Epic Real Estate Investing - EPREI 010 : Overlooked Profits : Investigate and Negotiate

Episode Date: August 4, 2011

The ol' saying goes... "You make your money when you BUY real estate and get paid when you SELL it." That couldn't be more truthful, however... many investors miss out on huge chunks of profit by ending their negotiating once a seller has accepted their offer, but what they don't realize is that that's only the beginning of their negotiating! On this episode, learn how to significantly expand your profit margins with just a few extra questions to the seller. Learn more about your ad choices. Visit megaphone.fm/adchoices

Epic Real Estate Investing Podcast, Episode 10. You're about to meet a man that can show you how he took control of his life and financial future and how you can do the same. He's never been on TV. He's not a millionaire, and he does not know Donald Trump. He is a full-time real estate investor, newly discovered author, and family man. He does not report to a boss. He creates his own schedule and takes his family on a few vacations every year.

He got started investing in real estate with almost no money in a really crummy credit score, and he's going to show you exactly how he did it and how he continues to do it. You will have to work. You will have to be responsible. However, laying by the beach sipping fruity drinks is a reasonable goal without further delay. Your guru. Sorry. Your guide to a better life through real estate investing. Matt Terrio.

Hello and greetings from the Epic Real Estate Investing podcast, the podcast that will show you how to create wealth through conventional and creative real estate investing. So you will have the option to realistically retire in the next 10 years or less and enjoy the good life while you're still young enough to do so. My name is Matt Terrio, author, full-time real estate investor and family man. Now, if this is the first time for you listening to this show, you're going to want to do two things. One, you're going to want to go back and listen to episode one to get the gist of what the show is all about and why it's here. I mean, everything that we discuss from this point forward is going to make so much more sense to you if you do that. And two, I want you to go and download the free real estate investing course, how to do deals, no money required, at free real estate investing course. It's a step-by-step course of which I reveal everything that I do, everything that I say, everything that I use, including the documents and the contracts,

to invest in real estate using no money or credit, and that's yours for free at free real estate investing course.com. Okay, so, as promised, well, actually, I blew my promise, so I'm sorry for that. It took me about 72 hours instead of the 24 hours that I promised to get this episode posted. My apologies, I am a brand new father, just four weeks old, and still managing how to care for a newborn and manage work. And being that I work most of the time out of my home office, even more of a challenge, because I've got to find that the quiet time to actually make a recording. But don't feel sorry for me. I'm not complaining.

It's just something new to learn. Anyway, we left last episode with how to uncover the many areas of which you can put more money in your pocket. Whether you intend to flip a property or to hold on to it, I'm going to start showing you now how the money you may or may not need is revealed during your due diligence. How there's typically a fortune right under most investors' noses and most of them can't even see it. And whether you'll need that money to close or not doesn't really matter, but it is money, your money nonetheless. Now, at this point, you have the problem.

property under contract and you've opened escrow. We're now going to begin the next step in the epic approach. The I in our epic acronym, the I stands for investigate and negotiate. Investigate meaning your due diligence. You'll hear those two terms used interchangeably. And this is actually level three of your analysis. We completed levels one and two during evaluate and decide, where we determined our initial opinion of value.

Now we're going to conduct our due diligence and determine our actual opinion of value. The purpose of this investigation is twofold. First, you want to learn more about the property to make sure there are no surprises after you complete your transaction. Specifically, the type of surprises that will cost you money or even worse, get you in legal trouble. But not to worry, if you find anything that even remotely scares you or causes a significant concern, you have your contingency clause already in your contract and you can walk away freely should you want. But that's not the intent. We're here to make some money. And that brings me to the second reason for this investigation.

and that is to find reasons to ask the seller for a discount, meaning you actually want to find some issues with the property in your investigation because you can go back to the seller and ask them to share the expense. Or how I like to phrase it, share in the liability. I mean, that tends to land a little nicer in your negotiations. Share in the liability of the newly found challenges, your new discoveries during your inspection. So the first step in your investigation is to hire a professional home inspector. And if you don't have an inspector on your team yet,

I would ask for referrals from your network first. And if you can't get a good referral, you can search for one at the American Society of Home Inspectors at ASHA.org. That's alpha samh, hotel, indigo.org. And that actual inspection is going to probably run you anywhere from $200 to $400 to $400. Yes, this step in the process

will take a small investment on your part, but it's an investment that's going to pay big dividends, and you'll see how in a minute. The second step is you're going to call your title representative to pull a preliminary title report. And what that report is going to reveal is you'll be able to determine if there is anything attached to the property that may affect your ownership, such as a mechanics lien, overdue property taxes, judgments, easements.

Most of the time, escrow will discover these types of encumbrances. They'll bring them to your attention, and typically they'll assist you in resolving them during escrow. But nonetheless, this is your deal, and you should understand everything you're getting yourself into. So don't trust that escrow will do this for you. Take it upon yourself and be proactive about it. And if this will be your first or second time reviewing a title report,

ask your title rep to help you interpret the report. I mean, most reps, they're going to be happy to do this for you. And remember, you have your choice of title reps. You are the customer. You can do business with any title rep that you want. So if the one you're using isn't providing you the type of service and assistance you'd like, pick another one. You're the boss in this relationship, okay?

The third step is you're going to go back to your property analysis, where you determined your initial opinion of that. value. And I want you to get detailed with that analysis now. Get meticulous about what has actually sold. Refine your search. Narrow it as much as you can by analyzing the properties that are most closely related to your property. You can narrow your search by reducing the area radius. Get properties as close to your location as possible. You can also reduce your search by the bedroom and bathroom configurations. Before when we were determining our initial opinion of value, we were really only concerned with square footage. It's okay now to narrow your search even further looking at the

bedroom and bathroom configurations. And then, if you can, narrow your search even further by when properties actually sold, the timing of the market. You know, when determining our initial opinion of value, we were looking at properties that had sold in the last 90 days. If you can, narrow your search to properties that have sold in the last 60 or 45 or even 30 days, get your search as narrow as possible so that you have at least still five comparables. And then average the lowest five. That's going to be much closer to actual value. Or I should say your worst case scenario of what you can expect to sell the property for. And also at this point, I'll actually look at the active listings as well. What this is going to do is it'll indicate

what your property's competition will be when it's time to execute your exit strategy. And when it's time to do that, I like to be the lowest price property of the comparable properties in my area. And here's why. When a market is appreciating, buyers tend to feed from somewhere in the middle and the top. That's where they'll start picking their properties because They know it's appreciating, so they're not so concerned with price. But in a depressed market, which is very common in our country right now, there are certainly exceptions. But in a depressed market, or even a declining market, or even a stagnant market, buyers will tend to consume the property from the bottom up. They're always going to look at the lowest price properties first.

And if I'm the lowest price property of like properties, I will typically get more exposure. And what happens is exposure drives demand and demand drives value. So that's why I look at the actives, particularly in a market like the one we're in right now. It might be different in your area, but that's how it is in my area right now. So you'll want to look at that. Now, once you have your property inspection complete, you've reviewed the title report and you've taken a more detailed look at the market data. And if you haven't discovered any deal-breaking information, the next step, the fourth step, is to get a licensed contractor or two or three or four. I'd advise to get multiple contractors to put together bids, to put together their proposals, to what it would

cost to repair everything that your home inspector found during the property inspection. Now at this point, you'll have a very accurate idea of what the property is worth, what it can be sold for, and how much it's going to cost to repair or rehab it should you choose to. Your investigation, it's essentially complete at this point. And most of the time, if you're diligent, you can get all of this complete in, I don't know, in less than a week. But no worries if it takes you a little longer because based on the contingency clause you put in your contract, you have at least 14 days to complete this investigation.

If you happen to finish early, any time before day 14, you'll still want to wait until day 12 to 14 before you go to the next step. Negotiate. Negotiate with the seller, that is. Now, why wait until day 12 or 14? Well, this is another very important reason to get properties under contract because it changes the psychology of the entire deal. What do you think the seller's thinking when you're under contract and conducting your investigation? that seller is thinking they have their property sold. They've signed a contract.

They're likely already making plans to move. They've probably already got their boxes packed. They for sure are already thinking about what they're going to do with their proceeds. I mean, in their minds, the property has sold. And knowing that, by waiting until the end of your inspection period, day 12, 13, or 14, somewhere in there, to present the findings of your inspections and investigation, you are almost assured to experience more flexibility in the sellers negotiating. Now, if you have a problem with this portion, if you think this is unfair or sneaky,

if that's just your gut instinct, don't do it. I mean, you can skip this step if you want. You've likely got a decent deal anyway if you follow all the steps up to this point. But don't forget, this is business. And in the real estate game, or any game for that matter, where there's a significant profit to be made, it will take savvy negotiating and strategy on your part if you expect to be in the game for the long term. You know, Matthew 1016 says,

I am sending you out like sheep among wolves, therefore be as shrewd as snakes and as innocent as doves. Sometimes I think Jesus might have been referring specifically to real estate investing. I don't know, maybe, maybe not. Either way, you'll want to know that no rules, no laws, or ethics are being violated by using the full allotted time given per the contract. That's why there's a contract. You are operating under the letter of the agreement and well within your rights as a buyer.

You are simply being shrewd. You're being a good real estate investor. Just by the nature of being called an investor, it's your job to go out and make a profit. It's just good, responsible business, responsible to yourself, and responsible to the people in your life that are depending on you to succeed. So, now it's day 12, 13, or 14. I like to wait till right around day 13, at least. And you'll call up the seller to set up some time to get together. And when you do get together, you're going to share with him or her what the inspectors and the

market has further revealed to you. And notice how I said that. I mean, it's just like when you initially presented the original offer. It's not you against the seller. It's you and the seller against the market. It's you and the seller against the inspector's report. It's you and the seller against the contractor's proposals. In my free real estate investing course, I actually videotaped a roleplay of what this

secondary stage of negotiating typically looks like. But for the sake of this podcast, here's the basic approach. You'll sit down with the seller. Again, I'd like to see you meet at a neutral location and I'll typically begin the conversation with something like this. Mr. or Mrs. Seller, I've completed my due diligence and you are completely aware that I am an investor. I mean, this is what I do to feed my family and pay my bills. And by the very definition of being an investor, I don't make money unless I can sell a property

for more than what I pay for it. You understand that, right? By this simple little sentence being set up front, I mean, you are getting an indirect agreement from the seller that it's okay for you to make a profit on this transaction, that you must be able to sell the property for more than you pay for it. By getting their agreement, you just laid the foundation or created the environment to get a discount, to get concessions. Then you'll show them the new market data you found.

Maybe you found a brand-new comparable that sold for less than your previous comparables and that brings the value of the property down a bit. Or you found an oversight in your initial evaluation that brings the property's value down a bit. Or maybe you found a comparable that was never on the MLS that sold for less than your previous comparables. or you discovered three new properties in the neighborhood that just hit the market. They hit the market while you were conducting your due diligence, and by way of more competition, the property's value might have been reduced a bit. And you're showing the seller all of this information from the perspective.

Look what the market is doing to your property's value. I mean, you're not actually going to say that. Well, maybe you would. But if nothing else, you want that to be the seller's perception. I mean, the seller has no control over the market, and you certainly have no control over the market. so don't take responsibility for it. Let the market be the bad guy. You're just the messenger,

the messenger of which wants to help the seller out of their situation. Mr. and Mrs. Seller? Mr. or Mrs. Seller, as you can see here, the market conditions are impacting your property's value, and unfortunately, not in a good way. I should be able to still help you out of this situation, but let me show you what the physical inspector found. You see, it's the bad market that's bringing the property's value down,

and you are there to save the day. day. Also, there's more. Look what the physical inspector found. And notice I didn't say, look what I found, nor did I say, look what my inspector found. I said, look what the physical inspector found. It's not you versus the seller. It's you and the seller versus the physical inspectors report. This is so crucial if you expect to get agreements from the seller, agreements to concede. And you can either let the seller read the report themselves, or you can help them out a bit and point out some of the bigger discoveries. You know, maybe the report found a few missing shingles

and some water damage in the back bedroom and or an issue with the plumbing. Or the water heater is not in cold or the electrical panel is outdated and not in code. Or there's a slight crack in the foundation that there's evidence of termite damage in the attic. Or something as small as the power outlets aren't GFCI outlets.

Or the kitchen cabinets are missing some screws. I mean, it doesn't matter what it is. It all has to be repaired, right? How could you possibly turn a house over to somebody to sell a house to somebody if everything is not fixed. But what if the report doesn't show anything is wrong with the property? That's a question I frequently get. No chance.

All reports show something wrong with the property. There's just far too much liability on that inspector. If they turn in a property report saying there's nothing wrong with it, they have to find something wrong with it. It's the only way in court should they end up there ever that they can prove that they actually inspected the property. So don't worry about that. There will always be something that needs to be repaired.

and what needs to be repaired comes with the cost. And at this point, the seller is typically shaking in their boots because they're afraid you might not go through with the transaction. And all they're thinking about is that they've got their boxes packed, their plane tickets purchased, they've put a down payment or deposit on the next place they're going to live in. I mean, they might have charged on a credit card new appliances or furniture for their next residence.

Oh my God, how am I going to pay for all of this? How am I going to get the money back that I've already spent? That's what's going through their mind, or some combination thereof. Now, after going through the report, you then show the seller what the professional, certified, licensed contractor said it was going to take to fix everything. Remember, I said to get more than one contractor bid, more than one contractor proposal. Why did I say to get more than one? Well, because if you lined up 10 contractors against the wall and asked each of them

to submit a bid on how much it was going to cost to repair everything, you're going to get 10 different answers. that being the case, which one are you going to show the seller during this meeting? The highest one, right? And which contractor are you actually going to use? I mean, you might use the lowest, but whichever one you choose, it's most likely not going to be the highest proposal. And even if you did want to use that highest proposal,

could you negotiate with the contractor to bring his bid in a little bit lower? Sure, you could. You've got multiple bids that you could use as leverage to say, hey, I could go with them, but I want to go with you. You know, what can we do? So you're starting to see how you're making money in this process. I mean, after everything is all said and done, you've showed the seller the latest market data,

you showed them the physical inspection report, and you've showed how much it's going to take to repair everything. And at this point, you're just going to be quiet for a minute and let them think about all of the information that they just reviewed. In fact, wait as long as you can. I mean, if they don't volunteer to reduce the price or issue a repair credit in escrow, or offer some sort of concession,

because oftentimes they do, they do so because they don't want you to back out of the deal. But if they don't, and you just can't bear the silence any longer, you can say something like, you know, Mr. and Mr. Seller, after reviewing all of this information, it doesn't really appear that the market is going to give us what we had hoped for. It doesn't appear that our original agreement really makes sense anymore. What do you think?

Notice what I said in there. It doesn't appear that the market is going to give us what we, you and the seller, had hoped for. And it doesn't appear that our original agreement really makes sense. What do you think? And again, here, you'll want to give them an opportunity to reply. I mean, after you ask, what do you think? Shut up. Don't say a word.

The first one that speaks at this point loses. So I don't care how uncomfortable it gets. Don't be the first one to speak. If they don't volunteer a concession and they say anything other than offering a concession, you'll want to say something along the lines of, Well, as I see it, the market is suggesting that this deal just might not make sense anymore. In order to get us back to the point where it would make sense, how much of these newly found liabilities would you be willing to share with me?

And again, shut up and wait for an answer. The first one to talk after you ask those types of questions, the first one to talk loses. So if the seller needs to sell, you will get a concession. You see, just prior to asking for a concession, this was a likely a good deal already. I mean, if they don't give you any concessions, I mean, it doesn't mean you can't do the deal, you can still do the deal, but know that the seller can't cancel or back out of the contract just because you asked. So you're asking just to see what they say. You're hoping for concessions, but if you did everything right up to this point, it's still likely going to be a

very doable deal without the concessions. I mean, unless you found something major during your inspections, you probably still have a deal. You're just going for a little more, that's all, typically any concessions you get in this secondary phase of negotiating can literally be 100% profit in your pocket. I mean, if you liked the deal already and saw that you were going to make $15,000 once you completed your exit strategy, whatever the seller's answer was to the question, how much of these newly found liabilities would you be willing to share with me? Whatever they said to that, that's a hundred percent profit. I mean, if they volunteered to pay for the roof at your $10,000 bid, but you had another bid at $6,000, I mean, you just made an extra $4,000.

or maybe your next buyer will take on the roof expenses themselves. You don't have to do the roof expense, but you still got the concession in which you created $10,000 of pure profit just by asking the seller to share in the liability with you. You know, if the crack in the foundation was a $15,000 repair, but the crack wasn't significant enough to require a repair. I mean, all foundations have cracks somewhere, right? They don't all need to be repaired. But if the seller offered to issue a $15,000 credit and escrow so you could fix the foundation,

you just put an extra $15,000 in your pocket. You've doubled your profit. So you know, this is where a ton of money can be made, and it's made just by asking. No labor or extraordinary effort is required. You just have to ask. Ask for your concessions. Whatever concessions the seller gives you,

you can put it all in your pocket and do none of the repairs. You can do some of the repairs, or you can do all of the repairs using one of the lower proposals, one of the lower bids, or you can do nothing and just split up. those additional concessions with your assignee and pass them on causing an even easier, quicker, and more profitable assignment. Now, once that's over and you've got your concessions or not, once the final price and terms

are agreed to, you now have the option of assigning the property to another investor or perhaps bringing in a money partner and buying it together. I mean, it's up to you at this point. It's not about your resources. It's about your resourcefulness. You know your situation better than I do. But what I do know, once you're at this point, there's really no doubt that you're putting some hefty cash in your pocket, of which was the goal in the first place, right? After all of this work, if you've completed this work exactly how we've gone over it in the last several episodes, if you can't find anyone to assign or wholesale a property to, call me, contact me.

I mean, if I don't take the property off your hands personally, I'll almost assuredly find someone that can. But you have to follow the steps as I've described them for that to be applicable. And if you don't like that idea, next episode, what we'll do is we'll go over how to find an unlimited number of assignees and buyers for your deals. I'll show you how to start building a massive buyers list that will cause buyers to compete for your deals. And when they compete, the value of your deals go up. And when the value goes up, that translates into even more cash and profit in your pocket.

But none of this is realistic unless you get properties under contract. That's always the goal when you come across a property. That's why we just determine up front an initial opinion of value. So we know it's a ballpark figure to get the property under contract. You can adjust that price later on. So you've got to get the properties under contract. That's always the goal when you come across a property. And to get a property under contract, you've got to write offers.

That's what you do. You're an investor. And investors write offers. Now, if you have never written an offer before, I want you in the next 48 hours to find a FISBO. look one up on Craigslist, and I want you to submit an offer. I want you to call the owner, talk about the property, and submit an offer. I just want you to actually go through the practice of submitting an offer.

And if it gets accepted, awesome. You move right on through the steps as I've described in this episode. Okay, so until next time, and as a very wise person once said, in business, you don't get what you deserve, you get what you negotiate. To your success, I'm Matt Terrio. living the dream. Thank you for spending this time with Matt Terrio and the epic real estate investing podcast. When you have a moment, stop by iTunes to leave your comments and let us know what you think of the show. And if you haven't done so already, get started investing today by visiting free real

estate investing course.com to access Matt's free course, how to do deals, no money required. Until next time. To your success. To your success. To your success. This podcast is a part of the C-Suite Radio Network. For more top business podcasts, visit c-sweetradio.com.