Seller Problems Create Biggest Paydays
In order to acquire properties at bargain prices - or prices that will allow you to make a reasonable profit, you must first determine if the property can actually be purchased for a reasonable price! Okay, I hear you thinking to yourself — Boy, this don’t seem so tough! Why can’t I just ask the seller? Certainly he can tell me in a minute. Friends, here’s a bit of advice –Sellers may not understand why they have problems, especially if they paid too much themselves.
Many times I’ve found very desirable properties for sale, but they’re seriously over-financed. Owners (sellers) who have over-financed properties are often extremely anxious to sell and many times for little or no cash down payments. The reason is to stop their negative cash flow! You must beware of these kinds of properties. An over-financed property can spell big trouble, no matter how small the down payment is. Once you determine how much you can afford to pay for a property and still make money for yourself, you must drop the whole idea if it looks like the purchase price will exceed your estimate! Sellers with too much existing debt have very limited flexibility for negotiating the price downward. Conversely, sellers with lots of equity also have lots of room to reduce their asking prices. These are the sellers you’re looking for.
FORGET SELLERS WHO CAN’T MAKE YOU A GOOD DEAL
Quite often you’ll find sellers who have over-financed their real estate by paying too much in the first place or by adding additional loans during their ownership. Regardless of the reason, and it don’t matter much, these sellers are simply not in a position to make you a very good deal! The only way they could, would be to pay down the existing debt - or to pay you money to take their property! Obviously, those are not very attractive options for most sellers. The simple truth is, when too much money is already owed on the property, it can seldom be a good deal for you. Don’t waste your time fiddling with deals that don’t show you a clear plan for making reasonable profits!
GETTING STARTED ON THE RIGHT FOOT
The very first thing I do when I hear about a property that becomes available, assuming I’m interested, is to begin what I call “detective work”! Sometimes my broker, Fred, will perform this task, but it took him four years of my coaching before he became snoopy (skilled) enough to suit my taste! Brokers and sales agents typically don’t do the exhaustive research or “snooping around” like I insist must be done.
The biggest difference between me and most agents is that they accept the word of sellers as being mostly true! I accept it as mostly exaggerated and often untrue! It’s never considered true until it’s proven to me. I’m not trying to be overly critical here, but you must never forget this important fact of investment life. Once the escrow closes and everybody gets paid, it’s you, alone, by yourself, who must live with the deal you signed! If somehow you’ve failed to uncover the true property expenses and it turns out they’re considerably higher than you were led to believe, guess what? It’s you alone who is now the stuckee! That’s the reason I learned to become a very snoopy house detective early in my investment career.
THE MORE YOU KNOW - THE BETTER YOU CAN NEGOTIATE
Motivated sellers are not generally “dorks or dummies” like many late night infomercials would lead you to believe. Mostly, they’re just people who have gotten themselves in a financial bind. Also, high on the list of motivated sellers are folks who for whatever reason are lousy landlords. The tenants are driving them “bonkers”. I’ve purchased several properties from sellers who were actually afraid to take me to their property for a showing. Their own renters frightened them! Knowing this kind of information is extremely helpful to me when I’m negotiating.
When I snoop around a property that I’m trying to acquire - And I discover that the tenants are basically running the place without much supervision. There’s an awful good chance that poor management or lack of landlording skills is really the motivation for selling. If I’m right, I know that sellers experiencing this kind of problem are often more than willing to give me very favorable terms in exchange for immediate “pain relief’.
Problem tenants who are out of control are worth big bucks to investors like me who know how to establish law and order! Many sellers who find themselves in this predicament are willing to forgo traditional cash down payments in order to rid themselves of this unpleasant situation! I have long emphasized the value of solving problems in all my training materials. People-problems pay big rewards to investors who can straighten out the mess.
DON’T FIDDLE WITH SELLERS WHO HAVE NO EQUITY
Properties that have been owned by the seller for a substantial period of time, 6 to 10 years or more, will offer far greater opportunities for negotiating the selling price downward. The reason is because the existing mortgage debt has most likely been paid down over the years. It’s always to your advantage to negotiate a purchase price when only the seller’s equity is at stake! For example: Let’s say the seller is asking $250,000 — You can assume the existing mortgage of $195,000. The balance or the seller’s equity to $55,000.
Let’s assume you’ve done your homework and concluded that $210,000 is the right price to pay. If the seller accepts, he will receive $15,000 for his equity. He mayor may not like it, but he still gets something from the sale. Now consider the situation if he had purchased the property only a year ago for a price of $235,000. The down payment was $20,000, so he still owes almost $215,000 on the mortgage! Your chance of buying this property for the right price of $210,000 just flew out the window! To do it, the seller would need to pay you $5,000 to buy his property. Even if it would help the seller financially, emotionally it’s almost too much of an obstacle to overcome. In short, this seller is not in a position to make you a good deal!
TAKING OVER (ASSUMING) EXISTING MORTGAGES
Many buyers are hesitant to purchase properties with multiple mortgages and promissory notes on them. I am exactly the opposite! The more notes I can assume or take over, the better I like the deal! In fact, I am constantly on the look-out for properties with multiple notes. Quite often I’m even willing to pay a bit more for them.
First, let me explain that private party notes or mortgages are the kind I’m looking for - not mortgages from banks or regular institutional lenders. My detective work involves finding out who is owed the money on the notes (called the beneficiaries). I want to know if they are rich, poor, out of work, live out of the area, young, old, do they have children who might need money for college and if so - how soon from now. People always ask me at seminars — Why do you care about that stuff? I’m trying to determine whether or not I’ll be able to buy the note back at a discount price once I become the owner of the property. Beneficiaries who need cash - or think they do, are the ones who will sell for big discounts.
For example, let’s say I purchase a property and assume or take over a private note with a balance of $45,000 - with monthly payments of $435 per month. The note was originally a 20 year term, but still has 14 years of payments left! Mrs. Smith, a 36 year old divorcee, holds the note. She received it from her divorce. Her only son, Johnny, is now 15 years old, a junior in high school. He has his heart set on attending college in a couple of years from now! As I see it - there’s an excellent chance I’ll be providing for Johnny’s “higher education” when I make an offer to purchase the note for $26,000 cash - - - two years from now.
AL WAYS VERIFY INCOME KNOW THE MARKET RENTS FOR AREA
I have found tenants who are paying $500 rent for a $400 house. When you see the tenants, you’ll often understand why. In one particular case, only four occupants were listed on the rental agreement, but I counted 12 people coming out the door one morning, about 9 A.M. while snooping around on the property. Sometimes you can get a good idea about who lives there by checking out the cars after dark. When I sense that negotiations to purchase a property are going my way, I spend more time driving by and observing what goes on at the property. The best word that describes how I conduct these observations is “sneaky”! No calling ahead like most real estate agents do for a “staged visit”. You can’t really learn what’s happening unless you sneak around a bit!
If you plan to rent your properties to regular everyday tenants at prevailing market rents, you must find out exactly what those rents should be. You can do this by matching the rents in classified ads to comparable properties in the same neighborhood as yours (or soon to be yours). Some valuable information can be learned by this exercise! First, you will learn if the rents are too high or low for the property you are negotiating to purchase. Hopefully, they’re low so you’ll be able to raise them. Equally important for your education — You will discover the right amount of income for the property. When you know exactly what the true market income should be for a particular property, it becomes a whole lot easier to figure out what you can pay for it and still make a profit on the deal!
