Don’t Let Clients Get Outbid on the Right Deal
It’s a seller’s market in most metros. How can you and your agents help buyers compete in the frenzy?
July 27, 2018
You might be working with buyers or investors in a seller’s market, and they just aren’t finding properties that meet their needs. Plus, competition is driving up prices. Many real estate professionals are in the same situation. How can you and your team find properties that have less competition? I have three real-life scenarios that may help.
1. Get to the deal first. Train your agents to find the deal before it goes to market.
I had a client who wanted to buy a beachfront condo in a very sought-after neighborhood, but there were no listings in the area. I knew some people who lived there, so I asked them if they knew anybody who might want to sell. They gave me the contact information of two absentee owners that might be interested. One was not, but the other was a busy doctor who never used the place. I told her I had a very interested buyer who would take the unit “as is” and could close in 30 days. The condo needed updating, so we deducted those costs from the sales price. The owner accepted, and my client was absolutely thrilled.
2. Write the best offer. I was showing a client several homes in a neighborhood she liked, but nothing met her needs. As we were leaving the neighborhood following another unsuccessful day of home touring, we saw a For Sale sign go up on a home that I knew would be highly desirable. It was in an absolutely perfect location where properties rarely go on the market. I pulled over and asked my client if she liked the location and the style of the house. It was love at first sight. I called the agent and booked an appointment immediately for my client to see the interior. The agent told me she already had seven offers—in just a few hours.
The house was underpriced, probably in anticipation of multiple offers. We had to come in with the strongest offer, which isn’t always the highest price. I asked my client if she had any chance of accessing cash to close and then refinancing later. She called her financial planner and found out she could immediately get a loan against her stocks.
I also asked if she’d be willing to go over asking price and try to negotiate it down later. She agreed, knowing the listing price was already lower than the home’s intrinsic value. We made an all-cash offer, closing in 15 days, contingent on inspections and appraisal. We went in $150,000 over asking price (often the norm in California). The seller accepted.
Once in contract, we ordered every inspection possible. On day 10, when the contingencies were to be removed, we asked for a price reduction based on the work that needed to be done. The seller had the option to accept and close in five days, or put the property back on the market. Since our new offer was still higher than the original ask, the seller agreed to reduce the price.
After updating the home, my client refinanced into a conventional loan, and the appraisal came in much higher than what she had paid. My client was happy, and now every time I see her, she thanks me for finding her dream home and changing her life.
3. Look for properties with some kind of distress. When I was visiting my daughter one weekend, she told me she had perfect credit. She was renting at the time, so I asked her if she had spoken to a lender to find out if she could qualify for a mortgage. She was only 24 at the time, so she laughed and told me she was too young. I begged her to do it anyway. She did and found out she could qualify for a $250,000 mortgage with just 3 percent down, and the payments would be less than what she was paying in rent. We started looking at properties just for fun.
We found a four-plex near the local college listed at $400,000. She later found out she could qualify because she could include the rental income from the other units in her loan application. However, she did not want to be a landlord managing student tenants. (I still think it would have been the best choice because the rental income from the other three units would have more than covered the mortgage and expenses. She could have lived in her own three-bedroom unit for free.) Instead, she found a little three-bedroom house across from a very popular park. The comparable properties in the area were around $350,000, but this house was listed for $250,000. After further inspection, we discovered that the former owners ran out of money during a renovation, and the second bathroom was not finished. No conventional lender would have approved it.
At that low price, I knew we had to come in with a very strong offer. This was a hot neighborhood. I told her that since she was already approved for financing, I would self-direct my IRA and lend her the money for an all-cash offer. She could improve the property, increase the value, and then refinance into a conventional mortgage and pay me back. We spoke with her lender, and he said that as long as we recorded my loan as a lien on the property, he could do the refinance at any time after close. I would have recorded the lien anyway to protect my retirement.
We estimated the cost of repairs and subtracted it from the after repair value (ARV). It turned out the asking price was much lower, so we made a full price, all-cash offer contingent on inspections and appraisal. Our offer was accepted over 10 others. After inspections, we asked for a price reduction to cover the needed repairs. The seller countered in between our contract price and adjusted price, and we accepted.
My daughter was thrilled. She enlisted several of her friends to help her finish out the bathroom. Somehow she got the work done for half of what she originally estimated it would cost. She refinanced shortly afterwards, and the loan from my self-directed IRA was paid back with 6 percent interest. One year later, she has $100,000 in equity and is paying the same as she had been paying in rent.
I’ve helped thousands of people buy investment property with the same methods. We make sure the rent will more than cover the expenses so that over time, the mortgage is paid off through the rental income. All of the buyers mentioned above could rent out their properties for extra cash flow—if they needed to move for some reason. This is how wealth is created through real estate.