The Importance of Zeroing in on Your Buyer’s Tolerance for Profit

The language of business is numbers. So it is with doing profitable real estate deals. There are three (3) very popular rules for calculating your offer. They are referred to as:

  1. “The 70% Rule:” (Offer equals the ARV (After Repair Value) times 70% less cost of repairs.)
  2. “The 75% Rule:” (Offer equals the ARV (After Repair Value) times 75% less cost of repairs.)
  3. “The 80% Rule:” (Offer equals the ARV (After Repair Value) times 80% less cost of repairs.)

The “80% Rule” offers the least profit. However, it offers much greater likelihood of getting the offer accepted than “the 70% Rule.” What’s exciting is that there are investors who use “the 80% rule” and still make more money on the deal than investors using “the 70% Rule.” You will want to find them.

Regardless of which rule is used, there are closing costs, holding costs, and selling costs. Generally, those costs total 15% and break down like this:

  1. Closing Costs: (3%) Paid to the title company to insure the deed is free of liens or encumbrances.
  2. Holding Costs: (6%) These costs are mostly the costs of borrowing the money to do the deal, but also include taxes, insurance and utilities etc.
  3. Sales Costs: (6%) Usually paid to the realtors who help close the deal.

As a wholesaler, it is critical to find the buyer who will pay the most for the property. Some buyers have their own money. This eliminates most of the holding costs. The same buyer may also have the property already sold or have an agent on board that eliminates their sales costs. The buyer who doesn’t have many holding or sales costs can use the 80% rule and make more profit than another buyer who has borrowing and sales costs but uses the 70% rule.

When we interview buyers, we want to find out their “tolerance for profit.” Do they have money? Are they an agent or do they partner with an agent? Going out to the job sites of successful bidders can help you find those buyers who do rehabs more efficiently and at a lower cost.

Asking this simple question can help you sort out the buyers who should be at the top of your list. “Suppose I have a property you know you can sell quickly for $300,000.00, but it is going to cost you $30,000.00 to rehab. Your ad says you buy houses, where would I have to be pricewise for you to buy this one?”

Simply put, the greater your buyer’s “tolerance for profit,” the more money you will make and the more deals you will do.

Negotiation in Real Estate

You might have heard the expression, “everything in real estate is negotiable,” and it is true! Nearly every part of the purchasing phase of a real estate transaction is negotiable. Understanding more about the negotiation process creates additional options, and confidence increases the chance of getting the outcomes you desire.

Negotiating is the process by which two or more parties with different needs and/or goals work to find a mutually acceptable solution. Because negotiating is a process, each negotiating situation is different and influenced by the process and what compromises are available.  We often look at negotiating as unpleasant because it implies conflict, but negotiating need not be characterized by bad feelings or angry behavior. 

If you do not think you are good at bargaining, just reflect on how much we all negotiate in our daily personal and professional lives.  Everything from when a project is due to when a meeting is scheduled is negotiated. 

Sometimes it is easy to negotiate; however, if there is a great deal at stake or we are anxious about getting a particular property, then it seems more daunting and even difficult. 

Here are several tips to improve your effectiveness in negotiating:

Timing Matters

There are good times to negotiate and times that limit a deal. In real estate, the longer the home has been on the market, the better! If someone has just listed a home, then they are far less likely to negotiate.  Additional considerations include: Does the listing say it must sell fast? Is the home already vacant? Gathering additional data and choosing when to make an offer is critical to your ability to time the offer.

Evaluate the Data 

Negotiation includes doing research and, ultimately, both parties are trying to find a solution acceptable to close a deal. Ideally, one needs to understand the other person’s needs and wants, with respect to the listing. How much did they previously pay for the home? What is the condition of the property? What data do you have about the listing? Is the home vacant?

Remaining Neutral 

It is normal to become emotional during the negotiation process.  However, if one gets more emotional, they are less able to channel their negotiating behavior in a constructive way.  It is important to maintain control and not let pure emotions control the deal. There are also times that the purchaser gets to emotionally attached to a property.

Explore Options

Before entering into a deal, prepare some options that you can suggest if your preferred solution or price is not accepted.  Anticipate why the other person may resist your offer, and be prepared to counter with an alternative.

No Need to Argue  

Negotiating is about finding solutions and arguing is about trying to prove the other person wrong.  When negotiating shifts into an effort to prove the other one wrong, no progress is gained. Do not waste time arguing. If you disagree with something, state your disagreement in a gentle but assertive manner, emphasizing what you want to achieve.

Conclusion    

Negotiating is a complex process; however, it can be mastered. If you focus on what you want to have happen, practice these suggestions and utilize the professionals on your power-team, you will be a strong negotiator and win over the deals you desire.