The Real Estate Investing Contract Offer
A Real Estate Investing transaction begins with an offer. An investor uses an offer to persuade a seller to sell at the buyer’s (investor’s) price and on the buyer’s (investor’s) terms rather than on the seller’s terms. It is through the real estate offer to buy that the investor begins to take control of the deal. It is through the offer to buy that the investor lays the foundation for the contract, a contract of the investor’s design.
You must understand the seriousness of the offer process and the power of a properly though-out, prepared and presented offer. You are just a signature away from a legally binding contract, so investors need to prepare a contract that they can live with, one that is designed for real estate investing and one that will be taken seriously. Take the time to get one designed for you with the help of your realtor, attorney or more experienced investor.
College and school of hard knocks will teach you this: Under contract law, four things are required for a contract to be considered a binding contract:
- Written and signed
- Legal Intent
- Mental capacity of the signers (legal competence).
Key Areas of Contract Offer – Price, Timing, Convenience
A contract has three parts that are great negotiating points: price, timing, and convenience. If you are willing to give the seller two of these three, they should be willing to give you the last one. I suggest Investors make them choose between price and timing.
A great way to establish motivation with a seller is to ask them why they are moving or selling. They will never say they are moving because the house is a piece of junk. They will instead tell you their motivation, for instance that they build a new home, had a job transfer, or were laid off. This established that they are a motivated seller and the first key ingredient to a bargain.
Now here is a great follow up line: Ask “when they need to be out by, for example, when will their home be finished, or when will they be leaving?” That response will help you establish timing, the second key ingredient to a bargain.
Then ask – “What is more important to them, price or timing?” Most sellers respond with “price”. Naturally a follow up sequence will look something like this: “Is it more important to get the price you want than to be out of the home quickly?” If the Seller responds that they have to be out sooner than later, respond by saying “looks like timing is more important than”. What the Seller had essentially done is created a “trap” for themselves.
Making Price Key Point To Your Contract Offer
Here is an example: “You need to be in Kentucky in three weeks. I am willing to close before them; I will handle everything so that you do not have any additional stress. However, for this to work for me as a real estate investment property, this is the most I can offer”. You want to really play up the convenience that you are creating for them. Most sellers do not realize how intensive the closing process is. If necessary make a list of all the steps that must be completed to close on a home. Your realtor or a title-agent will likely have a “cheat-sheet” that they can share with you.
Making Timing & Convenience Key Point To Your Contract Offer
Another example: “I understand that you need your asking price, I am willing to make it as convenient as I possibly can for you, but for this to work for me as a real estate investor, you are going to have to help with the financing. Let me explain. You have said that you owe $150,000 on the home, the value is around $145,000 to $155,000, and that your payments are $1200 per month. I will give you $2000 for moving expenses. I will then pay your mortgage payment for you for the next two years. After two-years, I will cash you out of the transaction. During that two-year period, I will be paying down your loan, taxes, insurance and maintaining the property. The advantage to you is that you will walk away with equity because of the principle reduction on the loan instead of walking away with nothing right now”
In this last investing example of working with a motivated seller, you give the seller their asking price and their timing, but they had to make it worthwhile for you with – terms.
Submitting Real Estate Contract Offers
Last thing about making real estate offers and submitting a contract – you must be able to make a profit or there is no point in purchasing the property. Make sure your bottom line purchase price “locks in your real estate investment profits”. Alternatively, if you are paying close to current market value for a property, but the area is renting for more than the amount of the payment you will be making, you have the potential for positive cash flow. Either way you should clearly see the end BEFORE you submit your contract offer to purchase a potential investment property.
Please leave a comment below or let me know if you have trouble submitting offers directly to sellers or through your realtor?