Master Real Estate Course

Lesson #9 Negotiate the Deal

Objective:

• Identify strategies leading to win/win transactions

1. Buy six properties. 2. Love your tenants. You buy a property and you pay off the mortgage. Then you enjoy the income. Then your children enjoy the income. Then your grandchildren enjoy the income. Your great-grandchildren will enjoy the income. When does this end? Now, you know why real estate investing is so great because it never ends. In a hundred years, your offspring will be saying, "Thank you great-great-great-great grandpa or grandma!" Start your family dynasty. This is beyond the comprehension of average people. You can do this. You deserve this.

Background:

The fun starts now because the real potential for making money starts now. The difference between a good negotiator and a poor negotiator is thousands and often tens of thousands of dollars. Good negotiators are prepared. They know exactly what they want to accomplish. They know their limits financially. They know which points they can bargain and which points they can't.

As a buyer, you negotiate from a position of strength. You don't have to buy this property or any property. Compromise is your option. If the deal is not to your complete satisfaction, there will always be new opportunities.

Remember a list price is a seller or agent's wishful thinking. You must negotiate from a price that works for you and not for them.

There will always be other deals. You have to know what you want. You are the commanding general of your future. You have to know what you will and won't accept. You have to be willing to walk away.

Probably ninety percent of properties are listed at or above fair market value. Through your offers, you have to bring the price down to market value. However, ten percent of properties are listed at or below market value. This means that you may be able to scoop up a good deal without any negotiating. You can pay full price and still get a great deal. Will this be you? You must be knowledgeable. You must be decisive.

Understand that if a $250,000 is priced 10% undervalue, that there is a potential profit of $25,000. Yes, if you are astute, you can make money buying properties at list price and reselling at the correct market value. Who will find these deals? The best person is THE expert on values in the small specific investment area.

Why will you succeed as a negotiator? You are an expert and probably THE expert on value in your small specific investment area. How many other people are looking at and tracking every sale? There is one person – YOU. You will be prepared and organized. You will be realistic and fair. Of course, just because you are right and fair does not mean that the seller or the seller's agent will agree with you. In fact, in the overwhelming majority of cases, they will not. They will negotiate with you. Or, you will move on.

Be prepared and accepting that some sellers and agents will take your offers as a personal insult. They have personal financial expectations from the property sale and now you are somehow to blame for foiling those plans. You are not willing to give them the extra five thousand or twenty thousand that they need for a hip operation or to buy a three bedroom new house.

What do the seller's personal problems and expectations have to do with your offer? Exactly; it means nothing. A property is worth only what a ready, willing and able buyer is willing to pay for that property.

If a seller wants a higher price, he or she is free to counter or reject your offer.

Think of a seller's asking price this way – it is a price too high for anyone to pay. If someone were willing to pay the asking price, the property wouldn't be for sale; the property would be sold.

You are a Master of Success. Stay focused on your objective. Hang tough. The seller's personal wants or needs have nothing to do with your wants or needs.

You are a Master of Success. It's business. It's not personal. If you see a good opportunity, grab it. Play fair. Negotiate hard. If you are in the game, you will win your share of negotiations.

Over time, with increasing frequency, deals will be brought to you. If you are known in your small specific investment area as a serious buyer, you will get the first call from sellers' agents. Your market evaluations will be taken seriously. You will also be establishing contacts with area investors who will sell their properties directly to you without broker involvement.

Masters of Success stay busy. Acquisition will take center stage in the first few years of your investment program. You will research. You will learn your small specific investment area and the players in that area. You will assemble a team. You will look at lots of property and make offers. You will negotiate and put deals together. You will buy and sell. You will own six properties and you will take pride in the ownership of these properties. You will keep your properties in top condition. You will stay busy.

The Andersons

I had been running a small display ad in the local newspaper: "Cash for your house. Immediate closings." I was averaging one to two calls per week and one good lead per month. My objective was to find people who wanted to sell their home quickly without using a broker. One morning, I received a frantic call from a Mr. Anderson asking me to meet him at his house. He owned a big colonial house in a good location. The house was worth about $225,000. It needed a new roof. It needed to be painted. The inside was a mess, but mostly cosmetics.

Anderson himself looked haggard and disheveled. He appeared to be distraught and with good reason. He wanted cash immediately. He needed money to move immediately. Within the last two months, his wife had left him, his son had been arrested. While we were sitting in the kitchen, the family dog was running a mile a minute in a circle trying to catch its tail.

I asked Anderson what he was looking for and he said, "I have no mortgage. Give me a hundred thousand and the house is yours. I want to be out of here in a week." I was going to offer $160,000 and hope to get the house for $175,000. I told him that the house was worth a lot more than a hundred thousand. I advised him to take a few days to think things over but that I was definitely interested in buying the house. I told him to speak with a lawyer before making any big decisions.

I called him back the next day and guess what? The lawyer bought the house!

Playing amateur psychologist cost me this opportunity. I should have made the offer of $160,000. At $160,000, this would have been a win-win deal and fair under the circumstances.

There is right and wrong. As you buy and sell and make lots of offers, you will find people who are not in a mental state to negotiate fairly. You must make a moral judgment. You are a Master of Success. You are a person of honor. Again, there will always be other deals.

Start with a new folder. Put the address of the property on the front and use the cover of the folder to log your daily activities. The folder will contain the following:

   1. Copy of the listing sheet
   2. Property inspection report
   3. Any photographs of the property
   4. The four repair and improvement lists
   5. The evaluations of the property on paper
   6. A list of comparable sales
   7. If available, a plot plan which shows the boundaries of the property
   8. Property projection information. What do you feel this property will be worth in 1 year, 3 years, 5 years, 10 years?
   9. Your mortgage pre-qualification or pre-approval letter.

With the folder, you have a basis for discussing your offers with your Super Agent. Your Super Agent's job is to present the seller with your offer in an honest and straightforward manner. When you make an offer, it will be in writing on a standard Offer to Purchase form. Your Super Agent will have these forms. These forms are now available online.

Your Super Agent may be your friend, but if he is working for the seller, he has a fiduciary (trust) relationship with the seller. For example, if you say to your Super Agent, "I want to makea first offer of $200,000, but I'll go as high as $230,000", your Super Agent has an obligation to the seller to share this information with the seller. So, unless your Super Agent is a Buyer's Agent, keep quiet.

Use your Super Agent as a fact gatherer. The role of the agent is NOT to do your negotiating for you. Win or lose, you must assume the role of the negotiator.

   Listed here are just a few general negotiation guidelines:

1. You'll never pay less for a property than your first offer. You may think you've made a low offer and then, you're surprised when it's accepted. Well, it's too late to offer less.

2. You may never really know a seller's motivation or circumstances. The seller may have paid $125,000 for a home that a listing agent now tells the seller is worth $280,000. The seller may have thought that $280,000 was a crazy price which no one would pay. When you happen along and offer $200,000, he or she is delighted and accepts. Conversely, another seller, when told a property is worth $280,000, may think that $280,000 is much too low and will hold out for every cent until a satisfactory price is reached or, more likely, they take the property off the market.

3. A first offer is exploratory. Don't load down a first offer with a lot of conditions. Work on the price first and later, you can use your conditions as bargaining chips. There is not a mandated time limit between offers. You can follow a first offer with a second, third, tenth in one day.

Some people are very good at knowing the values of a Hummel or a Beanie Baby. They make a few dollars. Some people are good at knowing the values of used cars. They make hundreds, maybe a few thousand. You are very good at knowing values of real estate in your small specific investment area. You make hundreds of thousands.

4. If your first offer is refused, the seller will often make a counter offer. Most list prices have some play in them. The seller expects offers and so raises his real price accordingly. You now have to react to the counter offer. A good method is to go to your folder and list every deficiency and drawback to buying this property that you can think relevant. Super Agent will communicate this long list of work and expenses to the seller. Super Agent will then tell the seller that in spite of all this, you, the buyer, agree to pay slightly more than your first offer. Now, you have put the seller on the defensive. He not only has to justify the price he or she is asking, but also has to justify the costs of all the work to be done. The negotiating process proceeds with new offers. Each time you offer more money, throw in a few conditions. Will the seller pay for a new roof? Will the seller pay for new carpeting? Will the seller pay for landscaping? Of course, the seller doesn't want to pay for anything. The seller wants to sell and to move on to something else. Condition the seller. When the seller says to Super Agent, "Listen, Mr. Super Agent, I don't know if this person is crazy or what, but I have no intention of painting this house. I know there's a lot of work to be done around here, but $240,000 is as low as I go and that's it!" Now, you have found the low price. Make a decision.

Not all negotiations, no matter how skillfully developed, will end in a deal. Know what you want and proceed accordingly. The other party is free to be greedy, clueless and counter-productive. Some will. Some won't.  So what. Next.

5. The negotiating process can take as long or as short a period of time as you decide. If you really want the property, make the deal in a few hours. If you're on the fence and looking at other properties, take your time. When you've completed negotiations, you and the seller will sign a form called the Purchase and Sale Agreement (P & S), which will specifically set the conditions for the sale. Super Agent will have a standard P & S form or your lawyer can draft one.

Some investors get so good at appraising properties in their specific areas and at negotiating that they specialize by buying property and quickly selling it at the profit. Profits of thirty and forty thousand dollars per transaction are not uncommon. Real estate investment offers many opportunities for even the part-time local investor. You'll decide where your expertise lies.

You can't make a good deal with a bad partner.

How To Make Offers

If there's one thing that separates beginning investors from seasoned pros, it's an ability to make offers. You can translate the word ability to mean willingness. Beginning investors are usually willing to make offers only when all their questions have been answered and the answers verified and re-verified. In contrast, master investors are often willing to make an offer on almost every property they review. Because they are prepared and confident and can make offers quickly, experienced investors often make the best deals.

Master investors act under the assumption that almost all real estate has worth. For instance, if an experienced master investor knows that over the past few years, income properties have been selling for $70,000 to $90,000 per unit in a given area, then he or she has a pre-established price guideline for making offers on comparable property in that area. Armed with this research, an experienced master investor probably wouldn't hesitate to make an offer of $55,000 per unit.

The experienced master investor also knows that if there are any unresolved questions or concerns, he or she can make an offer with contingencies. The contingency offer provides the investor with more than sufficient protection, while keeping the negotiating momentum alive. If the offer is accepted, the investor has made a very favorable acquisition. If the offer is not accepted, the seller may make a counteroffer. Then the give-and-take of negotiating will begin.

You are cooperative. You are a Master of Success. You are an Action Principles^® Champion. You get the job done.

By starting with a low offer, the master investor draws the seller's true price out into the open. The master investor knows that he can stop the negotiating at any time he desires. The master investor also knows that by making a lot of offers, he or she will sometimes hit a home run on price or terms or both.

This is business. This is a business involving tens and hundreds of thousands of dollars. Plan accordingly. You don't need to have a degree in psychology to figure out the seller's motivations. Know what you want. The Anderson Story above is a rare exception. Most sellers are perfectly capable of representing their own interests or hiring competent assistance. You are not in this deal to make friends or to impress anyone. This is business. Act professionally. Let the Action Principles® be your guide. If you are knowledgeable and capable of taking immediate decisive action, you will get your share of Anderson type deals.

Success Secrets of Andy Grove

Billionaire CEO of Intel

1. Celebrate achievements. Provide interim milestones, and supplant the long-term drive toward reaching a major result with a series of smaller steps.

2. Rotate jobs. Even if you stay with one organization, rotate jobs occasionally.

3. Enjoy the people you work with.

4. Enjoy your work.

5. Be dedicated to your work.

6. Be straight with everyone.

Library

The Unofficial Guide to Real Estate Investing, Spencer Strauss

Secure Your Financial Future Investing in Real Estate, Martin Stone

The Autobiography of William Zeckendorf, William Zeckendorf

Property Management 101

You are a Master of Success. You must deal with most management concerns immediately. Situations that require your immediate attention are: failure to pay rent or other fees on schedule, failure to maintain the unit in a hygienic condition, damage to the property, excessive noise/parties at inappropriate times, visitors who overstay their welcome, unauthorized pets, misuse of common areas including parking privileges, any type of criminal behavior. Snail mail and email won't cut it. Phone calls will probably be ignored. Knock on the door.

Be sure that tenants understand clearly that you are in the rental housing business and not law enforcement or family counseling or social welfare. Make it clear that any suspicious activities will be reported to the police and/or other appropriate agencies.

Operational Limitations:

Sellers and their agents will price properties according to their wants and needs and this figure may have little to do with economic reality.

Be prepared that some sellers and agents will take personal offense to your offers. This is pressure. Masters can handle pressure. This is business.

Rarely is anything in life perfect. You research and you research some more. You gather information. You consider options. You aren't paralyzed by indecision. You make a decision based on the imperfect information you have.

You can't make a good deal with a bad partner.

Jargon:

Amortize - To repay a mortgage with regular payments that cover both principal and interest.

Common Areas - Those portions of a building, land, and amenities owned (or managed) by a planned unit development (PUD) or condominium project's homeowners' association (or a cooperative project's cooperative corporation) that are used by all of the unit owners, who share in the common expenses of their operation and maintenance. Common areas include swimming pools, tennis courts, and other recreational facilities, as well as common corridors of buildings, parking areas, means of ingress and egress, etc.

Contingency - A condition that must be met before a contract is legally binding. For example, home purchasers often include a contingency that specifies that the contract is not binding until the purchaser obtains a satisfactory home inspection report from a qualified home inspector

Debt - An amount owed to another. See installment loan and revolving liability.

Lease - A written agreement between the property owner and a tenant that stipulates the conditions under which the tenant may possess the real estate for a specified period of time and rent.

Lien - A legal claim against a property that must be paid off when the property is sold.

Mortgage Broker - An individual or company that brings borrowers and lenders together for the purpose of loan origination. Mortgage brokers typically require a fee or a commission for their services.

Questions and Answers:

Aren't bi-weekly mortgages a good option for our system?

Thank you, yes, of course, you are correct. Bi-weekly mortgages perfectly suit our objective of retiring our mortgages early. With a bi-weekly mortgage you make a half mortgage payment every two weeks rather than one mortgage payment per month. Paying your mortgage every two weeks means that you will make 13 rather than 12 mortgage payments per year. The result is that you will save tens of thousands of dollars in interest.

Your mortgage lender may offer a bi-weekly payment option. If not, you can simply add 10% to each monthly mortgage payment with a note that the surplus should be applied to principal. Or, you can check http://www.paymap.com, which offers a mortgage equity acceleration payment service.

I am worried about what will happen to me if interest rates rise especially if I have to go with an adjustable rate mortgages to buy my properties. Should I be worried?

Yes, if you are overextended financially you should always be working to reduce your debt load. Yes, some properties owners could get caught in a squeeze if they have adjustable rate loans and rates rise beyond their ability to pay. Yes, you might have to commit to an adjustable rate loan to purchase a property but after you own the property you are in a much stronger position to do a little upgrading and then reapply to that lender or a new lender for a new fixed rate loan. If all your loans are fixed, you are set. Relax and start paying them off.

In the above example, you have to check for prepayment penalties written into the adjustable loan contract. However, also remember that these prepayment penalties may be negotiable. You have to ask.

I really like the idea of making low offers. How low should I make my first offer? Can I make it 30% or 40% under the asking price?

Your objective is to make enough money to buy six properties and pay off your mortgages. You will accomplish this objective through research and a willingness to make offers.

There are no set rules to making offers. If you find a property worth $240,000 that is listed for $220,000, there is already a potential profit of $20,000. You could offer $160,000 or $180,000 or any amount you wish but while your offer is being considered or rejected, you risk another buyer paying full price and acquiring the property.

Yes, you can make very low offers but this tactic may backfire. The seller could be insulted by your offer and refuse to deal with you. Again, real estate is a people business. Some owners may sell to you because they like you and accept a lower offer. Some owners may take a dislike to you and reject any offer.

In the long run, it pays to be pleasant, professional and fair. Remember, some will, some won't, so what, next. There will always be another deal for the active investor willing to put in the study time to find it.

I was told that I could invest in real estate with any management by buying REITs. Can you tell me what those are?

An REIT, Real Estate Investment Trust is a company, usually traded publicly, that manages a portfolio of real estate to earn profits for shareholders. You purchase shares in a company and the company buys and manages the properties and takes appropriate fees.

The properties purchased are usually larger properties than you would buy as an individual, for example: shopping centers, medical facilities, office buildings apartment complexes, and hotels.

The advantage of REITs is diversification in the types and locations of properties. Another advantage is professional management. The downside is that the assets are not under your control and the returns may be significantly less than if you have invested as an individual.

Why do I have to wait for properties to come on the market? Can't I approach property owners directly about selling?

Absolutely. You can do your own research or you can buy lists of multi-family owners, condo owners, owners over eighty years old or almost any other criteria. Write them letters stating your interest as an investment buyer.

You can place classified ads or small display "We Are Buyers" type of ads in your area newspapers. You can place coupons in the mass mail envelopes sent to homeowners.

You can join the Rotary, Lions and Kiwanis Clubs. You can join the Chamber of Commerce. You can join the country club, PTA and or church groups.  You can go where the people are in your specific investment area and tell everyone what you want to do and that is to buy real estate. You don't have to be shy or a wallflower waiting for real estate agents to call you. You can be pro-active.

I own my home and have about fifty thousand in equity. I was thinking about getting a line of credit to start flipping and investing. Is this a good strategy?

In your case, an equity line of credit will be an excellent financing vehicle. The interest rate on equity loans is usually tied to the National Prime Rate. Let's say that the bank approves an equity line of forty thousand dollars. If you obtained a traditional second mortgage, you would receive the forty thousand and have to begin making interest payments immediately. The equity line gives you the flexibility to only borrow the money, as you need it when you find a good deal. And, you can borrow the exact amount you'll need. If you need $23,452, you can borrow $23,452.

When you flip and sell a property, you simply pay back on your equity line and your account is full again, there is no need to go through another approval process.

Yes, with an equity line of credit you are fully cashed and ready to go. This is an excellent investment tool.

When you select your six investment properties should some of them be commercial or industrial or apartments or single families or condos?

The types of properties are not important. Any from the mix you suggested would be fine. Find six properties, which are well located, which can be well maintained and which will generate a reasonable cash flow.

If you count your own home and summer home, you need four other investment properties. If you own and rent a condo to your daughter, you only need three investment properties. If one of your properties houses your business, you only need two investment properties. If your business has two satellite locations, you don't need any other investment properties. If you are very rich, you can own office buildings or shopping centers or warehouses. If you aren't so rich, yet, you can own one-bedroom condominiums.

Action Plan:

This is a good time for review.

BAD - Are you a know-it-all who thinks that he or she can just pick and choose from this program? If you are, welcome to average and we don't like average. Maybe you'll buy a property or two but you will never be what you could be, which is a multi-millionaire in twenty years or less. Yes, it is hard work to define your area, to learn every property, to track every sale and to make important contacts. But, it is only this preparation that will lead you to an expertise where you can make many solid offers leading to many solid deals leading to wealth.

If you want easy, buy lottery tickets.

GOOD – Making millions of dollars is serious business. You plan accordingly. You devote 8-10 hours per week to your research, to looking at properties, to maintaining your contacts and managing your properties. You get to your real estate investment reading goals. You participate in the Forums on MasterSuccess.com and Dojo.com. You watch my weekly motivational instructional online seminar. You spend twenty minutes per day in quiet time. You aren't average. You are special. As they say in the SF in the cold and the rain on the 40-mile fun march, "This is what makes us special!"

Support:

• From the National Real Estate Investors Association: http://www.nationalreia.com/news.html
• Blog: Real estate investing for real: http://www.biggerpockets.com/renewsblog
• Blog: Home buying and selling: http://www.homebuying.about.com
• For general brokerage information: http://www.coldwellbanker.com, http://www.century21.com, http://www.remax.com, http://www.homes.com, http://www.move.com

Inspirational Insights:

Nothing contributes so much to tranquilize the mind as a steady purpose--
a point on which the soul may fix its intellectual eye.

Mary Shelley, b. 1797, English writer

One's philosophy is not best expressed in words; it is expressed in the choices one makes ... and the choices we make are ultimately our responsibility.

Eleanor Roosevelt

If you do build a great experience, customers tell each other about that. Word of mouth is very powerful.

Jeff Bezos, b. 1964, founder of Amazon.com

Practice rather than preach. Make of your life an affirmation, defined by your ideals, not the negation of others. Dare to the level of your capability then go beyond to a higher level.

General Alexander Haig, b. 1924, Secretary of State

Don't bunt. Aim out of the ballpark.

David Ogilvy, b. 1911, advertising executive

Class is an aura of confidence that is being sure without being cocky. Class has nothing to do with money. Class never runs scared. It is self-discipline and self-knowledge. It's the sure footedness that comes with having proved you can meet life.

Ann Landers, b. 1918, syndicated columnist

The soldier is the army.

General George Patton

Exert your talents, and distinguish yourself, and don't think of retiring from the world, until the world will be sorry that you retire.

Samuel Johnson, b. 1709, English writer

Do not be too timid and squeamish about your actions. All life is an experiment.

Ralph Waldo Emerson, b. 1803, American writer

Energy and persistence conquer all things.

Benjamin Franklin, b. 1706, American statesman

Never be bullied into silence. Never allow yourself to be made a victim. Accept no one's definition of your life, but define yourself.

Harvey Fierstein, b. 1954, American actor

An expert is a man who has made all the mistakes which can be made in a very narrow field.

Niels Bohr, b. 1885, Danish physicist

Money won't make you happy... but everybody wants to find out for themselves.

Zig Ziglar

The mark of a good action is that it appears inevitable in retrospect.

Robert Louis Stevenson, b. 1850, Scottish writer

One does what one can, not what one cannot.

Agatha Christie, b. 1890, British mystery writer

If you do not hope, you will not find what is beyond your hopes.

St. Clement of Alexandra, b. 150, Christian scholar

Action often precedes the feeling.

Zig Ziglar, b. 1926, motivational speaker

Accept challenges, so that you may feel the exhilaration of victory.

General George Patton, b. 1885 WWII general

Work spares us from three evils: boredom, vice, and need.

Voltaire, b. 1694, French writer