It might be hard to find a doubt-the-request client in the first place; Since you thought you were looking for a property, but you are actually, seeking a distressed seller - someone who is eager and in-needs to sell fast. As if, he needed to sell yesterday!
If you are lucky enough, you might fall on someone much luckier than yourself to find you!
This is how good things work always, isn’t it?...
Next, we will assume that we are going to buy a property from a suppositional seller to simplify the process to the maximum.
Let’s make things easier and clearer;
Assuming that we are the broker or the buyer, and as an example, a realtor approached us seeking help to get his property sold. In the fact, he owned the property for 3 years but a crisis came over his business plans and suddenly left him with an office condo that is draining his finances with no revenues; He has been trying to sell it for more than a year and not getting any results.
He was planning to receive a part of what he spends on his condo but on the other hand, all the improvements he made were free. In our story, the realtor is the perfect distressed seller, but where to find him?
You can find such sellers in:
- Your network of friends and office mates. Tell them you're looking to buy a property. If they insist, tell them that as long as it's a good deal, you can pay cash (…)
- Networking or online events like cashflow games or investing seminars.
When you get a bunch of multiple data, the next best thing to do is to analyze each one and find the right one for you.
Getting back to our realtor, how did we know that his property was a good deal?
We asked the following questions, actually:
What makes the property worth it?
In our case, it is the property's Fair Market Value (FMV) or Resale Value (RV) which is intended; According to our seller, the real estate developer was selling similar units at about Php 4M (i. e. US $83,125.00 according to the latest currency exchange rate, dated January 2021).
Honestly, he was willing to accept just Php2.5M net, off taxes and expenses. So we’ll have a range of Php 1.5M, which is a very interesting deal!
Another essential behavior of the property to check, is what is owed on the property: What is the remaining loan balance if any? What is the interest rate, and how many more years are still left to close the loan? What is its monthly amortization?
In our example, the property offered for sale has no loan and is free from any legal contraindications, which is a positive factor.
Next in our exploration, is what are the improvement or repairs needed and how much it is expected to cost? Fortunately, there is no maintenance needed because it was never used and is still in very good condition, and therefore no negative impact.
From what it precedes, and naturally, a question crosses our mind: Why then the vendor is trying to sell his property? What does he need? What will he use the money for? He already told us earlier that it is draining his finances (…) Fewer investigations lead us to the answer: He will use the revenue to fund his wife's clinic in St. Lukes, a famous medical center in Quezon City.
Therefore, if we can pay him cash and close the amount in 2 weeks, what is the final price that we can negotiate about? According to what was said earlier, it is 2.5M. But when we pushed him, he went down to Php 2M but later he called back to say that it was his final price: Php 2.5M. We wouldn’t press him more since the margin was good already…
The objective of these inquiries is to re-estimate the resale value, get an approximation of the repairs and expenses spent, and find out the lesser price the seller was willing to go down to. When you have the three values, then you can calculate the Maximum Allowable Offer (or MAO) using the following formula:
MAO = (RV * Cost Factor) - Repairs - Expenses - Profit
In this formula, where the values are just an estimation, RV stands for Resale Value, discussed earlier. The Cost factor is a multiplier to consider for holding costs. Repairs are the estimation of the reparation cost, while Expenses are for taxes and other expenses, and Profit is for your targeted profit.
The Cost Factor that our seller will use ranges from 70% - 100% depending on the market conditions and your buyers' list. If you have a sure buyer for the property, use 100%. If you don't have a buyer but since the area is engaging, use 90%. If you don't have a buyer and the market is down, then use 70% or below.
Using our seller property as an example, we will have the following:
MAO = (4,000,000*0.8) – 0.00 – (15% 2,500,000) – 200,000
MAO = Php 2,625,000
The asking or demanding price (which is initially Php2.5M by the seller) is below the resulting MAO (Php 2.65M) so this means we can accept the asking price and still make a profit of Php 0.125M.
What if the asking price is higher than the MAO? Then, you will have to negotiate.
Step 3. Everything is Negotiable!
In the real estate industry, you should negotiate everything.
You can discuss the price, the terms of payment, which items are included in the purchase, etc… I meant everything.
For your convenience, I recommend exploring some related references for proven results in your communicating skills. You will learn more about how you can convince your interlocutor with an unbeatable dialogue of negotiation. So for your continued business success, here are two essential titles to consider:
Here, are some other good examples of how to conduct a successful discussion with any kind of seller:
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Always ask for the lowest price they can offer. As mentioned earlier in step 2, here is the exact scenario to follow once again. Assume that you’re facing your fellow and negotiating him with the following deal: “
If I can pay all-cash (or fresh money-cash) and close the whole amount in 2 weeks, what is the LOWEST price you are willing to offer?” That has been said, you don't have to change any of the wording. Use it as it is, word by word: Those are proven scripts to mimic as a parrot!
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Is that the best you can do? This is the question you must ask immediately after you get his first demanding price. If it is close to the MAO (discussed above), go to the next step and inspect the property. During the inspection, point out all the defects found in the location, such as neighborhood and property itself, etc…
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Have your purchase contract ready for modification – You can always ask for an exclusive
option-to-purchase real estate which is a legally binding contract that allows you as a prospective buyer to agree with the seller, in which you are given the exclusive option to purchase the property for an extended and limited time and a specific price. It is advised to do so in case you are certain to have a buyer or the property is located in an engaging area. However, this exclusive
option-to-purchase normally requires a small amount of money as a deposit. If the price is already below MAO, have them sign the agreement already done. This protects you from a sudden mind-change from the seller.
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