Making your first offer can seem a little scary. But it is NOT. I've taken the time to break down the steps for you in Seller Responded – Making Your First Offer Example P1 & Seller Responded – Making Your First Offer Example P2 . Since we’re just getting started, perhaps you’re wondering how we can be so sure that we can find a buyer or tenant quickly enough to make all this work without our having to put-up any money.
Making An Offer – Option #1
In the first example, we’re planning to sell the property outright to a new buyer at a higher price than we paid. Since we will have negotiated a below-market purchase price ourselves, we can be flexible in our sales price to our buyer. If we note resistance or reluctance at our $80,000 price tag, we can lower that price somewhat to make it more attractive to a buyer.
After all, we have none of our own money invested. We requested 60 days (or 90 days, or ??) in order to make this work. If at the end of our escrow period we still have not been able to find a buyer, we can negotiate an extension or simply walk away from the deal. We would have made the offer subject to our finding a suitable buyer within that time frame. Chances are, we’ll have a buyer within a couple of weeks if not sooner.
If our negotiations follow the option outlined in number 2 above, we would immediately place a classified ad under Houses For Sale in the local paper with the headline: No Bank Needed. The last time I ran that headline, I got 30 phone calls on the first day the ad appeared in the paper, and the second person to look at the property bought it.
Remember, our seller is carrying back the financing so we’re not dealing with a bank. We reserved the right to transfer the financing to a new buyer as well as allowing ourselves to create a new, wraparound mortgage. Either way, we can accept a new buyer that may not have top credit but who does have cash and can make payments. Not very many investors take advantage of these alternate financing arrangements, and they’re missing out on great deals.
With our third option, we again run a classified ad but with the headline: Rent To Own and we place that ad under Houses For Sale; NOT under houses for rent. We’re not looking for tenants. We want people who want to buy but may be having credit problems to the extent that they can’t qualify for a regular bank loan. This option also gives them the opportunity to “try-out” a home to make sure they like it before they actually buy it. If they make their rent payments on time as well as their car payments and credit card payments, by the time a year passes, they will have improved their credit rating to the point where they will qualify for a regular bank loan.
Stop and analyze what we’ve learned thus far…
Our example number 1 above is the way most people go about investing in real estate, yet it is the least profitable. I’m not suggesting you avoid this approach, but consider the profit streams. In Option number 1, there is only one profit to be obtained; the difference between what we pay for the property versus what we can sell it for.
Making An Offer – Option #2
In Option number 2, we can make a profit from the difference in down payments. We then make a monthly profit from the difference in mortgage payments. Finally, we make a profit from the sale price differential. We haven’t discussed this as yet, but we have a fourth profit potential: discounted paper.
While we were negotiating the terms of the seller financing, we included a clause that gave us the right of first acceptance in case Ida Mae decided to sell the mortgage to a third party to raise cash. Notes (mortgages) are frequently bought and sold. Usually they are sold at a discount to face value. In our case, our seller provided financing of a $66,500 mortgage at 5% interest for 30 years payable at $356.99 per month that includes principal and interest. We owe Ida Mae that money.
If Ida Mae decides to sell our debt to another party, we have the right to purchase that mortgage at whatever bona fide price she is able to obtain from a third party. Because this is a first mortgage and because we are a good credit risk and make our payments in a timely manner, she probably won’t have to discount it more than 20% (some higher risk notes are discounted over 50%). If she decides to sell at a 20% discount, we can then step in and buy it from her for $53,200 (80% of $66,500). Our buyer will still be paying us $443.67 per month and still owe us $74,000 on the wraparound mortgage, but we just made an additional $13,300 buying back our debt from Ida Mae at a 20% discount.
Making An Offer – Option #3
In our third option, we generate a profit from the difference between the option payment we give to Ida Mae versus the option payment we receive from our tenant/buyer. If our first tenant/buyer doesn’t exercise his option to ultimately purchase the property, we find another tenant/buyer and start over with another markup between the option payment we receive and the option payment we make.
Next, the rent our tenant/buyer pays us is greater than the rent we pay to Ida Mae so we have an ongoing monthly profit for as long as we are involved in this property. Finally, we again profit from the sales price to our tenant/buyer that is higher than the price we agreed to pay to Ida Mae.
In summary, we’ve come up with at least three (3) viable solutions to Ida Mae’s problem of wanting to sell her house, and every one of our solutions are profitable to all the parties involved. So when we call back at 5 PM, we know that we will have something to offer Ida Mae that will solve her problem.