creative Investing is Unscrupulous Investing

My husband, Dan, recently looked the Wikipedia definition of Creative Real Estate Investing. It said:

Creative real estate investing is any non-traditional method of buying and selling real estate. Confidence tricks and pyramid schemes in the 20th and 21st century such as Nouveau Riche (real estate investment college) have embraced the term, leading contemporary usage of the term to be synonymous with unscrupulous practices.

Synonymous with unscrupulous practices. Ouch!


This definition buzzed in my head when recently I encountered a fellow real estate agent who voiced her negative opinion of licensee's who practice creative real estate.

I meet numerous seller's every week. They call me because I tell them I want to buy their house. There is a reason they call me and not an agent.

David and his family wanted to sell us his mother's house. I told him he could make more money by listing it on the open market with an agent. He knew. However, his mother's health was declining and she would soon be transferred from her hospital room to a nursing home. He didn't have time to list the home. If the home didn't sell before his mother was transferred her estate would be drained by Medicare to pay for her care. He needed to sell it fast and without any uncertainty from the buyer.

Chuck and his wife have spent the last few years fighting with their home builder after their home's foundation cracked in several places. They were ready to move on. They didn't have the money, energy or time to undertake a foundation repair. I was able to give them the security of having a buyer while he completed his negotiations with the home builder, buy the house when he was ready and give him the time he needed to relocate his family.

Some people are desperately trying to avoid foreclosure. Some people have homes in such disrepair that they are embarrassed to have it on the open market. Some people have had agents refuse to list their house until numerous repairs were made.  Some people need money for their homes quickly. Some people just simply don't want to list their house. I've helped them all.

As Realtors, we are doing a disservice by refusing to accept the legitimacy of creative real estate options. Are there unscrupulous real estate investors out there? Yes. Absolutely. But, as for me and my team, we believe in being able to provide all options to our sellers while treating them with honesty and integrity. I hope that more Realtors will come to see that there are other options outside of traditional listings to sell a house and start to participate in the creative side of real estate. Maybe then we may see a decline in the unscrupulous, fly by night investors.  

Wednesday, February 4, 2015

It's a Home, Not a Used Car

There is a technique Real Estate Professionals use with Sellers to bring the price down (or so they think).  Whether they are trying to buy it or list it, they want the homeowner to believe the home is worth less so they can buy at a price that makes a big profit, or so they can list at a price that will sell fast.

I call this technique, "The used car technique".  The strategy is to take a tour of the home, and as you are doing so, touch every crack and grimace.  Sneer at the popcorn on the ceilings.  Gasp at the condition of the appliances.  Generally, the idea is to give the impression that this house is going to need so much work!

I love it when my competition employs this technique.  Because, while sometimes this might work... especially if the investor or agent is the only person the seller called... this technique really only guarantees one thing; the seller will hate you.

A home is not a used car.  Whereas most people sell a car because they recognize it is no longer useful to them, or it a piece of junk they no longer want to mess with; People love their homes.  Even homes that seem like a disaster to you, are loved by that homeowner because it represents memories to them.  They often times raised their kids there, or were raised there themselves.  They had Christmas there, Thanksgiving in that home and had trick-or-treaters knock on that front door.

They love their home.

By pointing out how awful it has become, you are stepping all over their memories.

I can remember two specific deals (good ones!) where we came in before another investor, and were told they went with us even though our offer was less, because they just "didn't like the other guy".

When we ask for a tour, we love to point out all the things we love about the home. (Some times this is harder than others!)  I often ask, "What did you like most about the home when you bought it?"  I work hard to make connections between the seller, the home and myself.

Because, unlike a used car, I am never there to "buy" anything.  I'm there to sell myself to the seller as the solution to their problem.  My end goal is to make sure this home ends up with a new family who will love it as much as the seller's do.  Whether that's selling it on the open market, or buying it and renovating it, I want this home to see new life.

People generally recognize their home needs repair and/or updating (although we do run into a few who seem oblivious, that's the exception).  You don't need to point that out.  Point out what you love about the home, make connections with the seller and then sell yourself as the solution to whatever their problems and/or goals are.

You will find this will end in more contracts than the Used Car Technique!

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