Price versus Terms: What is the smarter deal when investing in real estate?
Not all purchases are created equal. Here is a story of two buyers looking to buy the same property. The same $100,000 property with different offers, How do these different offers effect the seller? How do they affect the buyer? Why would two different buyers have such different offers? How do they find different values to the same property? It all boils down to motivation. Those who perfect the art of uncovering your opponent’s motivation will win every time.
So as a seller of a property you are approached by buyer (Rick) who states they did their diligence on your property that you have for sale with a list price of $100,000. They stated that based on their objectives and analysis of the property they could offer you $100,000 for your property as long as you carried the note for them. (Seller financed)
While you agreed to think it over and told them you would sleep on it, another offer came in from Buyer (Dave) their offer is for only $90,000 but it was an all-cash offer.
What is the Sellers Motivation?
How cut and dry is this decision? There are a lot of decisions to be weighed in here. This is a simple illustration of Price versus terms, which works best for you as the seller, which works best for the buyer?
Often when having an open mind you can get what you want to accomplish while the other party can get what they want to accomplish and you can both win. The key is to think about the other party and find out why they are selling (or Buying) uncover their needs and you can structure a deal that will work best for them while benefitting you.
A seller who wants to move out of state and retire may be motivated to have monthly cash flow and carry a loan for you. While a seller who wants to sell so they can buy a new larger home may have zero interest in carrying a loan as they need to cash out to buy the next home.
You can see these two examples have two very different motivations and when you aim to solve their underlying motivation you can indeed both win the game
Why would a seller except my offer? How do I sell them my proposed offer? How do I illustrate how they will benefit from my offer? Understanding the pros and cons for both parties will allow you to identify how your offer will benefit the other party. As you illustrate the benefits of accepting your offer you may create a great win win for both of you.
Let’s look at the pros and cons for both parties. Let's start from the eyes of the seller:
Buyer (Rick) full price with terms
· Full price offer
· Interest payments each month for duration of loan actually pays you not just the principle value but also interest payments. Finically this looks pretty darn good
· You may benefit from tax breaks by not taking full capital gains at one time
· If buyer defaults on property you can take the property back by foreclosing on loan and resell it. Keeping all payment and interest to date
· You have to do your diligence on the buyer and make sure they are good credit worthy buyers who will pay their bills. If they default on payments this will be a headache for you.
· You want to do diligence on the buyers to make sure they will maintain the property
· Your principle amount is tied up until the term of the loan expires or until they refinance or sells and pay you off.
Buyer (Dave) lower priced Cash offer
· You sold your property and are no longer tied to it. You can take the cash and proceed as you wish to
· You settled for less money than you desired
· You may have a higher tax liability depending on your tax basis
Now let’s look at the same example from the Buyer's perspective. The pros and cons tend to look different, while you may think it's simply reversed they do take on different benefits for each party.
Buyer (Rick) full price with terms
· You get to own and control a property without having to pay the high acquisition cost of obtaining a loan (perhaps you may not qualify for a Bank loan) investors who own multiple properties are capped at 4 to 10 loans depending on the lenders criteria
· You do not have the liability of the loan on your credit report which may drag down your credit score.
· Your tax liabilities will be reduced due to less cash flow
· Your cash flow will be reduced due to higher finance charges
· Your equity position will be less or not existence during initial acquisition..
Buyer (B) lower priced Cash offer
· You started the investment with a $10,000 equity position (Yay)
· The cash flow will be stronger as the loan amount may be less
· You have more liabilities showing on your credit report tightening your lending capabilities.
· Your cash is now tied up reducing your liquidity and ability to further leverage your investments
· Because of higher cash flow your tax liabilities will also rise
This is by no means an exhaustive look into all the things a buyer and seller look at. Every buyer and seller has different motivations.
What other pros and cons for each scenario can you come up with? Go ahead and think of different motivations people may have. The better you become at negotiating deals the more profitable deals you will do.,
So which of these two offers is better for the buyer, for the seller?
To discuss these scenarios closer contact us for a complimentary strategy call. We are happy to discuss your particular scenarios in confidence.