Negotiating the purchase of a real estate asset can seem complicated and overwhelming at times, so this week I interviewed my business partner, Aziz Shunnara, who is an excellent negotiator about some tips for negotiating the purchase of residential real estate assets.
Aziz Shunnara is the Chief Financial Officer and a managing partner for Duratus Properties. He also owns and invests in many other businesses and has over 20 years of experience in business negotiations.
This week Aziz shares some tips and tricks that anyone in the real estate industry can apply in their own negotiations. Whether you have previous negotiation experience or are just starting out, it is always beneficial to continue developing your negotiation skills.
Q1: What advice would you give someone who is submitting an initial offer to purchase an investment property?
A: First, the buyer needs to know their numbers and have a formula for creating good offers. Here at Duratus Properties, we use the following basic formula to calculate our offers:
ARV - Profit Minimum - ( 8% x ARV ) - Construction Estimate = Offer
- ARV: The After Repair Value is the value of a property after it's been improved, renovated, or fixed up. It's the estimated future value of the property after repair.
- Profit Minimum: This is the minimum amount of money that you are willing to make on the project (can either be a dollar amount or a percentage)
- 8%: This 8% takes into account closing costs and real estate commissions. This may need to be adjusted depending on your area, but it estimates 2% closing costs and 6% real estate commissions.
- Construction Estimate: this should be a rough estimate for how much the renovations are going to cost
After you know these numbers, you can adjust and submit your offer. Ultimately, the offer needs to work for you and your business, and it’s ok if a seller rejects your offer at first; they may come back to you if they don’t get better offers (this happens to us all the time).
Another important strategy is to try to understand the seller and their motives for selling the property before submitting your initial offer. There are often other factors that matter to the seller besides the price of the property. For example, the timing of the sale can often be an important factor that is just as important in negotiations as the price.
Q2: Besides the price, what are some other important terms to consider and negotiate?
A: Many people only think about negotiating the property's purchase price, but there are several other important terms to consider and weigh during negotiations. Here are some common terms to negotiate:
Time - how quickly can you close? Does the seller need to be out of the house by a certain date? If a buyer can close quickly, sometimes a seller will take a lower purchase price to quickly sell a property.
Financing Options - How you are going to purchase the property matters and there are several options available that can have a substantial impact on the purchase price. Many sellers and realtors only consider two financing options--cash and conventional loans. In reality, there are many other ways to finance a purchase including seller financing, lease options, and several types of loans (but this will be the subject of another more in-depth blog post in the future). Different financing can have a substantial impact on the purchase price.
Contingencies - Some sellers, particularly distressed sellers, place a premium on conducting an easy transaction with minimum hassle. In some cases, if a buyer is willing to waive certain contingencies like the home inspections and purchase the property “as-is,” their offer will be given higher priority.
These are just a few of the common important terms to consider when negotiating a real estate purchase, but there can be several others. The best way to figure out ALL the terms available for negotiation on a transaction is to get to know the seller well. When you understand a seller’s motivations and pain points, you will get a good idea of what terms are important
Q3: After receiving a home inspection, how would you advise a buyer to negotiate repairs?
A: The negotiation does not stop after a seller has accepted your offer; in fact, the negotiation has just begun!
Your home inspection can be a valuable tool for you to use during negotiations. You should use the results of the inspection to either request additional repairs or request a credit for estimated repairs at closing. This credit can sometimes take thousands of additional dollars off your purchase price.
Q4: What are some common mistakes that people make when negotiating real estate purchases?
A: People can make many mistakes when negotiating real estate transactions, but here are a few common mistakes that I see:
- Creating an inaccurate construction budget
- Getting caught up in a bidding war over a property
- Only negotiating the price (and not other terms)
- Not conducting proper due diligence (missing key repair items, flood zones, inflated ARV estimates, etc)
However, perhaps the most common mistake that I see is people do not try to get to know or understand the seller. They let intermediaries like realtors or wholesalers prevent them from truly understanding the seller’s motives, which results in an imperfect understanding of the whole situation.
Q5: Any other general negotiation tips and tricks?
A:
- Attack the heart--get to know the seller as a person and try to understand their interests and pain points.
- Create a relationship with the seller and all those involved in the negotiation that can last beyond the transaction. This is important because even if the sale doesn’t work out, there is always future potential to consider. Real estate is a people business, and relationships are more valuable than money.
- Practice! Try to practice your negotiating skills as much as possible--even outside of real estate transactions. Try to practice negotiating on smaller purchases so that you can sharpen your skills.
