After hundreds of meetings with sellers, I find the best way to negotiate is to not ever negotiate. It’s a mindset change that drastically increased my level of success with homeowners, not only in purchasing their property, but also in helping to forge listing agreements as well.
It all starts with the recognition that we are not in the business of real estate. We are instead, problem solvers. Therefore, I’m not looking for a particular property, but rather opportunities to solve homeowner’s problems.
That sounds simple, but when embraced, it allows you to put parameters around the purchase of a house, abide by rules, avoid being a motivated buyer, and look for solutions within reasonable parameters that will solve the homeowner’s problems and allow you to have more success.
What do I mean by “parameters”. Well first, there needs to be a recognition that you are in business to make a profit. Therefore, you should never purchase a house for more than what it’s worth. And what it’s worth in a situation where the homeowner is in distress and you are making an investment is different than what it is worth on the open market. For more on that, read my blog, What is a House Worth?
The price of a home can vary with terms, but again, working within parameters where the purchase can turn a nice profit.
Once you know your parameters, you are better able to focus on the problems of the seller that fall within those parameters and look for solutions rather than trying to negotiate the best “price”.
But more importantly, it will also allow you to explain those parameters to the homeowner in a reasonable manner and not get trapped in some serious negotiating pitfalls.
For example. If I have established my cash-purchase parameter as 70% of After-Repaired-Value minus the Costs of Repairs/upgrades, then explain that to the homeowner. “Mr. and Mrs. homeowner,” you might tell them, “once I have updated your home, it would sell on the open market for $200,000.00. The way I arrive at the cash-value of a home is to multiply that by 70% and remove the costs of the upgrades. The reason I have to have a 30% margin is because I will lose 18% on the buy, carry and sale of the property, meaning that after all of the work I have to do and the time it takes, I will profit roughly 12%”.
I often let them know, my parameters are the same as all other investors. We aren’t looking for a negotiated price, but rather the cash value of their home.
This makes it reasonable.
One of the pitfalls that you can avoid, then, is asking the homeowner what they want for the house prior to ever sharing the cash value of their home. If my formula means that the cash value of the home is $100,000, but they were thinking they wanted $160,000, if I ask them what they want and they tell me, all of a sudden my cash-value sounds completely unreasonable.
But by explaining my parameters, $100,000.00 sounds very reasonable and $160,000.00 is starting to sound very unreasonable.
Once that has been established we can start to look for solutions that stay within those parameters, like finding the homeowners new housing, helping them coordinate a move or find storage, etc.
By working WITH the homeowner on solutions while staying in your parameters, rather than trying to negotiate the best price will not only allow you to walk away with solid deals, but more of them!