Today I want to talk with you about something that’s super-important to your real estate investing… but something that might not get as much attention as it should.
And while there’s a big trend in doing deals with off-market properties, these key 6 tips I’m about to share with you apply to just about any kind of investment deals.
Let’s talk pre-screening and negotiating with sellers…
Why Is Pre-Screening Important?
Let me just say: You MUST pre-screen your sellers.
Pre-screening is a critical factor that you can’t overlook when you’re doing deals.
In your first official contact with the owner/seller, you’re getting a first impression of them and they’re getting their first impression of you.
Think about it… haven’t you met someone before for the first time and you just didn’t get a good vibe from them? Or maybe they just weren’t a nice person.
You’re not going to want to do business with someone like that, right?
If you don’t feel like you can start building rapport with this person, don’t waste your time. Move on.
And, this is also just as important: the initial pre-screening meeting is when you need to find out what the seller really wants.
What’s the seller’s motivation?
I’ve been in meetings when the seller just wasn’t really ready to sell, they just wanted to talk. Such a waste of time! Move on.
You should also remember that this goes both ways… you need to come off as the credible and legit investor that you are when you’re first meeting with sellers.
If you don’t—guess what—they’re NOT going to want to do business with you.
Remember, everyone likes doing business with people we:
#1—What Do I Say to the Seller?
When a seller calls, here’s how I like the pre-screening conversation to go…
Me: Hi, this is Josh Cantwell, how can I help you?
Seller: I got a letter from you about buying my house.
Me: Awesome! Would you be interested in selling that house?
Seller: Yes, but how did you get my info?
Me: Well, I’m looking for a couple more rentals in that area, so I decided to drive around and look for possible vacant houses. I wrote down some addresses and looked them up on the tax assessor’s website and it gave me your name and address. Since you’re interested in selling, do you mind if I ask you a few questions about the property?
Seller: No, go ahead…
Okay, let me throw a little psychology at you…
You might have noticed that I said I was interested in buying a couple more ‘rentals.’ I use that word on purpose because it has less of a negative connotation than saying, ‘I’m looking for properties to flip.’
If a seller were to hear ‘flip,’ they’ll probably start thinking, ‘Well, this guy only cares about making a bunch of money and he’s gonna lowball me…’
And if you’re not into rentals, just change it up depending on the list you’re targeting.
If you’re marketing to high-equity absentee owners, you could say something like:
“I send direct mail to several people in the area who own houses but don’t live in those properties. And that’s how I came across your name and address.”
What Info About the Property Do I Need?
If the seller says you can ask them questions about the property, here’s what you need to find out:
- Seller’s name
- Best phone number to reach the seller
- Property type (single-family, duplex, etc.)
- How many beds, baths
- Square footage
- Is seller working with a Realtor?
- If so, name and number?
- Any particular reason why you want to sell?
- What repairs are needed?
- Who lives in the property?
- How quickly do you need to sell?
- What do you owe on the property?
- Are your payments current or behind?
A Couples Notes Re: Some of This Info…
The reason you want to know if they’re working with a Realtor is because you want to play by the rules. Meaning, don’t go around the Realtor or do something behind their back… if you plan on making an offer, call up the Realtor and do it the right way.
Okay, when you ask the seller why they’re selling—that’s when you gauge their motivation. This is critical! What’s their reason? If they say they’re facing foreclosure or it’s a rental and they’re ready to be done with it or it’s an inherited property that needs too much work—move forward. If they seem wishy washy about why they want to sell, move on.
About repairs… take what the seller says about repairs with a grain of salt.
Why? Some sellers may be honest and even overshare how much work the property needs… and others may say it’s in great condition, when it isn’t.
Now, I know that asking about what they owe on the property can be uncomfortable—for both you and the seller. So, if they say they don’t want to tell me what they owe, I say this:
“I understand this might be uncomfortable. But for me to make an educated offer, I need to know how much is owed. If you owe more than I can pay for the property, I can’t make you an offer and buy it. And I don’t want to waste your time or my time. If you can give me a ballpark number… I don’t even need to know who your lender is…”
Okay, I do have one last question I ask the seller: What are you looking to get for the property? If I can offer you cash and pay all your closing costs, what is the lowest offer you will accept?
And believe it or not, right there on the phone, I’ve had sellers drop their price by $50K! Now, you’re not going to get huge number jumps like that all the time, but it can happen.
I end the call with:
Thank you, I’ll run some numbers and get back to you with an offer as soon as possible.
When talking with sellers, know this…
- practice makes perfect
- be confident when asking and answering questions
- understanding the seller’s motivation is key (don’t waste your time talking with unmotivated sellers)
Use a database (like FreedomSoft) to store all the lead info, and outsource your incoming calls to:
- Pat Live
- Acquisitions Manager
#2—How Do I Analyze the Deal?
So, I like to hop on the tax assessor’s website to verify the information the seller gave me.
Then, I start running comps. Here are some great resources for finding usable comps:
- Look for cash sales on the MLS
- Zilllow’s sold listing but not the Zestimate
Look for houses sold within the past 90 days within a half mile radius of the possible property deal. Then simply choose 3-5 comps that are similar to the subject property in square footage, number of beds/baths and style. You’re smartest number will be the one in the middle or the average.
#3—How Do I Estimate Repairs?
Because I usually make offers over the phone, I don’t really know exactly how much the property needs and how much it’ll cost.
But here’s my typical estimates (for a 1,500 sq. ft. 3 bed/2 bath):
- Seller says no work is needed: $5K-$10K (think fresh paint and new carpet)
- Sellers says minor paint and carpet: $15K
- Seller says needs work: $15K-$25K
- Seller says needs a lot of work: $30K-$40K
- Seller says needs to be torn down: go look at the property
Remember that the more houses you look at, the better you’ll get at making repair estimates.
It will also be helpful for you to have on hand a Repair Estimate Form that has a checklist of typical repairs… how much it usually costs to replace a roof in your area or the average kitchen remodel or replacing windows.
#4—How Do I Figure Out My Offer Price?
Well, start with your After-Repair Value (ARV)… what the house is worth when it’s completely fixed up in great condition. What your comps showed you is how you figure out your ARV. For this example, we’re looking at $160,000 ARV.
160,000 (ARV) x .67 = $107,200
From there, you’ll subtract:
- repair estimates ($25,000)
$107,200 – $25,000 = $82,200 (maximum allowable offer, MAO)
And remember to factor in these costs as well:
- closing costs
- holding costs
- your wholesale fee (if you’re wholesaling it)
I usually like to see my purchase price at 52%-55% of the ARV. And remember, you don’t need to be exact to the dollar, just in the ballpark.
#5—Make the Offer
So now that I know my offer can be around $80K, I call the seller back. I tell them I ran some numbers, and based on other similar recently sold properties in the area, I tell them my offer.
I ask if that’s a purchase price they can work with.
If their number is way above my offer, I’m not going to waste my time on the deal anymore. For now… I simply tell them I’ll follow up with them later if the property is still available.
But, if they come back with a number that’s $10K-$20K over my offer, I’ll ask to come over, so they can walk me through the property.
Maybe the property will need less work than I estimated, which means I can bring up my offer a bit. Or maybe it actually needs more work, which I can politely explain to the seller during the walkthrough…
Either way, meeting with them in person after my initial verbal offer over the phone allows me to build even more rapport with the seller.
Usually, before our in-person meeting, I email them my offer. And I bring a contract with me for that meeting too.
You MUST make offers!
Let me be clear…
I believe that making offers is the most important part of your real estate investing business. You should be making an offer on every property you come across.
Every. Single. One.
You should be making 5-10 offers a week.
Listen: If you are not making offers, then you are not making money.
#6—Renegotiating a Bad Deal
Now, after you’ve really had a good chance to inspect the property and you realize your offer is too high because of the amount of work the house needs, you’ve got to renegotiate.
Tell the seller it didn’t pass your inspection, but your partner said you can still make the deal work by coming down about $10K on the price.
By blaming the money issue on ‘your partner,’ you’re still the good guy. It sounds like you are on the seller’s team—after all, you’ve already built a connection—and it’s your partner who’s the ‘bad guy’ here.
Gently let them know that you’ll have to cancel the contract if the property doesn’t pass inspection or the purchase price doesn’t come down.
Building rapport with the seller is crucial to your success.
An easy way to do this is to have your ears and eyes open!
If the seller mentions they like to fish, talk about that with them. Maybe you see that they have golf clubs, strike up a conversation about that. Connect with them about shared or common interests.
And always, ALWAYS be positive. Put a smile on your face.
Those things will help you go a long way for your offers to be accepted and to get you more deals.