Opportunities in real estate investment are heating up for spring. Many markets across the country are red hot, while others are starting to surge. In markets like Portland and San Francisco, competition for properties is fierce, even for ones needing major renovation.
This creates danger for the fix-and-flip investor to pay too much. In less heady markets, properties are easier to get, but profit margins are more slim. No matter the market, negotiating the best price means the difference between big profits and a long slog toward lackluster returns.
To get the best deal, real estate pros recommend these 6 tried-and true negotiation strategies. Whether searching for investment properties through MLS listed properties, short sales, or auctions, getting in at the right price assures success. Following these negotiating principles keeps the law of averages and the laws of supply and demand on your side.
1. Due Diligence Comes First
Knowing the lay of the land before even starting the negotiation not only sets the buyer up to get the best price, it saves time. Wasting time on deals that are ill-fated from day one is a mistake even veteran real estate investors can make. What is the point of spending precious time negotiating a deal that isn’t going to reap the biggest profits, when you could be spending that time on something with better potential?
Careful analysis of the available inventory in a region must reveal which properties have the most profit potential. Negotiating any real estate deal takes time and energy. With competition for hot properties as intense as ever, it’s likely that investors will find themselves in a competitive bid or negotiating with an unreasonable seller.
2. Set the Price and Remain Firm
Having faith in your assessment of the profitability keeps you from making an emotional decision that costs money. You can’t succeed if you pay too much, no matter how hard you work on fixing the property. There is always the danger of being pushed to spend too much. That’s why setting a max price before negotiation starts becomes so important.
To set an accurate price going in, enlisting the help of a real estate agent and appraiser pays off. Comps provide a good guidepost, but appraisers and agents who really know the area can help fill in the picture, which turns an estimate into a bang-on target.
Every bit too high eats your profits, and every bit too low leaves you vulnerable to losing the property to an investor who perceived the project’s value more accurately. Strong due diligence means consistent fix-and-flip profitability.
It’s also important to have multiple properties lined up. If the first pick doesn’t work, be able to move to the second pick without delay. There is no “win” in buying a fix-and-flip property for too much money. To be a strong negotiator, you have to be willing and able to walk away from the deal.
3. Know Your Margins And Be Reasonable
Due diligence gives your final price, the amount that gives you a profit margin acceptable for the time, effort, and expense of buying, fixing, and flipping. Each dollar below that represents additional profits.
It also represents a margin for error. Sometimes, a surprise hits after the home is purchased, which could be anything from an act of God to a sudden change in the market. The further below the acceptable number you purchase at, the higher your chances of success.
One mistake, however, is making an outrageously low offer. If you are dealing with a seller who is emotionally invested in the sales price, it could be considered offensive. It can also weaken your negotiating position. If you are really willing to buy the house for a certain price but bid too low, you may look like you got caught bluffing and that hurts credibility. The key is to be firm and communicate confidence, which is difficult when you make unrealistic offers.
4. Know the Seller
In investing, intelligence shows where the best deals are. Wall Street insiders succeed because they know the street. Cultivate sources, such as real estate agents, who can provide information. Before the formal negotiation starts, find out everything you can about the seller. How long has the home been on the market? Is the seller in a hurry? Why are they selling? Are they in danger of foreclosure? By understanding the seller’s motivations, you gain a negotiating advantage.
5. Anticipate the Seller’s Next Move
Good negotiators are conscious of how much each player can be expected to move at each stage. When the buyer counters the initial offer, be careful. Your response sets the tone for the rest of the negotiation. Good negotiators know that this is a game of meeting somewhere in the middle. If you increase your offer by X, how much movement can you expect from the seller in return? Like a chess player, think as many moves ahead as possible.
6. Avoid Contingencies
When competing for a hot property, fix-and-flip buyers have an advantage. They don’t need contingencies, such as selling their house first. They also plan to do repairs, so being picky about small defects isn’t necessary. In fact, fixing them is a profit opportunity, so long as you factor those costs into your offer.
Because you don’t come with contingencies, the seller should be willing to accept a lower price from you, which increases your profits. Communicate this to the seller, and make sure that you price in the no-contingency benefit. Don’t give it away!
Contact Orchard Funding Today
When you go into competitive real estate negotiations, you need a strong, dependable lender on your side. Time is of the essence. You are working hard to find the best opportunities and negotiate the most profitable terms. When that deal you’ve worked so hard for comes through, you need the lender that helps you get it closed fast!
Orchard Funding provides fast fix-and-flip loans up to 90 percent of the purchase price plus up to 90% of rehab cost for residential, multifamily, and small commercial properties. Timing means everything when negotiating so call Orchard Funding at (310) 356-7373 today.