"Formula" for 3-part offers?

Question

A friend from my REIA was talking to me about how to make offers, and he (and other sources I've looked into) suggest making 2- or 3-part offers to increase the odds of my offers being accepted.

As an example, he suggested:

1) All cash; this would be my lowest offer

2) A seller-financed offer $30k higher at 8% with 5.5% down that balloons at 5 years

3) A seller-financed offer $50k higher with no money down at 6-7% with no balloon and the option to refi at any time I want.

I've also seen this suggested:

1) All cash

2) Title changes hands

3) Lease option (title stays in seller's name)

I'm very curious to know if the more experienced investors out there have a set strategy or formula they use to develop their 2- or 3-part offers. I realize that deals will vary based on the market, the current owner's situation, the type of deal, etc., but I'd like to streamline the process of putting together an offer once I've analyzed a property.

TIA!

Kerry Baird · Answer

Yes, you’ve got it. And yes, you need to sit down with them and talk. You also need to be aware of repairs needed and the cost to repair. And you can either use your local MLS approved contract, or ask a local lawyer. I’ve even set up an appointment at a title company, and we put together an agreement on the fly.

Nicole Heasley Beitenman · Answer

@Kerry Baird How do you determine how much to raise/lower the offer depending on the terms? Do you typically have balloon payments or do you adjust your terms depending on whether or not the title changes hands?

Kerry Baird · Answer

Very similar to how you have written it. Renovations, if any, are deducted from a full value. I estimate about $5000 for the items I need to replace...roof may be higher depending on the square footage and quality required for the neighborhood. A/C, windows, flooring, paint, plumbing, electrical, kitchen price depends on the area and the quality that is in place. And then I work down your list. Hard money can come in at 70% LTV or so, and 12.5%, and 2 points. I have made a number of these offers, and haven’t had a single one take a lease option, but I have had a handful who were thrilled with me taking over their mortgage (sub2). I do not wholesale, but buy with the intention to renovate, or renovate and rent. I have done marketing to motivated sellers, which is where these conversations have had the most success.

Kerry Baird · Answer

I've used that method successfully. It works better, in my opinion, to present the benefits to the seller directly than through a Realtor. I met with sellers who called me off of my marketing piece and talked with them at their home.

Nicole Heasley Beitenman · Answer

@Kerry Baird I'm getting it now. The starting point of 65% ARV is helpful because I feel overwhelmed by the options of creative financing. I'm still trying to figure out what tools I have and which are the right ones for the job. There's a duplex down the street from me for sale by the owners. They're in their 80's and want out. So I know their main problem, but from what you're saying, I need more details. I need to know factors beyond "We're old and want out" such as where they want to go, how fast they want out, what they want to do with the money, etc. What kind of legally prepared documents do you bring?

Kerry Baird · Answer

I think you are asking a different question than I am answering. I’m answering it from the perspective of How I Bought 31 Houses, From Motivated Sellers. You are asking from the perspective of Exactly How Do I Word My Offer. That comes with sitting down with sellers, and having a handful of options to offer the sellers, right? These are the tools of the trade, the options. But people are living, breathing creatures who have certain needs. The “formula” of numbers is the starting point. The 65% of the ARV starting point that many books talk about. OK. How the deal goes down is somewhat of an art, because people are different and their needs are different. Firstly, when motivated sellers are calling from a marketing piece, it is because they have a problem and they want to have it solved. They need to sell their house. They need to be done with a problem house NOW. Non motivated sellers do not reach this point. They have a job, or an emergency fund, or some backup plan. The people I am talking about in this particular discussion, must sell and cannot wait very long for the right buyer to come at the highest price. I hope this sets the stage, as it is key to making the types of offers that you are talking about from the start of this thread. If the seller isn’t motivated to sell, why else would they do x or y or z? Why would they consider anything but a regular, plain vanilla offer? The key to this is presenting an offer that is suitable to their very need, and then filling that need, doing what I said I would do, which is buying their house. This means that I am professional, having good legally prepared documents. Dressing professionally. I listen to their needs. I’m an investor, and if I am going to a house appointment, I intend to buy that house. I am not in the business of overpaying for houses; I am also in the problem-solving business. Someplace in there is the offer they will take and where I am able to lift that burden house from their shoulders. If it isn’t a burden, there is not much reason to discount, and I’m not going to buy an overpriced house. Newly wed couples do that. Seasoned investors do not.Solving their problem very often is time related, and not so much money related. What I am talking about is sitting down with them and listening to their situation, and problem-solving it with the tools at my disposal. Taking over their mortgage is fast and easy for them to move on as quickly as possible. If they also need to move as quickly as possible, then this option is a benefit to them. We can close immediately. If I have to get a traditional mortgage, we all have to wait for appraisals and underwriters. It takes TIME. I only have so much in downpayment funds. So it also takes MONEY. If we have to wait weeks for funds to arrive, then it does not solve their time related problem. There is not the certainty with this option, and in the situations my sellers have been in, they need fast and they need certain.When I have discussed the lease option strategy, they understand that they still own the house. They do not convey ownership until such time as I may (or may not) exercise the option to buy. Since their motivation is high to be done with the property, due to their own personal situation, this option hasn’t been the one that worked for my sellers.

Jose Castillo · Answer

Great formula, I’m curious to hear what other investors have to say.

Nicole Heasley Beitenman · Answer

@Kerry Baird How did you structure your offers?