Note: This is the next post in the series ABCs of Buying, Selling and Investing in Real Estate. Each post, I select a letter(X this week) and develop a fictional story around the letter. The story is fake, but the advice is real(ty),
This post continues the story found in Three Xray Techniques for Buyers to Use for Real Estate Property Analysis
Xavier called me one Wednesday as I was about to leave the office for dinner. He said he had just gotten back from seeing a house and had some questions for me. I quickly put my stuff down so I could listen to what he had to say. Xavier was a top notch negotiator. He had recently decided to start investing in real estate. He had come to me earlier with questions about how a buyer can learn more about a property to put one in a better negotiation position. Xavier was a bit of mind reader when it came to parties sitting across the table from him, but he had found the real estate game to be a tough one to crack. For this purchase, he said he had been out to the property with the agent who called him about finding it on the MLS. Xavier said the list price was a right one, but the other agent had told him that it was in a multi-offer situation and Xavier was clueless about how to approach the offer. Even though, Xavier told me upfront he felt obligated to use this agent to buy the house, he wanted to flip it and would use me to list it for him. He wanted some advice on the X factors in a good offer that pushed it to the top of the seller’s list. What did he need to do to get this house?
This is what I told Xavier….
First, I thanked him for trusting me to list his flip. I told him he needed to come to me next time on the buy side of things, because my company’s Flip Worthy program gave investors discounts on MLS listing fees if they buy the property through us. It really helped the bottom line and I realized any loss revenue through the volume of purchase contracts flippers bring my way. He nodded, but still wanted to know about multi-offer situations. I told him. “Multi-offer situations are becoming more of the norm versus the exception in this tight seller’s market. It seems every property that comes on the market becomes a multi-offer situation. Some sellers will add structure to the process and call for the final and best offers by a certain date and time. Some sellers will keep it informal and loose by just considering offers as they come in the door. If two end up on their laps at the same time, all the better for them. Buyers agents have added a whole bag of tricks to get their offers noticed from asking buyers to write a letter to the sellers to submitting offer prices way over selling price. However, despite these tricks, there are three true and steady X factors that will make your offer stand out from the crowd.”
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Offer more earnest/option money – With every offer made on a house, the buyer will put two amounts forward in addition to the sales price amount, the option funds and the earnest funds. The earnest funds are the good faith gestures by the buyers to show to the sellers that the offer is a credible because the earnest money can be kept by the seller (in most cases) if the buyer should default on the contract. The traditional amount to put down in earnest funds is 1 percent of sales price. If a buyer really wants to show the seller that he wants the house, he will increase this amount, maybe even double it. The option funds are paid to the seller for consideration of the option period the buyer gets to perform inspections on the property during a set time period. During this time period, the buyer can back out of the deal for any reason and not default on the contract. Regardless of what the buyer decides, Seller gets to keep these funds. If the buyer wants to make an impression, offer a much larger amount than the traditional $100 for seven days. The additional free cash is really attractive to most sellers.
Offer to pay for traditional seller costs – Believe it or not, sellers actually have to spend a lot of money outside of sales commissions when selling a house. With many items in the offer, the buyer will request the seller pay. The title policy is a policy protecting the buyer and lender from defects in the title. Most sellers absorb this cost at closing as it is taken out of proceeds. If the buyer offers to pick this tab, it really opens up the seller’s eyes because these policies can run up to thousands of dollars. Sellers will also traditionally pay for a new survey if needed. This buyer can offer to pick up this $600 cost if they want to leave an impression with the seller. You also have to look at home warranties and closing cost assistance. Buyers will request a home warranty be bought for them. These warranties cover the house’s systems for the first year the buyers live in the house. Closing cost assistance is often requested by buyers since they might not have enough cash for both the down payment and closing costs. if the buyer really wants to put their offer above others, they should refrain from requesting these items from the seller.
Offer higher sales price (but request closing cost assistance) – One trick I have seen several agents use in multi-offer situations is offering more for the house, but then turnaround and request some closing cost assistance. Buyers should be careful here as some mortgage programs do not allow buyers to have too much in closing cost assistance. You also eliminate the closing cost assistance as a negotiation ploy with the repair amendments. If you can, however, it is a great strategy to take this step. For example, you might offer $5k over asking price, but then request the seller pay for $3k of your closing costs. Sellers will not lose anything by paying for closing costs because the offer price is higher than the asking price. In fact, in our example, the seller actually comes out ahead two thousand dollars on the deal. This technique is not used widely so it might be just enough to get your offer selected above other ones.
When I was done, Xavier said he was appreciative of my advice. He really liked the idea of padding the seller’s pocket by offering more in earnest/option funds while sellers would really love the idea of not having to pay for all these fees that traditionally fall to them. He didn’t really see the point in my third piece of advice. He said it was easy enough to see through, but would keep it in mind if he ever needed one more trick to get the seller’s attention. Before he hung up, he said he would be giving me a call in a couple of weeks about rehabbing the flip. I smiled and said I welcomed the phone call.