Hey there, Lee Arnold here. My buddies here at Awesomely asked if I could share some info about how to negotiate a deal.
So, here I am!
Why me, specifically?
Well, I’m an active investor, licensed broker, and run a nationwide private lending company, COGO Capital. We see hundreds of deals coming into our office all day, every day AND all the challenges that investors face — including getting a good deal.
So, I’m going to share what’s been working for my businesses and what you can do differently to have a better chance of getting some incredible deals.
But first, there’s a rather common mistake we’re seeing investors make. If you’re not doing this, kudos to you! But you need to be honest with yourself, asking: Are you making this mistake?
Many investors are doing it wrong…
Let’s say there’s a property with an ARV of $220,000 and a seller who’s asking $180k. So, the seller understands that the property is in disrepair, and that’s why they’ve priced it below full market value. They’re making some concessions for condition.
Ok, but…
You know the typical formula for calculating MAO — maximum allowable offer:
After repair value X 70% minus rehab $.
Let’s say rehab costs are $35,000.
$220,000 X 70% — $35,000 = $119,000 MAO
Then, the investors we’re talking about, who are making this mistake, will send the seller an offer for $119k… without ever stepping foot in the property.
Wrong strategy.
In the seller’s mind, they’ve already reduced the price to a number that they think you should be able to make money on. But, they’re not calculating things like hard money costs or carrying costs, monthly payments, utilities, sales costs, excise tax… all of those things come into play here.
And you know that this is not enough margin for us to make money.
But if you come in and offer $119, you’re never going to get a deal accepted.
Here’s the better strategy…
Don’t offer $119,000. Offer $180,000 — subject to an inspection.
Boom.
You’re going to pay $350-$500 to get a third-party, licensed and bonded home inspector into that property. And they’re gonna crawl all over that home… in the basement, attic, roof. They’re going to look at the fireplace, utilities, furnaces, air conditioning units — everything.
And they’re going to come back with a 30-60-page report of everything that’s wrong with that property. And many of those things, the seller isn’t even aware of.
Now, armed with your report from the inspector, you go meet with the seller and say:
“Mr./Mrs. Seller, here’s where I’m at… we are under contract at $180,000. As you can see from the home inspector’s report, the property needs a new roof, which will run me about $10,000. You can also see that the property is in need of a new air conditioning unit and a new HVAC system. That’s $8,000. There are also some leaks in the plumbing system. So, we’re going to need to repair some of those leaks in the plumbing system. And then, of course, as you know, the carpets in this house are shot. The appliances are shot. So, I’ve calculated another $8,000 there. I’ve got about $30,000 of needed work.
So, Mr./Mrs. Seller, here’s what I’m willing to do. If you will take care of all of these things, I will happily pay you the $180,000. Now, if you cannot, I need you to reduce the price to $140,000 so that I can purchase the property, do all of the needed repairs, get to the price you’re asking, and then sell it at $220 and still make a profit.
So, Mr./Mrs. Seller, do you want to do the repairs, and I’ll pay you $180k, or do you want me to do the repairs, and I’ll give you $140?”
Now, the reason this is such a powerful and effective strategy is you have brought new information to the table. You didn’t go in and talk about how terrible their house was and how the roof was shot and all the things that needed to be fixed
The third-party inspector did.
Look, every property that we get under contract in my company… the next step is to immediately order a home inspection. Once we get the home inspection, we go back and negotiate that price down so we can get closer to our maximum allowable offer.
Do this instead…
See, the reason many of you have been losing out on deals or not getting as many properties under contract as you’d like is because you are limping in with low-ball prices way too early in the process.
If you want to get in the front door with a seller, offer them what they want, subject to an inspection, and then negotiate down, based on the facts that come from the home inspector’s report.
You will get SO many more deals… that you might currently be missing out on.
So… go get those deals.