How to get the best deals with creative negotiating

It’s easy for us to take a course or listen to a podcast and hear how people are buying homes to distressed sellers for pennies on the dollar. But in reality, most sellers won’t sell you their house for such a steep discount unless you are truly solving their problems. In the Bay Area, it’s very rare for a person to accept a low-ball offer just because you have ‘cash’ and can close quickly. You need to be creative and you need to find out what they actually ‘need’. Here are three examples of ways I was able to acquire a property below market value by speaking with the sellers and discovering what their true needs were.

Release a part of the EMD

On one of my very first projects, the seller was very sick. He had Parkinson’s disease and his family wanted to put him into a care facility so that someone would be able to take care of him at all times. The problem was, they didn’t have the spare cash to do it. Pulling equity out of the home wasn’t an option because they didn’t earn enough income. By speaking with them, we were able to determine the issue, and allowed them to take some of the earnest money deposit before we closed escrow to help him move to the care facility. During that time, we agreed to extend the escrow period so that the family had time to clear out their stuff and move to a new home. By allowing the seller to take money from the EMD, we were able to acquire the property for over $100,000 less than their neighbors!

Negotiate like a cop, and represent yourself in the deal

On another project we noticed that the listing agent was from a different town. He was listing a property in Sunnyvale, even though his office was in Turlok (about 1.5 hrs away from the property). The listing looked awful. The pictures looked like they were taken with a flip phone camera, the property was over priced, and worst of all, there were no open houses or lock boxes on the premises. The agent notes said “call seller directly to view home”. Who would do that? Not a lot of people. This house sat on the market for weeks in the middle of the biggest real estate rally we’ve seen in recent years. When we first approached the home owner, we made a low-ball offer to see if they would take it. It was listed for $2,000,000 and in original condition (people from out of state will probably have a heart attack from seeing this number). After rejecting our offer of $1,700,000, I thought it was a lost cause. They wanted no less than $1,850,000. A week later, I happened to be reading a negotiations book by Chris Voss called “Never Split the Difference”. In one chapter, they said that the best way to negotiate is to throw out an odd number, because it shows that the number is ‘calculated’ and isn’t something you just pulled out of thin air (which we do). I told my partner the strategy and he tried it. He offered $1,757,923, still about $100,000 away from their desired number. I guess the strategy worked, because we got a call the next day from the agent saying they accepted. Then the agent made of the costliest mistakes of his career and said “Go ahead and write it up”. When I heard that, I was shocked! The agent didn’t think to represent us and write the offer! I immediately told my partner to shut up and started writing the contract. By representing ourselves in this deal, we put an extra $43,948 (2.5% of $1,757,923) in our pocket. It’s one of my favorite stories in my real estate career so far.

Partnering with the seller

Finally, my favorite strategy so far was to partner with the seller on a project. We got a call after sending out a mailer to a home in Sunnyvale, CA. This house was huge, and the price for fixed up homes in this location was around $2,400,000. My partner told the seller that we could only purchase the property for $1,900,000. She wanted at least $2,100,000. By talking to her, we found out that she lived in Texas and the house was rented to a family for over 9 years. Now that they moved out, she was ready to sell the home and move on with her life. She had a pending hip surgery and didn’t have enough cash to remodel the home. If she were to go to a general contractor to do the work, they would have charged her about $150,000. Where was she going to get those funds? We told her that we would love to work with her, but we wouldn’t be able to buy it outright from her because the closing and holding costs would eat us alive. We structured the deal so that it was a win-win-win situation.

She agreed to hold onto the house and continue making any normal payment such as the mortgage, property taxes, and utilities, while my partner and I would pay for the rehab costs. I also wrote in the contract that I have the right to choose the listing agent when we sell the property. If the property sells for over the expected value of $2,400,000, then we would split the difference 50/50. The final agreement ended up looking like this: My partner and I would do all of the work and pay to rehab the home and put it on the market. At close of escrow, we would get a check for $180,000 for our time and for putting up the money. If the property sold for over $2,400,000 then we would split it 50/50.

I know what you might be thinking. Why would she agree to pay us $180,000 at close of escrow when she could have spent just $150,000 and hired a contractor directly. Yes, this is true. But she would have to find the $150,000 to start with. She would have to manage his work from Texas while she was dealing with the hip surgery. Plus, people are more willing to give up future gains then they are to guarantee losses. i.e. imaging giving $10,000 to a relative after you won a $100,000 jackpot vs. having to pay $5000 for a car accident. The $10k doesn’t phase you, but the $5k hurts.

If you read correctly, I said this was a win-win-win situation. Where did the third person come from? The third party was my contractor. A general contractor who works with retail home owners would charge around $150,000 for the work, but because we give a lot of business to our GC, he put in a bid for us for around $120,000. However, I decided to share the love and brought my GC into the deal as well. I told him to do the job at cost, pay for half of the rehab fees, and we would split the profits 50/50. Instead of charging us $120,000, the total costs came out to be ~$90,000. Since we paid only half, we basically came out of pocket $45,000 (and in this particular deal, my partner handled all of the finances so my out of pocket expenses were $0!).

During this time, I also negotiated a great deal with a listing agent to sell the property at a steep discount. Instead of charging us the usual 2.5% commission, she would give us 1.25% back, effectively increasing our profit by $30,000. At the end of the day, we put in very little of our own money into the project, and it ended up selling for $2,506,000! After all was said and done, we grossed around $263,000 and netted $173,000 with almost no risk (even if the property didn’t sell for $2,400,000, we still would have gotten paid $180,000 at close of escrow). The seller was happy, the contractor was happy, and we were happy. Win-win-win.

Conclusion

It’s incredibly difficult to acquire properties with just a cash offer and fast closing. These days, non-contingent cash offers are being made on properties on the MLS! To get good deals, you must negotiate with sellers to find out what their needs are and figure out ways to solve their problems. Some people need free rent back for a few months, some people need relocation assistance, and some people need the EMD released early so that they can use that cash ASAP. Find out what your seller needs, try your best to help them and add value in their lives, and you will be rewarded with great deals, creative financing, and amazing stories to tell.