The Biggest Mistake New Investors Make Is Offering Too Much

If your offer does not embarrass you, it is too high! You can always go up … rarely down. Do not be afraid to make low offers. The worst that can happen to you is that the bank will say no, and then you will make a higher offer. A rejection is not the end of the world, so offer low. We can’t stress enough how vital this is to your success. We want to make a point here.

Regardless of the property value, start your offers at 40 percent. We are using an example of a $100,000 properly. You may live in an area where the average property sells for $500,000 or $2 million or more. The value of the property has little to do with the offer. Actually, more expensive properties can be easier to short-sale because of the cash reserve issue. The cash reserve is the amount of money the bank has to keep aside (cannot lend out) for each REO it  has in inventory. For some banks, it’s two times the value of the property; for others, it’s o much more. This really ties their hands—after all, a bank’s business is lending money.

Successful Short-Sales Start with the Homeowner
Let’s say you’ve already completed step one—you have found an interested homeowner couple. Once you have determined that they have no equity, explain the short-sale concept to them and let them know that if you are successful in your negotiations, you’ll be able to help.

• Be certain they understand that if you cannot come to an agree¬ment with their bank you will not be able to help them and they will still be in foreclosure.
• You must negotiate the following with the homeowners before you proceed with your end of the deal:

               The amount of money they will receive for moving expenses.

               The homeowners’ move-out date.

“I found a distressed property and sold it to an investor for a $59,000 profit! I still can’t believe it. I made what used to be my full year’s salary in one transaction! It took only about six days, from start to finish, to find the homeowners and do the paperwork and that sort of thing. It took 30 days to close on the transaction. In that short amount of time, I made all that money!”
From an REO investor

Financial Agreement with the Homeowners

• When dealing with homeowners without equity, we explain that one of their best solutions is a short-sale.
• We explain to the homeowners that if we can negotiate with their bank to accept less than what is owed as payment in full (as long as the amount is acceptable to us), we will purchase the property.
• We also explain that we need their help in obtaining the short-sale, as the bank will require items that only they can provide.
• If they are in agreement, then we proceed with executing the paperwork for our short-sale package.
• One of the first questions you should ask the sellers is what they are seeking as a result of your help.
• The answers will vary from “Nothing—just help my credit” or “Three thousand dollars to get moved with” to an unreasonable amount of money that will kill the deal. 

Most homeowners with no equity simply want out of their situation. We always  tell them that if we are able to work out a deal with the bank and actually purchase the home, we will give them whatever they need to move with.

There are two reasons for this:
1.  We want to help them financially.
2.   If the sellers should move out during the short-sale negotiation, we want to maintain communication with them in case the bank requires additional information.

Knowing that they will receive cash when the deal is complete will motivate them to continue to cooperate with you.

Any amount of money you agree to give the homeowners is fine; however, this figure cannot appear on the closing statement. It must be on a separate agreement. We use a bill of sale because it is a legal way to provide financial assistance to them. Typically, one of the bank’s conditions for accepting your short-sale is that the sellers do not receive any sale proceeds. The bank will not accept thousands of dollars less than what is owed by the sellers, pay all the sellers’ closing costs, and then allow the sellers to leave the closing with a profit. Can you blame the bank for that?

The legal way to avoid this problem is to pay the sellers to clean the house or for another service, such as debris removal.

You can also buy appliances, computers, baseball cards, an¬tiques, furniture, cars, or anything else of value via a Bill of Sale.

When purchasing an item from them, you are legally buying something, not giving sale proceeds. To do this, you must use a bill of sale.

How Much Should You Pay the Homeowner to Move?
What is a fair amount of money to give homeowners in foreclosure? There is no real answer. We feel that they should not be rewarded for failing to make their mortgage payments; however, they do need to move and start over.

There are many gurus teaching investors to give the homeowners $500 and tell them to move out.

Here is our question to you: Can you move with $500?

If not, why would you expect someone else to? These home-owners are trying to start over. They need money for a moving truck; for their first and last month’s rent, as well as the security deposit; and the deposits for electric, gas, water, and phone service, to name a few of  the expenses they face.

Be fair when dealing with these folks. You have 20 deals around the corner, but  this is their one and only chance to start fresh. Re¬member what we always say: You reap what you sow, so sow some good seeds.

Setting the Move-Out Date
Here is the key question we use to encourage homeowners to move out quickly:

“When are you planning to move in with family?”

Without being blunt or rude, this question will imply that they must move out soon and will put the thought in their minds that they could move in with family. Most homeowners aren’t thinking clearly and don’t consider that as a possibility until we mention it.

Moving in with family is a great option. There will be no re¬quirement for a credit check or for first and last month’s rent and security- deposit (money they don’t have and would want from you).

It is impossible to expect the sellers to move out immediately when you are not promising an exact result. When they are not moving in with family, they often need moving money. Therefore, they will remain in the home until closing.

How do you handle homeowners who need to stay in the property until the day of closing?

• Hire a moving truck the day of closing.
• Have the movers load the homeowners’ belongings.
• Have the homeowners come to the closing while the mov¬ing truck is in the driveway of the subject property.
• Before and after the closing, go to the property and do a walk-through.
• Determine if the property is in the same condition as when you went to contract.
• Buy something from them and give them the cash so they can get going.
• Pay the movers yourself as a good deed.

Why should the homeowners be out by the closing?

• If you have wholesaled the property to a rehabber, the rehabber will want to begin work immediately.
• If you give them several days to move out and they don’t, guess what? Your rehabber now has to go through the eviction process (not a good way to build a relationship).
• One of the homeowners could get into a car accident or die before they move out. Your rehabber now has to evict a widow or widower or put someone out who is now disabled or recuperating.
• The homeowners could file for bankruptcy and live free in the rehabber’s property for months. The homeowners could fall asleep smoking in bed and burn the house to the ground.
• A natural disaster could come along and destroy the prop¬erty.

Why do any of these things matter to you? Because you are trying to build a replicable business. If you have sold the property to rehabbers and now the rehabbers can’t get the homeowners out, they will never do business with you again.