I'm going to let you in on a little secret...
Deal negotiation isn’t all about the numbers.
It’s about striking a deal that creates a win-win situation, where both you and the seller feel like you’re walking away with a good deal.
To be able to make that happen, there will have to be some give and take by both parties.
Deals go bad when one party makes constant demands and the other party feels like they’re getting a raw deal. If the numbers don’t work for you, then you need to be prepared to walk away. On the other hand, if the sellers that you work with constantly feel like you’re trying to “hustle” them, I can guarantee you won’t be in business long. Word will get around and you’ll have a hard time finding sellers who will want to do business with you.
There’s an art to negotiating good deals and it’s not all about the numbers. It’s also about the people and how you interact with them.
Make sure you do these 5 things every time you negotiate a deal and I think you’ll find that the deals you end up working on are better deals with bigger profits.
1. EVALUATE THE DEAL
You should never make an offer without first doing a complete deal analysis.
That includes pulling comparables, doing a repair estimate, and doing all your due diligence to find out how much is owed on the property, what is motivating the homeowner to sell, and what their goals are. There’s a big difference between a seller who is asking retail price for their home because they just want to move and someone who is in a financially distressed situation and needs to sell.
Once you’ve talked to the seller, know what they owe, and are confident that their motivating factors will allow you to work out a deal, it’s time to figure out the numbers.
First, pull your comps.
You will need two sets:
One set that will help you determine what the After Repair Value is of the property and what you will be able to sell it for.
Another that will help you determine its current worth and will support the offer that you make.
When you pull your comparables, stay within one mile of the property (if at all possible), find properties that have sold within one year (the more recent the better), and stick to properties that have the same number of bedrooms, bathrooms, garage stalls, similar lot sizes, and finishing touches such as finished basement, pool, etc. as these will impact the value of the property.
Next, do a repair estimate.
If you’re new to real estate investing, you may want the expertise of a general contractor for your first few deals. They will be able to go through the property and give you an itemized estimate of repairs, with a total that includes labor and material costs.
When you feel more comfortable doing repair estimates yourself, you can use a tool like Realeflow, which has a repair estimator built into the software. The Hammerpoint Repair Estimator guides users through what to look for, room by room, item by item, automatically calculates costs, and builds a complete repair estimate.
You will use this number when determining your offer, so don’t hold back. If there’s anything that you’re not 100% sure if you should include in the repair estimate, then include it. It’s always better to overestimate repairs than underestimate so there are no surprises later.
2. DETERMINE A FAIR OFFER
You should take several things into account when determining what your offer will be including...
- What the comparables are for similar properties in the same condition as the property is currently in
- What the repair costs will be
- What the After Repair Value is of the property
- What is currently owed on the property
- What the seller’s motivating factors are
These will help you determine what to offer for the property.
NOTE: My rule of thumb has always been to start at 70% of the After Repair Value minus the repair costs.
The goal is not to make a lowball offer, but to make an offer that, after looking at the numbers, is fair to the seller and will give you enough room to make a good profit. It is few and far between that your first offer is accepted, so start at a place where you have room to negotiate to an amount that satisfies both parties and allows you to make your profit.
3. MAKE DECISIONS QUICKLY
“The early bird gets the worm”
“You snooze, you lose”
“A day late and a dollar short”
You’ve heard these sayings before and, in real estate investing, they’re absolutely true.
I remember when I first got started in real estate investing and didn’t have any type of tool to help me do things like repair estimates and comps, I would spend hours gathering the necessary information before I could even think about formulating my offer.
I can’t tell you how many times I spent hours finding comps, visiting the subject property, driving by comparable properties, then going back to figure out what to offer, and finding out that the property had just sold.
“A day late and a dollar short” never rang truer and I never felt more deflated than when I was finally ready to make an offer, after hours and hours of work, and was told that another offer had just been accepted.
In this business, you need to move fast and make decisions quickly.
So how do you do that?
You use tools. Now there’s a time saving or automation tool for just about everything, but not all tools are created equal.
For example, you can use Realeflow to pull comps and build reports, create a detailed repair estimate, do a complete deal analysis and potential profit evaluation, and create your offer documents in a matter of minutes.
The more time you spend doing these things instead of making offers, the more room you’re leaving for other investors to take deals right out from under you.
4. BUILD RAPPORT WITH THE SELLER
Negotiation is not a game of will or to see who can strong-arm who. It’s a process of reaching an agreement between two parties that satisfies each party's wants and needs.
In order to even get to the point of negotiation, you have to be likable. No one wants to do business with someone they don’t like.
Furthermore, you have to listen to the seller. Really listen to what they’re saying and how they’re speaking and mimic their style of communication when you respond. They need to trust you, they need to believe that you are doing what’s in their best interest as well as yours.
Tell them about other people in similar situations who you’ve helped before and tell them about people who you didn’t help because it wasn’t in their best interest at the time.
Talking about the sellers who you didn’t help, but pointed in a direction that was more beneficial for them at the time, shows that you’re not just in it for the money, but that you’re in this business because you also truly enjoy helping people. That speaks volumes when you’re trying to earn someone’s trust.
Be reasonable and fair in your negotiations, always.
If you get to a point where the deal isn’t going to work, always leave on good terms. Help the seller in any way you can because you never know when they might need your help again or who they could refer to you later on.
5. KNOW YOUR LIMIT
This one is the easiest of all… Set your purchase price limit and don’t go over it.
It’s no secret… We want to win. We like to win. When you negotiate a good deal, you feel like you’ve won.
But don’t let that feeling of “winning” a negotiation take over. Don’t get caught up in the negotiation process. It’s like going to an auction… or to Vegas! You have to set your limit before you get started. If we’re talking about Vegas, heck, most people would be smart to set their limit before they even book the plane ticket! But I digress…
My point is, when you do your deal evaluation, do it based on different buying and selling scenarios and come up with a maximum amount that you’re willing to pay for the property and still make a profit that you’re happy with.
If you follow these 5 steps every time, you will find yourself negotiating some great real estate investing deals in no time.
I'd love to hear which of these 5 steps is, or might be, the hardest for you and why? Please leave a comment below!