Create A Great Deal
Jeff Schoenfield explains how some terms cannot be negotiated, as they are absolutely essential to making a deal. You need to discover those terms, get them satified, and negotiate the other terms.
John Riggins explains a lesson he learned from Henry Kissinger at a National Association of Realtors Convention. John learned that before you walk away, you have to make your best offer.
James Nellis explains two alternative styles of negotiating. You can use a gentle approach whenever possible. But, on occasion James needs to use more force.
Michael Krisa, That Interview Guy, explains how important it is to avoid being emotionally tied to the outcome of a negotiation. The ability to walk away from a deal gives you more power. When you have a good alternative to making a deal, so that you can walk away if you do not get good terms, then it is more likely you will get good terms.
Rob Levy, a Portland area Realtor, tells a story about some good advice he got from his father. Real Estate negotiation is all about compromise and working it out.
The story of a cartoon told by Niel Thomas of Anchorage Alaska summarizes most Realtor’s approach to negotiating. On some occasions, one of the participants is only willing to proceed if the other one is willing to lose.
Brad Korn, a Kansas City Realtor tells a great story about some sensitive negotiations to put a sale together, and let his seller take the resting place of her pet dog with her when she moved.
A “short” sale is where a lender takes less money than what is owed on the loan. This is done by the lender instead of foreclosing on the property, when the borrower is having trouble making the payments. If the property can be sold, but sold for less than what is owed, the lender may prefer to take whatever money remains after paying for the cost of the sale instead of going through the foreclosure process which may result in the lender getting the home after foreclosure.
The security of a loan depends on whether its lien, normally a deed of trust, is recorded in first position, second position or any position after that. In other words, the loan that was put on first is recorded in first position, the one that is put on second is in second position, and so on. If there is only one loan, the homeowners and their Realtor need to try to persuade that lender to take less than what is owed. If there is more than one loan, the loan in first position will rarely give up anything, as they have better security. The reason is that in most states when the first loan forecloses, the second and all subsequent loans, have no security interest in the property i.e. they get nothing out of the sale of the property unless the foreclosure sale at the courthouse results in a bid that is higher than the amount owed on the first loan. Since the ability of the second lender to collect from the sale of the home is much worse, that lender is the one to talk to about taking less than what is owed.
As you might imagine, lenders will not take less than what they are entitled to unless they have no better choice. So, the borrower has to show that they do not have the ability to pay the rest of what is owned on the loan. If you are starting the sale of a home where you expect to go “short”, you will need to gather information that shows that the borrower cannot pay the balance due. Start with a “letter of woe”, i.e. a letter that describes the difficult financial situation that the borrower is in. Then, gather tax returns and at least two recent pay stubs. Information on bank accounts and other debts can be helpful. You might also get the form that the lender will require in order to fill it out before an offer comes in so that you can be ready to present it to the lender.
When an offer comes in to sell the property, be sure you put a contingency in the contract for the approval of this sale by the lender (s) that will need to accept the short proceeds. Something like “This contract is contingent upon the approval of this sale, and the net proceeds of this sale, by (insert name of Lender(s)). In the event that (name of Lender(s)) does not approve, this contract may be terminated by Seller”. If you do not have that contingency in the contract, the Seller is signing an agreement to sell the property at a price where the Seller will have to come up with the extra money to pay off the balance owed to the bank. If the Seller does not have that money, you will have created a serious problem.
There may be other issues for the seller in selling “short”. The amount of the principal portion of the debt that is not paid back to the lender may be taxed as ordinary income. So, if the lender does not get $50,000 of the principal on the loan, the seller may be taxed as though he/she made income of $50,000. This depends on whether the loan is Recourse or Non-Recourse. We do not have space here for a full discussion of the Recourse concept, but the short version is if the bank cannot go after the borrower for any balance of the loan that they do not get at the foreclosure sale, it is probably non-recourse. These laws vary from state to state. A good example is that in California, a “purchase money” loan to buy an owner occupied home (1 to 4 units) is non-recourse, as the lender can only foreclose. If that loan has been refinanced, it may be a recourse loan where the lender can go after the borrower if they do not get enough at the foreclosure sale. The IRS is not particularly kind in their interpretation of this concept. For example, in California if a lender forecloses using the Power of Sale in the Deed of Trust, instead of going to court to foreclose, the lender cannot go after the borrower after the foreclosure sale. But, the IRS says that if the lender could have gone after the borrower if they had not foreclosed using the Power of Sale, the loan is recourse and the “short” amount is taxable. There is a bill that has passed the U.S. House of Representatives that would change this for people who do not have high incomes. This bill has not become law, as it still has a long way to go.
The other problem with selling short may arise if the borrower did a stated income loan. If the borrower told the bank at the time of applying for the loan that his/her income was huge, then submits tax returns and other documentation to show that it was nowhere near that amount, the lender may have proof that there may have been loan fraud.
The advantages of this process for the buyer is that they get a home at a great price, below the value of the mortgage balance. However, the buyer gets a bumpy ride. It will take the lender some time to review and approve or disapprove the short sale. Until that is done, the buyer does not know if he/she has bought a house or not. There may also be other requirements that the lender will put into the transaction as a condition of approving the sale. Also, if the seller does not have any money to pay the balance on the loan, he/she probably has no money to do any repairs, so the buyer is probably taking the house “as is”.
The short sale will allow the seller to have less of a problem with his/her credit than a foreclosure, although the short sale normally shows as a blemish on the credit reports. Some lenders will be kinder than others on how they report it. The sale also allows Realtors to accomplish a sale that would not otherwise happen, although the lender who is going short frequently tries to negotiate the commission down. Finally, the short sale allows the buyer to get a home at a good price and one that has not gone through the distress of a foreclosure process.
If you would like to learn everything about short sales, go to www.ShortSalesR.us because it goes through nearly all the issues. Look at the search box in the upper right of the splash page, put in what you are looking for, and it will give you the posts on that subject.
If you have any questions about this, please call Tim Burrell at 919-812-5111 or send an email.
If you are selling a home that is facing a foreclosure some steps you should take are to:
You can buy a property in foreclosure:
If you are a Realtor who wants to represent lenders selling REO properties:
It is extremely hard to get started handling REO properties, as the Asset Managers are overworked and do not want to train anyone new in their system. So, if they can go with the current agents who are experienced in how to handle all their administrative requirements, they will not start fresh with you. The biggest trick is to get started, handle your first assignments perfectly, and have the Asset Manager recommend you to others in their group.
If you want to learn more about short sales and representing REOs, click here and join in the discussion of how to succeed in distressed properties.
When there are multiple offers on a property, the way you negotiate changes completely. I represent buyers, so here is a series of techniques that I use to have my clients be successful, because it is harder to get the home for your client when you have to win the competition.
The first thing you need to discuss with your client is how badly they want the home. Some buyers will not participate in a bidding war, so you move on to another house. If they have to have it, proceed.
The first thing you have to determine is what the listing agent is looking for in a buyer and what provisions are appealing to the seller.
Ask a broad question, “Is there anything else that is important to the sellers?” Listen well and take notes.
The more of the desired terms that you give the seller, the more likely you will be the successful suitor. You need to focus on much more than the price.
What Procedure?
The next thing you need to know is what procedure the agent representing the seller is going to follow to respond to all of the offers. If the agent says they are just going to negotiate with buyers one at a time, you need to find out what will make your client that buyer. Some agents negotiate with the first offer that comes in, so be the first in time. Others select one offer based on quality. Whatever the criteria, find out what it takes. This is poor representation of the seller, but if that is what the listing agent is going to do, you need to learn how to play their game.
If the seller is going to give counter offers to the best qualified buyers, provide the best qualifications you can. If the seller is going to negotiate with all the buyers at once, be sure you get to stay in the game to get a chance at the property.
How Many Offers?
The most important information is how many buyers are making offers. If you are going to be the successful bidder, you will probably need to go over the asking price. How high you need to go depends on the number of buyers. Call the listing agent a short time before they are going to consider the offers and find out how many offers there are. The price you need is proportional to the number of buyers. The more buyers there are, the higher the price. You want to come in right before the deadline so that you will know about the other offers, but other agents will not know about your offer.
If you are in an area where multiple offers are not common, you may have a hard time convincing your buyer to offer more than the asking price. Many buyers think that the asking price is more than the seller wants, and won’t go that high. In a multiple offer situations, the abundance of buyers shows that the home is easily worth the asking price and probably worth more, because you will not get that level of interest in an over priced home. Even by going over the asking price your buyer will have made a good investment so long as you do not get too carried away by the auction effect. If the buyer is worried about overpaying, put in an appraisal contingency so that they can be protected by a disinterested appraiser’s opinion of the value of the property. However, you will need to explain to the buyer that this contingency may make the seller unhappy, and could move your offer from being the winner to being a loser.
Ability to Close the Sale
It is crucial to show the seller that your client can close the sale, absolutely, for certain, no ifs ands or buts. Follow the example above concerning furnishing bank statements, with key information blanked out to protect your client from identity theft problems shows strength. Also provide as complete a loan approval as possible. Think of the process as a horse race. The sellers are trying to pick the right horse, one that will for sure cross the finish line. You want to convince the sellers that if they bet on you, they will not be sorry.
Take it As Is
One other way to separate your buyer from the others is to commit that you will take the home “as is”, but retain the right to inspect the house. If you feel that there is a good chance you will get the home, get a professional inspection before the time for making offers, and attach your inspection to your offer to take it “as is”. The reason for this is that many agents have had buyers promise to take a home “as is”, then when they have been selected to buy the house, they have gotten “buyer’s remorse” about the high price they paid. So, they try to claim that the subsequent inspection showed problems they did not expect when they ask for repairs. With the inspection done before the offer, the seller is more confident that you will not have a change of heart between signing the contract and the close of the sale.
Avoid the Auction
A completely different buyer strategy is to try to change the listing agent’s procedure for dealing with multiple offers so that you completely avoid the bidding war and the auction effect that it has on the buyers. The book Create a Great Deal is coming out shortly, and it goes into detail on how to win when there are multiple offers without letting the other buyers have a chance to bid. You can reserve a copy of the book by clicking here. If you need to discuss how to do this before the book comes out, click here and join the Real Estate Negotiating Institute where we will discuss this technique in detail. I hope you are able to win the home for your buyers when there are multiple offers using these negotiating techniques.
When I was younger, many menus in Chinese restaurants let you pick one item from column A or one item from column B. The more technical term for this is a Package Option. This technique for counter offers is to give your counterpart a choice, i.e. a two pronged counter offer. My buyer will give the seller a price of $210,000 with the playhouse, washer, dryer and refrigerator or $208,000 without those items. The benefit of this type of counter offer is that the counterpart frequently picks one, as they are so busy concentrating on the two choices that they do not concentrate on the fact that they can choose neither one and make another counter offer. Another benefit is that the counterpart does not feel like they are being pushed into a corner by being forced to take one option, as they have two (or more) options, and they have the last word.
Be aware that there is a frequent response to this type of offer. The counterpart will take the best of both choices. In the example, it is not unusual for the counterpart to come back saying they want the price of $208,000 with the sale including the playhouse, washer, dryer and refrigerator. So, if you are looking to close negotiations, give your counterpart a Package Option, but be sure you will be happy if they take the best of both choices. Either way, you will finish the negotiations, whether they accept one of the choices, or propose the best of both choices.
If you are dealing with a inexperienced or rigid real estate agent, this choice can confuse them. So, evaluate whether your counterpart is intelligent enough to handle the choices that this technique provides.
A related concept is giving people two choices when you want to get a any decision. When you are negotiating to set an appointment, instead of asking, “When do you want to look at homes to buy?” ask “Would tomorrow be good or Saturday be better?” They will frequently pick one of the two, instead of thinking that one of their other choices is to not set the appointment at all.
Tim has written a book to be published soon called Create a Great Deal that has nine techniques, and some people call them tricks. If you would like to reserve a copy of the book, click here. We discuss techniques as part of the Real Estate Negotiating Institute to learn every trick that might be seen in the market place. If you would like to join us, click here and join the discussion. I hope you can use this tool to close a negotiation and create a great deal.