Real Estate Articles

Setting Limits BEFORE You Negotiate | By: Multiple Speaker(s)

Setting Limits BEFORE You Negotiate
Note: this is an excerpt from Mr. Drew’s “Negotiation for the Real Estate Investor” homestudy course, which you can buy on my website for $495 or something like that.

As an educated real estate investor, you should already know what makes a great deal versus a good deal versus a marginal deal versus a bad deal. You are aware of all of the formulae and have the skills to calculate values and costs. But have you ever sat down and thought about what YOU, PERSONALLY want from a deal?

Buying, selling, and renting properties is about more than price and terms. It’s also about ease vs. hassle and time and energy. If you haven’t thought about EVERYTHING you want from a deal, you don’t know where in the negotiation you have to stand firm, and where you can give a little to get a little.
When I say think of what you want out of a deal ahead of time, I’m not talking about a specific deal. Obviously, when you sit down with a seller to discuss what you’ll pay for his property, you should have your maximum allowable offer or offers calculated. That means you’ve gathered all the information that you can, determined the after-repaired value of the property, subtracted repair costs and subtracted your profit. At that point, it’s simple: you just never, ever, pay more for a property than the arithmetic tells you is allowed.
No, I’m talking about something more along the lines of a mental image, decided upon BEFORE you even have a specific deal in mind, of the things that you want out of ANY deal. Yes, the most you’re willing to pay (or the least you’re willing to accept) are part of this general outline of “must haves, but you should think about the other things you want and need from a transaction as well. What are some things that don’t involve price and terms that could be important to you? Well, here are some that are important to me:

1. Time. My partner and I get calls all the time from sellers who have properties in Hamilton (a city about 40 minutes north of where we live) or Clermont County (an area on the far east side of town that takes us an hour or more to get to). When these calls come in, the phone negotiation is much more aggressive. Why? Because I don’t want to drag myself out to North Boofoo for anything less than a completely slam-dunk deal, and because I only want to do it once. If I’m trying to wholesale a deal in one of these areas, I want to be able to tell the buyer, “it’s on lockbox, show it to yourself, it’s an absolute steal, tell me when you want to close”. And in order to do that, I have to be getting it at a LOWER price than a property that’s closer to home, AND have a highly motivated seller who’s willing to sign a contract and give me a key at our first meeting. I can’t know that unless he tells me so over the phone. If he doesn’t tell me what I want to hear, I move on.

2. Hassle. There are certain things in our business where the pain in the posterior (or the potential liability) is out of proportion to the value that thing creates. Different people have different pet peeves in this regard; one of mine is buying appliances for rental properties, because the only thing that makes sense to put in them is used refrigerators and stoves, and these have to be bought from used appliance stores that are out of the way, open odd hours, and have unpredictable inventories. A hunt for a good used appliance can take hours, so we always, always ask for every appliance on the premises, and ask for a significant ($1,000+) price reduction if we can’t get them. On the other hand, as important as they are, we’re willing to give up the appliances for better terms or quicker possession or the aforementioned discount.

3. Mental energy. I know wholesaling backwards and forwards. I have all the forms, contracts, service people, and knowledge at my fingertips. There’s nothing I have to look up, learn, produce, or otherwise expend any energy on doing to make a wholesale deal happen. In fact, I have other people who do 99% of my work for me. A Drew’s life is a good life.

On the other hand, the first time I did a “subject to” deal, I had nothing in place to make it happen. I didn’t know how to fill out the contract, what to tell the closing agent, or how to handle the paperwork. Although I understood the concept of subject to, and saw that it could be profitable, doing the first deal took 2 days of research to make happen. There was no way I was going to work for 2 whole days–in a row yet!–for any deal that wasn’t a home run. I basically kept talking to sellers on the phone until I found one that had a 4.5% fixed rate 30 year loan AND $20,000 equity AND a property that was in great shape and in my own neighborhood before bothering to go see one of these houses.

Now, of course, I have the things I need to do these deals without any stress, and treat them like any other purchase. But I still commonly pass up potentially profitable deals on mobile homes, condos, and commercial properties simply because they’re not in the “obvious home run” category, and I’m not interested in investing the energy to learn about them unless they are.

Some new investors, armed with $50,000 in education and no experience at all, take the view that they’ll pursue any deal that looks like it has a profit at the end, no matter how vaguely they understand how that profit might be realized. From my perspective, this is a strategy that produces a lot of activity but not much result. From a personal and negotiating standpoint, it’s much better to set limits on what you will and will not accept in a property in general and a deal in specific up front, and then concentrate on finding the deals that fit those requirements.

Whether you’re buying, selling, or renting–or hiring a contractor or buying a piece of office equipment, for that matter–figuring out what you will and will not accept well ahead of the actual negotiation makes a big difference in how confident you’ll feel as a negotiator, how profitable your deals will be, and how good you’ll feel about ending a negotiation and not looking back when it turns out that the other guy’s needs just can’t be reconciled with your own.

One of the real estate strategies that I’ve been most involved in over the years is wholesaling, where I put properties under contract for a certain price, then sell my right to buy the property to another investor for a $5,000-$20,000 profit. A lot of the advertising and marketing that my partner and I do is to attract sellers of the kinds of properties that lend themselves to wholesaling–primarily cheap, ugly ones in bread-and-butter or border-zone areas–and it’s a fact of a wholesaler’s life that about 20 times as many sellers will respond to this advertising as actually have good deals. At the beginning of my career as a wholesaler, I pretty much looked at any property that a seller called us about (mostly because at that time, not too many sellers were calling!) which meant that I spent a LOT of time standing on the front porches of various unmotivated sellers trying to get them to accept prices that just didn’t fit their goals at all.

Once we got our marketing plan together, though, this became impossible. We commonly receive 5-10 calls A DAY from sellers when all the ads are running and the mail is going out. So we developed a set of basic standards–limitations, if you will–that guide us to this day in deciding whether I actually leave my house to go to look at a property. We find out over the phones whether these standards are met, and if they aren’t we usually don’t even open negotiations, much less waste the time it takes to physically look at the property.

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