BiggerPockets Real Estate Podcast - BONUS: Excerpt from “The Book on Negotiating Real Estate”

Episode Date: March 15, 2019

In this bonus episode, co-authors Carol and J Scott read from Chapter 5: Seller Motivation and Leverage. This passage reveals the exact questions the authors ask sellers, and how to “aggressively listen” for valuable information — even when making casual conversation. Plus, Carol and J do some investor/seller role-playing. Order “The Book on Negotiating Real Estate” today at www.BiggerPockets.com/NegotiatingBook; you can get a physical copy, eBook, or audio version (that one is read by professional narrators) — OR just get the Ultimate package, which includes everything, PLUS access to two live Q&A webinars with Carol and J, two bonus videos, and a Quick Reference Guide with the top negotiating tips and tricks from the book Learn more about your ad choices. Visit megaphone.fm/adchoices

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You're listening to Bigger Pockets Radio, simplifying real estate for investors large and small. If you're here looking to learn about real estate investing, without all the hype, you're in the right place. Stay tuned and be sure to join the millions of others who have benefited from biggerpockets.com. Your home for real estate investing online. What's up, everyone? It's Brandon, host of the Bigger Pockets podcast here with the, well, just myself today, because here's the deal. Today we got a special bonus episode. You're probably wondering, what the heck is this 321 and a half? I mean, in the last 321 shows, I don't think we've ever had a half show. Well, today's a little special. I got a bonus episode for you. Maybe we'll start doing this more often.

But here's a deal. Yesterday's show, we had Jay and Carol Scott, and we had Mark Ferguson. The three of them wrote this book, the book on negotiating real estate. The show was amazing. I don't know, it was like an hour and a half long. But we didn't cover. even like 2% of what I really would have liked to cover. And so we decided, why don't we throw in a bonus episode and just take a sample from the book that they just published? And so that's what we're doing today. So on today's show, we have an audio sample from the book and we're going to play it for you really just today.

So the book on Negotiating Real Estate by Carol, J. and Mark. So we got about 20-minute section from one of the chapters that I really, really think kind of gets the heart of what negotiation is all about. And as just a side note, By the way, Carol and Jay are reading this because I just thought it would be a lot of fun to have it in their voices. But if you do get the audiobook and we do have it on audio, we have a professional narrator doing it. So just, you know, you're not throwing off when you hear if you end up buying the audiobook.

All right. So what you're about to hear are some must have skills, like how to judge just how motivated a seller is and how to do what they call, quote, aggressive listening. Like, okay, they reveal like the exact questions you should ask a potential seller. And then Jay and Carol also do some role playing, which is a ton of fun. So anyway, enjoy this. And hey, of course, if you want to get the book, go to biggerpockets.com slash negotiating book. There's a bunch of different formats and different prices. But I'd highly recommend the ultimate package because it's got a bunch of cool bonus content.

And I think it's like $49. So well worth it when you're negotiating over tens of thousands of dollars. That's the fun part about real estate, right? Small little negotiation things can make a huge difference down the line. So definitely listen to this episode today. And, of course, come back next week to the Bigger Pockets podcast. And with that, enjoy the show. Let's get to it.

Chapter 5. Seller Motivation and Leverage. Whether you're negotiating an off-market property directly with a seller or you're making offers through real estate agents on MLS listed properties, your greatest opportunity for gathering useful information will come by speaking directly with the seller or her agent. This process might start over the phone when a seller contacts you from a direct mail piece or a bandit sign. It might start on the front steps of a seller's house after you've knocked on their door.

It may occur at a party where a discussion with a random stranger turns into a discussion about buying their house. It could also occur at a meeting you've scheduled with a potential seller in her kitchen. Or perhaps you found a great deal on the MLS and you have your agent get in touch with the seller's agent to get more information. Regardless of the circumstances, an early discussion with the other party is your opportunity. to accumulate information that can be used to your advantage later in the negotiation. But at this point, we're not looking to gather random information. We want certain specific information. The information we're looking for. This is our opportunity to seek out the critical information that will allow us to create a competitive first offer and provide us the greatest amount of leverage later in the discussions. Specifically, the initial interaction with a potential seller should be focused on three things.

One, determining the seller's source and level of motivation. There are several factors that influence how favorable a deal you can get from a seller. But the one that stands far and above all the rest is her level of motivation. If the seller has circumstances in her life that make her highly motivated to sell, you will have much greater leverage throughout the negotiation, and generally speaking, you will have an opportunity at a much better deal. On the other hand, if the seller's motivation is low, perhaps she's only talking to because you wouldn't stop pestering her about selling her house, you'll be entering the negotiation in a weak position and are unlikely to achieve a remarkable outcome.

The seller's source and level of motivation are going to be driven by current circumstances, in her life? Is she going through a divorce, job relocation, or death of a spouse? Is the seller a senior citizen who is moving to assisted living and the house is being sold by a relative? Is there some specific financial circumstance driving the sale? For example, the seller has a large medical expense or needs to fund a business opportunity? These types of motivators will often create an urgency that will encourage a seller to accept an offer far below retail price, and perhaps far below a price that she would otherwise accept. Number two, determining the seller's minimum acceptable offer.

As we'll discuss in the following chapters, the next step in our negotiating process will be putting together our initial offer. There is a lot of guesswork that goes into determining an optimal offer price, but much of that guesswork can be removed if we have a reasonable idea of what the seller's minimum acceptable offer, their MAO, will be. In most cases, while we can certainly ask, the seller isn't going to just tell us her MAO. And in fact, even if she is willing to tell us, there's a reasonable chance that she'll be lying to us, or more importantly, that she might even go lower under the right circumstances. So in addition to just asking, we need to use other

strategies to determine the seller's MAO. Number three, finding additional leverage for our negotiation. The third goal of interacting with the seller prior to a negotiation is to assess the leverage you will have once the negotiation begins. Remember, leverage is just a fancy word for all the things that give you power over the other party in the negotiation. Like with motivation, this will generally be driven by current circumstances and situations in the seller's life, but there may be other more nuanced factors at play as well. For example, maybe the seller wants to leave town but can't sell her house until she can sell

her business as well. Perhaps you have some connections to help with that. Armed with this information, you might now be able to help the seller solve two problems at once, which makes you very valuable to her and provides you additionally. leverage. As we discussed earlier, a deal where you can speak with the seller directly is going to be much different than a deal where there are agents involved and speaking directly with the other party is unlikely to happen. Luckily, there are ways to get the information we are looking for regardless of whether you have the ability to speak directly with the seller or there are agents

working as intermediaries. We'll examine each of those situations separately below as we dive into some tactics you can use to start gathering the three types of information that will determine how much leverage you'll have in the upcoming negotiation. Getting information directly from the seller. It may seem obvious, but the best way to determine the motivation of the other party in any negotiation is to talk to them. We discussed building rapport in the last chapter. In all of the techniques we mentioned there can be used to foster a relationship with the seller to build trust and to start gleaning information that can be used to assess the strength of your negotiating position. But it's going to require more than just building rapport to get the information we're

looking for. Here are a number of tips on how to approach your initial discussions with the seller. Ask good questions. Your first goal during your discussion with the seller should be to determine the reason he wants to sell his house. We're not just looking for a general response such as, I need the money. Or, I'm ready to move. But a specific reason, such as, My child is starting school at Stanford next fall, and I need $80,000 for tuition. Obviously, the seller is unlikely to give you that level of information from a simple question, which is why building rapport prior to delving into his motivations is so important. For example, you might start the discussion with the simple question, why are you looking to sell your house?

You should then be prepared to follow up that question with more detailed questions. The conversation could go something like this. My wife and I are just looking to downsize and use the equity in the house to pay for some upcoming expenses. I can understand that. I'm looking forward to the day my kids head off to college so that my husband and I can downsize and do some traveling. What kind of expenses are you dealing with? My daughter's getting married next year, and weddings aren't cheap these days. I can just imagine.

I have two boys, so luckily I won't be facing that particular expense. That's part of the reason my husband and I just eloped. How much do weddings cost these days? Well, we're looking at a minimum of about $30,000, maybe more, but she's my little girl. She's worth it. At this point, the seller has told you that he needs at least $30,000, out of the sale of the house.

It could be much more, but it's unlikely to be much less. Once you know how much they owe on their house, you can add $30,000 to that amount, and you now have the bottom range of their M-A-O. To glean information from a seller, here are some other questions we like to ask. How long have you owned the property? How long have you been thinking about selling the property?

Have you already found a new place to live? What do you plan to do with the money from the sale? Are you under any pressure to sell? Are the payments current? Here's a quick tip. The key to getting detailed information from the other party is to avoid asking yes or no questions. Instead, ask open-ended questions that require back and forth discussion. Gage the seller's expectation. It's important to gauge the seller's expectations and to determine up front whether she has a reasonable grasp on what to expect from your offer. One great way to do this is to ask the questions about the condition of the property. This can either be done over the phone during an initial conversation or in person after you've already had the opportunity to evaluate the property for yourself.

Here are a few questions we might ask. On a scale of 1 to 10, how would you rate the condition of your house? If you were going to renovate the house to sell yourself, about how much would you expect that you'd need to spend? If you are given $50,000 to renovate your property, which items would you fix or renovate? While this line of questioning is a great way to get information about the condition of the property before you see it, that's not the main goal. The main goal is to determine how realistic the seller is with respect to her property's condition and the amount of work and money required to bring it up to full value. For example, if the seller thinks her house is a nine out of ten in terms of condition and that it would only cost $5,000 to renovate, but you determine it's about $3 out of 10 and would cost

$80,000 to renovate, then you can expect that the negotiations will go a lot differently than if the seller recognizes her house is in need of major work. Having this information will determine how much you need to educate the seller throughout the process, and will ultimately help guide you in presenting your initial offer. Determine motivating factors other than price. In addition to determining motivation and trying to get as much information as possible from the seller, you'll also want to use this discussion to determine if there are motivating factors other than price or other requirements the seller has.

For example, you might ask, assuming we can agree to a price, is there anything else you want or need out of this deal? This gives the seller the opportunity to give you more information about his situation, information that could be used to help formulate an offer and then later be able to better negotiate that offer. For example, the seller might respond in a half-joking manner with. Well, price is the most important thing, but if you know anyone who can haul all of our furniture to Nebraska for us, that would be a big help too. Now, the seller has not only given you more information there moving to Nebraska, but he's also expressed a pain point he has. He is stressing over how he'll get his furniture from here to there. At some point prior to submitting

your offer, you could investigate the cost of shipping a house full of furniture from here to there. And then during the negotiation, you could potentially use that as a concession. Let's say that you find out it's going to cost $11,000 to move the furniture. At the appropriate time during the negotiation, you might say. You had mentioned earlier that you needed to get your furniture to Nebraska. I happen to know a great moving company that I've used for several years now. If you'll agree to take $15,000 off the price, I'll pay to have your furniture moved. I'll coordinate with the movers, schedule the dates for you, and you'll never even see a bill. In this example, a simple question and a bit of follow-up investigation gives you an opportunity to solve one of the

sellers problems and at the same time would save you $4,000. Listen aggressively. We often don't listen as intently as we should. Instead of listening, too many of us think about what we're going to say next. When we do this, we tend to miss small but important cues that the other party may be giving us. For example, our brain naturally filters the words that give us the most meaning and context. Typically, These are the nouns and verbs. Because they give us the basic gist of what's trying to be conveyed, the most bang for a listening buck, you could say, we often don't give enough attention to the descriptive words,

the adjectives and adverbs. For example, let's say a seller tells you that he needs to walk away with $50,000 in cash at closing. You ask him if he'd consider walking away with less, and he responds with... Well, I'd really like to walk with $50,000. I kind of need that amount and I'd be reluctant to walk away with much less than that. The important words and phrases here are really like, kind of need, reluctant to, and much less.

Each of those words weaken the main message that he must walk away with $50,000. While he's not admitting to being willing to take less, his choice of words makes it very obvious that he would be willing to take less. Listen to what they don't say. Sometimes you can get more information from what someone doesn't say than from what they do say, which is why it's important to be able to read between the lines when trying to get information from the other party in a negotiation. Here's a quick example. A couple years back, I was selling a property for one of our friends. I was the listing agent.

The sellers had filled out a property disclosure statement listing all the issues that they knew. about with the house. One question on the disclosure was, does the property have any underground oil tanks? The seller checked no to that question. A week later, I got the house under contract, and the buyer had his inspection. The inspector found evidence of a buried oil tank. The buyer's agent called us, livid about the fact that the seller had lied on the disclosure statement. In reality, they didn't know about the tank. It had been there since long before they had bought the property. For 10 minutes, the buyer's agent ranted and yelled about how the sellers were liars, how I was a liar, how his buyer was angry, how he felt betrayed, etc. But the one thing he never said

was, the buyer doesn't want the house, or the buyer is backing out. Most listing agents would get concerned about losing the deal, making excuses, and then offer concessions to make up for the mistake. But because the buyer's agent didn't make any demands or threats, I was pretty confident that he simply needed to blow off some steam. In fact, I thought there was a pretty reasonable possibility that the agent was doing this in front of his client just to put on a show and prove to his client how dedicated he was. I was confident that the buyer wasn't going to back out, and I didn't want to shift the balance of power into his favor based on this misunderstanding. For this reason, I simply said, I'm so sorry about that misunderstanding. I feel horrible, and I'm sure the sellers will as well.

They didn't know about the oil tank, but if you can forward me the inspection report, we'll update the disclosure statement immediately with that new information. We never heard another word about the oil tank. Determine their motivation to work with you. One more thing to keep in mind when trying to determine a seller's level of motivation. It's not just important how motivated they are to sell, but also how motivated they are to sell to you. A seller may be desperate to sell, but if she's talking to several different investors who are interested in buying, you're no longer just competing with the seller for the deal. You're now

competing with a bunch of other investors as well. While you don't necessarily want to come right out and ask a seller if she's talking to any other investors, you don't want a reminder that she has other options. There are ways to glean this information more subtly. I like to ask sellers this question. If we can't come to an agreement for me to buy your house, what do you think you'll do? This gives the seller an opportunity to discuss her alternative options. She's talking to other buyers, she doesn't really need to sell, and so on, which is what will ultimately drive her level of motivation. The better her alternatives, the more careful you need to be about an aggressive offer. The fewer alternatives she has, the lower your offer can be without her jumping ship and going

after another option. Determine the property payoff amount. The payoff price of the property is often going to be a major determining factor of the seller's MAO. Because you can often assume the seller will not be willing to accept an offer below the payoff amount, this is a number you should be getting as quickly as possible. During the very first conversation, most investors will ask how much the seller owes on the house.

If you find out that a seller owes far more than you know you could possibly purchase the property for, the next step would be to dig deeper into whether she would be willing and able to sell below the payoff price. If the answer is an unequivocal no, you can often move on from the deal right there. The seller has said her MAO, her minimum acceptable offer, at well above your MAO, your maximum acceptable offer, leaving little room for any chance at a compromise. In addition to asking the seller what she owes on the property, it's also a good idea to verify this number before putting together your initial offer. Not all sellers are going to be honest.

And even those who have the best of intentions might not have all the facts. For example, if a seller is delinquent on their mortgage payments, it's possible that penalties and fees are accruing and that their payoff is much higher than they even realize. In addition to finding out what's owed on the property, make sure you also ask about any unpaid back taxes, liens, or other obligations attached to the property. We can't tell you the number of times we've heard about investors who ask a seller what they owe on a property, only to later find out that because the investor didn't ask the right

questions, the real payoff amount is more than double the amount the seller indicated. By the way, asking the seller for a copy of their most recent mortgage statement or an online printout of the current loan status isn't unreasonable. If they are unable or unwilling to provide this information, you can generally find out the date and amount of the initial loan and any refinancing from public records. Using this public data, you should be able to determine a reasonably accurate payoff amount. Asking the most important question. The information we've gathered on motivation and property payoff amount are likely enough to allow us to generate a reasonable opening price bid. But given that we're great negotiators, there's one more tactic that will often provide

an even clearer picture of the seller's minimum acceptable price. And that's asking the seller flat out, what is the lowest price you'd accept? Now, you may be thinking that's a bit too direct and any reasonable seller is going to be unlikely to give you an honest answer. And I'd agree with you. But if you phrase that same question just a little bit differently, you can get the information you're looking for while at the same time sending the message to the seller that she'd benefit from answering the question. Instead, what if we ask the question, if I were to offer you all cash and close as quickly as you'd like, what is the best price you could give me in return? Do you see what we just did there? We changed the discussion from, I want you to give me information that will allow me to get the

best deal for myself. Two, I want to offer you the things you likely most want, cash and quick clothes. What can you do in reciprocation? You're now doing her a favor by asking this question. If the seller had indicated that there was something else tremendously important to her as part of the deal, you can simply replace or add these items instead of the cash and quick close. The key question is, if you were to provide the seller her dream scenario, what is the lowest price she'd be willing to accept in return? You may be thinking, what if I can't offer all cash or close quickly or whatever terms you suggested, that's okay.

You're not making any promises at that. this point, you're merely gathering information. You're only saying, what if. If the seller later expresses frustration that, for example, you want to get financing instead of paying cash, you can simply say, I ask that question in the hopes that I would be able to offer cash in a quick close. Unfortunately, since our discussion, I've entered discussions with two other sellers as well. And while I still hope to be able to pay cash, I take my promises seriously and I don't want to overcomit to you. This not only sends the message that it was just a misunderstanding, you didn't lie about anything, but it also allows you to send two subtle messages.

Should the two of you not reach an agreement, you have other alternatives and the fact that you are serious about your commitments. Assuming the seller is willing to answer your question, you now have another important data point that you can use to evaluate about where the seller's MAO might be. All right, and that was a little taste of the book on negotiating real estate read by two of our talented authors, Jay and Carol Scott, who wrote the book alongside Mark Ferguson, all good people. So anyway, I love that thing. I love that book.

And I love the part that, you know, today talking about making casual conversation about like paying for weddings or kids college or moving, but you're listening for those clues that tell you more about how much money they really need to close a deal. I'm going to actually really try to implement that in my own life. So anyway, that's all I got for today. go get the book, biggerpockets.com slash negotiating book, and you can find all our books at biggerpockets.com slash store. Well, I am Brandon Turner for David. I only show up when there's a guest, Green. Signed off. You're listening to Bigger Pockets Radio, simplifying real estate for investors

large and small. If you're here looking to learn about real estate investing, without all the hype, you're in the right place. Be sure to join the millions of others who have benefited from biggerpockets.com. Your home for real estate investing online. Thank you all for listening to the Bigger Pockets Real Estate podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday, and Friday. I'm the host and executive producer of the show, Dave Meyer. The show is produced by Ian K, copywriting is by Calico content, and editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up for our free newsletter, please visit www.com.

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