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Wednesday, April 14, 2010

Strangle Hold

Today was one of those days. You know, the kind where everything seems to be circling the drain. We had a deal accepted on Friday, found a wholesale buyer Tuesday morning, and the seller backed out Tuesday afternoon. $10,500 wholesale fee down the drain. I have been negotiating with this seller's agent. This of course, is mistake number 1. NEVER waste your time dealing with someone who cannot make the decision. This seller's house is occupied by non-paying former owners. The current owners sold the house and carried back the financing. When the buyers stopped paying, the sellers foreclosed, took the house back, but never kicked out the old owners. They have been living there for over a year rent free.

So, instead of selling this problem property to me after we had already reached an agreement, they decided to list the house and see what they can get on the open market. "What in the World are they thinking?" is all I can ask myself. They have been avoiding dealing with this property for over a year and now expect a buyer to come along and take care of the problem for them AND pay close to retail? They listed the house for $10,000 more than I had it sold for. For some reason, they expect a buyer to come along with agent representation, get access to the property, make an offer, all the while the former owners who have been foreclosed on are still living in the property. I guess they also expect the new buyers to evict the former owners before they can move in?

I would imagine they are in for a shock because after the property doesn't sell, which it won't, my new offer will be $10,000 less. Real estate is a gamble and they decided to play their chips on the open market and see what transpires. If it works out for them, and I truly hope it does, that would just be a nice ending to a long, unnecessarily, drawn out story. If it doesn't work out for them and they come back to me, I will have to explain that by listing the house and not selling it, they have established what the house is not worth. It is worth somewhere south of that number and I still need to make a reasonable profit. Whether I pay $30K, $50K, or $300K for a property, I want to make $5K~$10K, minimum. Since they will have established a value that the house won't sell for retail, I have to buy it for much less so I can make my profit and still sell it to a wholesale buyer with enough equity in it to get my buyer interested while still allowing them to make a minimum 10% profit on their side of the deal.

Because I have consist leads coming into my office I simply let my buyer know that this deal is sidelined for the next few weeks and moved on to the next lead in my pile. I quickly learned that having a consistent flow of leads is what keeps me from strangling this one to death trying to force a deal when there is obviously not one to be made. The sellers are just not that motivated. Time and circumstances changes all situations. By consistently following up and working the fresh leads that come into my office every day I don't have to maintain a strangle hold on this non-deal hoping for a payday that is not going to happen. I can simply set it aside, work the hot leads looking for new opportunities and deals to create and revisit this lead after a few weeks. I like to refer to this as putting it on the back burner and letting it cook a little more. Just like a cake in the oven, when I stick a toothpick in it, if it comes out wet, I know it isn't done yet and I need to let it cook a while longer. Time and circumstances changes all situations.

2 comments:

  1. Hey Aaron
    Thanks for writing simple to the point commentary about your every day investing experiences. Helps us newer less experienced investors get some insight on how things roll in the investing arena around here. Unfortunately what you described about seller not quite motivated seems to be all I have experienced. I have made well over 50 offers mostly to private owners (non MLS) and they always want just a little more money than I am offering and the vast majority want cash, not interrested in a financing solution.

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  2. We deal with a lot of sellers insisting they want cash offers as well. We explain to these sellers that our private investors expect a return on their money and therefore we cannot pay them what they want. By explaining to the seller this situation they understand that we are not buying houses with our money. A great anology would be to explain how they bought the house and the bank lent them the money at a very low interest rate and small down payment which made it affordable on a monthly basis and therefore they could pay the amount they did for the property. You cannot go to a bank for a loan and therefore the lenders you work with expect more interest, a higher down payment, and that equates to a higher monthly payment which lowers the amount you can pay in price.

    If the sellers are willing to carry the paper and give you little to zero interest (our favorite) you can pay them a much higher price. Prive Vs terms. They pick one, you pick the other. Like the old candy bar story; You cut, I chose first.

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