I need advice on negotiating a flip purchase
John FranczykPro Member
Wholesaler · Racine, WI · Member since 2015 · 143 posts · 84 votesI need advice on negotiating a flip purchase
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Andy SabischPro Member
Investor · Jackson, MS · Member since 2021 · 662 posts · 562 votesFirst there is not a lot pf meat on the bone to cover unexpected costs, holding costs due to the dynamic market and the availability of trades. If you have a crew of committed resources to complete in essence a new build in a short window that is one thing but of not, where the market is now may not be where it is when you are ready to list it.
The other thing is that when you have someone that thinks they know the market whispering in the sellers ear, you will likely have a challenge on your hands especially when you are offering almost half of what the seller is being told it is worth (even if it is not). We just went through that where we had a house under contract and then the seller talked to a friend that said the property was worth considerably more and talked the seller into backing out two days before closing. It cost him $5,000 for us to release him from the contract (could have been worse but we opted to release him) so we found that even with a signed contract nothing is firm until keys change hands.
It sounds like your seller is getting advice that might not be in his best interest so if you are sold on the property and the work and the price, develop a proposal that shows immediate cash now in a changing market rather than hoping for a sale and having to hold and maintain it.
I would be very conservative with the ARV on the property as with more interest rates looming, you will see values drop to adjust for that . . .we are seeing that in multiple markets we work in which 6 months ago would never have happened.
The other thing is that when you have someone that thinks they know the market whispering in the sellers ear, you will likely have a challenge on your hands especially when you are offering almost half of what the seller is being told it is worth (even if it is not). We just went through that where we had a house under contract and then the seller talked to a friend that said the property was worth considerably more and talked the seller into backing out two days before closing. It cost him $5,000 for us to release him from the contract (could have been worse but we opted to release him) so we found that even with a signed contract nothing is firm until keys change hands.
It sounds like your seller is getting advice that might not be in his best interest so if you are sold on the property and the work and the price, develop a proposal that shows immediate cash now in a changing market rather than hoping for a sale and having to hold and maintain it.
I would be very conservative with the ARV on the property as with more interest rates looming, you will see values drop to adjust for that . . .we are seeing that in multiple markets we work in which 6 months ago would never have happened.
11 Replies
- 4yAndy SabischPro MemberInvestor · Jackson, MS · Member since 2021 · 662 posts · 562 votesFirst there is not a lot pf meat on the bone to cover unexpected costs, holding costs due to the dynamic market and the availability of trades. If you have a crew of committed resources to complete in essence a new build in a short window that is one thing but of not, where the market is now may not be where it is when you are ready to list it.
The other thing is that when you have someone that thinks they know the market whispering in the sellers ear, you will likely have a challenge on your hands especially when you are offering almost half of what the seller is being told it is worth (even if it is not). We just went through that where we had a house under contract and then the seller talked to a friend that said the property was worth considerably more and talked the seller into backing out two days before closing. It cost him $5,000 for us to release him from the contract (could have been worse but we opted to release him) so we found that even with a signed contract nothing is firm until keys change hands.
It sounds like your seller is getting advice that might not be in his best interest so if you are sold on the property and the work and the price, develop a proposal that shows immediate cash now in a changing market rather than hoping for a sale and having to hold and maintain it.
I would be very conservative with the ARV on the property as with more interest rates looming, you will see values drop to adjust for that . . .we are seeing that in multiple markets we work in which 6 months ago would never have happened. - Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes4y
@John Franczyk
If he is at $250 and you are at $150 I would not spend a lot of time on this one. Doesn’t matter what his financial situation is, what matters is the value of the home
7e investments53 Reviews - Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes4y
@John Franczyk I don't think you can make money on this one, at least not with an addition. If you are adding 1,000 sqft you will have to expand the foundation, expand the roof - that's about 200k-250k. Plus you have to rehab the house, so it all matches. And then landscape after excavation. It is not easy to make an addition flow well, usually it feels like an afterthought, making them hard to sell.
Better to buy a tear down, bulldoze the structure and build new as an in-fill development. Or offer him 200k, clean it out, paint it and sell for 250k.
- Wholesaler · Racine, WI · Member since 2015 · 143 posts · 84 votes3y
This is a postscript to my original post. After touring the property again, I made an all-cash offer of $82,300 or, in the alternative, an offer with $50,000 up front and owner financing for $61,400 (total - $111,400). The seller rejected both options without a counter-offer.
I later heard he accepted an offer of $160,00 from someone else who, in my opinion, is overpaying.
This is an example of a situation where getting no deal is better than taking a bad deal.
- Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes3y
Buy the property with no realtor commissions on your end. Assume the sellers current note and give the seller a chunk of cash, offer to let him stay in the property for free for a month or two in the meantime before he moves out
- 3yAndy SabischPro MemberInvestor · Jackson, MS · Member since 2021 · 662 posts · 562 votes
Quote from @John Franczyk:
This is a postscript to my original post. After touring the property again, I made an all-cash offer of $82,300 or, in the alternative, an offer with $50,000 up front and owner financing for $61,400 (total - $111,400). The seller rejected both options without a counter-offer.
I later heard he accepted an offer of $160,00 from someone else who, in my opinion, is overpaying.
This is an example of a situation where getting no deal is better than taking a bad deal.
John, Great perspective. As the old song goes . . . you gotta know when to hold em and know when to fold em. In your case you offered what made sense and would not cross that line. If teh buyer is lucky and is able to make a profit at what he paid, great for him. Likely there will surprises and the buyer will find out they over paid. There was a house on auction locally here and we knew what it would require and what the market was. It went for what the sales price fixed should have been. It went on the market in June after the interest rates started to go up at $30K over what the rest of the neighborhood was selling for. It is still on the market . . . . was able to talk to the owner who bought it as a flip and he said that he over improved and now has to sell at the listing price or lose money . . . I said he was losing the monthly holding costs so dump it and he said he could not afford to do that . . . his time in the market will be short indeed - 3yWale LawalBusiness MemberReal Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
1. Don’t negotiate against yourself
This is a standard rule of negotiations, regardless of what you are negotiating for. However, it is not as clear cut as it seems: there are two sides to this.
First, the person who speaks first sets the tone for the negotiation. This is called “anchoring” because if the first person to speak values the asset highly, the second person is likely to value the asset similarly. Since you have done your research and know what the property is worth, the anchoring principle is not as important. But, if you’re going into the negotiation less-informed, you don’t want to negotiate against yourself by offering more than the counterparty believes the property is worth.
Second, most negotiations end at the midpoint of the first two offers. No one wants to concede more than the other, so if the first person drops their asking price by $1500, the second will likely increase their offer by $1500. Then, if the first person drops by $1200, the second will likely follow suit. This process continues until the two negotiators settle on the middle value. Both are more satisfied because they feel like they fought for a fair deal. By letting the other person speak first, you define the midpoint, which gives you much more power than the anchoring principle would.
Plus, there’s a chance the other party’s offer will be even lower than what you would have offered: you never want to negotiate against yourself, and by waiting to see what the seller asks for, you eliminate this risk.
For the best results, come in with a goal price. Let’s say you are aiming to acquire a property for $80,000. If the seller asks for $100,000, you raise your eyebrows and offer $60,000, setting a midpoint of $80,000. As they make counter-offers, match their concessions and hopefully you will end up at your goal price. The seller will think they have convinced you to pay more than you intended, but you will know that you orchestrated the negotiation effectively.
Keep in mind that this technique is an art, not a science. While negotiations commonly end up at the midpoint of the first two offers, it is not a law of nature: some sellers won’t play by these rules and may either settle for a lower price or refuse to budge altogether. Use this tip as a starting point, but be aware that different people will negotiate differently, and you are not guaranteed a particular price just because you employ this strategy.
2. Be patient
Time is money, but in real estate negotiations, money sometimes requires time.
When the other party makes an offer, don’t say anything right away. By appearing to mull things over for a long time, you’ll make the seller uncomfortable – and convince them you are carefully and cautiously thinking out your plan. Even if you know exactly what your counter-offer will be the minute they speak, let them sweat. It’s more likely they’ll agree to a lower price if you make them silence throws them off balance.
When the turtle wins the race
Sometimes, you can take this to the extreme. If you aren’t at risk of losing right away, take a day to think over each counter-offer.
If you take a day every time they ask for a concession, they will get frustrated with waiting and will eventually just give in to your requests. A few thousand dollars on a $100,000 property may feel like chump change in the moment, but if this strategy saves you a few thousand dollars each time you negotiate, you will end up saving tens of thousands over the course of your investment career.
Think about it like this: you wouldn’t bay $200 for a dishwasher you could get for $100; whether you are saving that money on an appliance or on the purchase of the house, a hundred bucks is a hundred bucks.
Be careful with this strategy since the seller can negotiate with other buyers while you are making them wait… if there are a lot of buyers interested in the property and you implement this strategy, you’ll end up losing the deal. Save this for cases where the time on market is high and the owner is struggling to sell.
Stay in touch
If a seller won’t compromise, keep tabs on them. Many sellers are emotionally attached to their homes and place more value on them than an objective observer would. Often, homeowners have unrealistic expectations for the selling price of their properties and will become more realistic after their property has been on the market for a few months.
Check back in with the seller every few weeks to see if they are ready to come back to the table and make concessions – you can also use this time to refine your strategy and figure out exactly how to get them to lower their asking price.
3. Go in with the right mindset
People don’t typically value saving money as much as they value making money. If you dropped a coupon in a puddle, would you pick it up and use it at the store?
What if it was a dollar?
When you think about the difference between buying a property for $55,000 or buying a property for $54,000, especially if you need to spend two hours haggling for it, the saving may not seem like much. Now imagine that you need to haggle another two hours to get the price down to $53,500. Is it worth it?
In the first case, if you are successful, you just made $500 per hour. In the second, you’re still making a whopping $250 per hour. To put that in perspective, the average lawyer makes less than $70 per hour. No matter how frustrating the negotiation is, those extra four hours just might be worth it.
Think of negotiation as work that you are getting paid for, not as money you are saving. Any accountant will tell you that saving money is the same as earning it, even if it feels different in reality. Take advantage of the pleasure you get from earning money while you’re negotiating, not just when you are working to renovate the house.
4. Do your research
All of these tricks are useful, and if you employ them in multiple negotiations it’s likely each one will save you cash at some point or another, even if they don’t work all the time. However, none of these strategies are a substitute for being sufficiently educated about the value of the property you are trying to acquire.
The only way to know that you’re getting a good deal is to go in with a full arsenal of information. Know your numbers, know what your goal is and how much you are willing to pay. If you don’t know the math inside and out, the seller is going to capitalize on your lack of knowledge and you’re going to end up losing out.
With these simple strategies, you will greatly improve your ability to negotiate property purchase prices. Let the seller offer first, make them wait for your counter-offer, think of negotiating as making money rather than saving it, and know the property value inside and out. Once you’ve figured out how much – or how little – you’re paying for your investment property, call us at Asset Based Lending to get the cash you need in just a few days.Good luck!
NETWORTH BUILDERS5237 Reviews - Investor · Ashburn, VA · Member since 2020 · 140 posts · 145 votes3y
Quote from @Andy Sabisch:
First there is not a lot pf meat on the bone to cover unexpected costs, holding costs due to the dynamic market and the availability of trades. If you have a crew of committed resources to complete in essence a new build in a short window that is one thing but of not, where the market is now may not be where it is when you are ready to list it.
The other thing is that when you have someone that thinks they know the market whispering in the sellers ear, you will likely have a challenge on your hands especially when you are offering almost half of what the seller is being told it is worth (even if it is not). We just went through that where we had a house under contract and then the seller talked to a friend that said the property was worth considerably more and talked the seller into backing out two days before closing. It cost him $5,000 for us to release him from the contract (could have been worse but we opted to release him) so we found that even with a signed contract nothing is firm until keys change hands.
It sounds like your seller is getting advice that might not be in his best interest so if you are sold on the property and the work and the price, develop a proposal that shows immediate cash now in a changing market rather than hoping for a sale and having to hold and maintain it.
I would be very conservative with the ARV on the property as with more interest rates looming, you will see values drop to adjust for that . . .we are seeing that in multiple markets we work in which 6 months ago would never have happened.Completely agree with @Andy Sabisch here. This sounds like a very thin deal already even at your price, and the market is weird right now, AND you have some dummy realtor giving him bad information. Everything is stacked against you and I think it is a waste of time to pursue further. I would punt.
We had a similar situation where it was a husband/wife getting divorced. Our relationship was with the wife, and we never interacted with the husband. We offered $425k back in July and she wanted to do it but he had some realtor in his ear and they ended up listing it. We told her best of luck and to reach out if they aren't able to sell. Sure enough, they weren't able to sell, market worsened, and she came back to us. We re-looked at the numbers and with the data point of them listing and being unable to sell, we were nervous and offered $50k lower than our original price, and they ended up taking it.
I think it is a great and horrible time to be flipping. It is horrible because of the market, but that is also what makes it great. Sellers are no longer able to list an as-is dump and sell for above asking price. The value proposition of off market cash buyers has significantly improved and we are very cognizant of that. There is absolutely no need to do thin deals like the one you are looking at in this market. I'd be patient, and once reality sets in for people like the seller you are talking to, they will realize you are giving good info and they should listen to you (assuming you are giving good info!)
- Real Estate Agent · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes3y
1. Explain that it has to be a cash buyer. That way it eliminates owner users who would pay more.
2. Show your numbers. Explain your thought process and that you aren't being greedy.
3. Show them a path to closing. Short/no contingencies, quick escrow, etc. Sellers need to know that if they take your deal, it's finished and the Seller can move on in life.
Quote from @John Franczyk:
I have a track on a house that is a good flip candidate - 2 Br, I Ba, 70+ year old structure with a strong foundation and good systems, sitting on 1/3 acre at the end of a cul de sac. The seller is 70+ years old. He's lived there all of his life.
The 6 or 7 neighboring properties have all been upgraded to 3-4 BR, 2-3 Ba. The strategy here would be to expand the house with 2 more BR, a great room, and at least one more bath. Neighboring properties are selling in the $350K range. The seller's realtor friend tells him to ask $250K. My best price right now is $130K-$150K, with an expectation of putting $150K into it. I can make the business case for a rehab deal and can get the deal done before year-end. If the seller listens to the realtor, he will go through a slow death of reducing prices until he sells it next year some time.
The seller needs $50K to get out from under some debt. The rest would be gravy, and I don't believe he needs a big payment to cover retirement living expenses.
How do I approach the negotiation?
So all in 300kis and you hope to sell for 350k, terrible deal. Much to small of a spread, one mishap and you lose or make little to nothing, Paying 100k, putting in 150k so now all in 250kish, sell for 330k net, is ok,
- Investor & Agent · Tulsa, OK · Member since 2016 · 1k+ posts · 1k+ votes3y
Quote from @John Franczyk:
This is a postscript to my original post. After touring the property again, I made an all-cash offer of $82,300 or, in the alternative, an offer with $50,000 up front and owner financing for $61,400 (total - $111,400). The seller rejected both options without a counter-offer.
I later heard he accepted an offer of $160,00 from someone else who, in my opinion, is overpaying.
This is an example of a situation where getting no deal is better than taking a bad deal.
Good for you knowing when to walk away
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