The Real Estate Investors Biggest Problem
Let’s begin our discussion of the Real Estate Investor’s biggest problem by examining the typical timeline for traditional Real Estate investing. The way everybody else does it.
- First things first. You have to have an asset: buy a property and get it for less than what you can sell it for.
- Next, consider that the average Real Estate investor makes an average of 20 to 25 offers just to get ONE property under contract (that’s a success rate of only 4-5%).
- Investors used to be able to get assets for less than $.70 on the dollar. Now, however, they’re lucky to get anything below $.80 – $.85 on the dollar. And let’s hope that water heater holds out. As well as all of the other major appliances – one major issue and there goes your profit.
- And the market is more competitive than ever. With dwindling inventory and the market shifting to more than $5k per month for successful marketing, the odds are definitely not in your favor.
So how do we solve the everybody does it this way problem? The answer is quite simple and only a few top tier investors know about it – seller financing!
Sure, I know what you’re saying, “I know about seller financing. It’s when the seller becomes the bank and they float the note while getting a monthly payment.” Well, in its most basic definition, you are correct. But let me ask you this question, “Why aren’t more investors using this strategy?”
The answer is: they only understand the basic one liner above associated with this topic. Oh yes, we can hear some of you now, “I know about this space and this isn’t for me!” You couldn’t be more wrong! Just knowing the basic definition doesn’t make you an expert, just like reading a book doesn’t make you a literature professional. Cliffs Notes can help shortcut your understanding of a book, but it doesn’t make you a specialist in the field – especially if you’ve only read a handful of novels. We hope you get the point here. We’re not necessarily saying you don’t know what you’re doing. We are saying, you may want to read a little further and see what additional skills you can acquire to generate more and even better deals.
There is so much more to understanding seller financing. This is the key to unlocking your financial future. Understanding the true scope and potential of seller financing will open doors and increase your returns. As an investor, you need to think beyond negotiating the purchase price (yes, you are correct that this is a big line item), but it’s not the biggest item you should be fighting to win. In fact, this will be the last item on your to-do list after reading through this article. Or, at the very least, it won’t be as important to you when you realize the full potential seller financing holds.
Think about the mindset of a seller. They want top dollar for their property and will choose the offer that brings them closest to the asking price or, at least, they will choose the offer that brings in the most money. Why not break all the rules and offer top dollar for it to begin with because they are going to choose the top price anyway? Most of the time the investor who truly understands the seller financing realm will be able to make an offer above the asking price and still make more return than the average traditional investor.
We know what you’re saying, “These guys are crazy and doesn’t know what they are talking about!” Trust us when we say, once you unlock the secrets of seller financing, you will have a better success rate and more deals to choose from because you will understand how top tier investors are doing deals in today’s market. Hint: it has nothing to do with how much money they have; it has everything to do with the understanding of seller financing and comprehending terms.
Wait, is that the secret? That terms are the trick you have up your sleeve? Are terms the answer to the equation? In short, yes! By allowing the property seller to get their asking price, you are giving them what they want. This also puts you in the negotiating hot-seat giving you the best shot of leading the conversation. In effect, you are lowering their defenses and allowing them to listen to you and start a conversation, which positions you at the top of the line to close the deal. We are literally stacking the deck and positioning ourselves to be the front runner of the conversation.
What do you think this will do to our conversion rates? Again, by giving the seller the asking price they desire, you get them to listen to what you have to say because that is their biggest point of pain. This is the conversation we want to be in because it opens up the dialogue and allows the seller to be open to ideas and be agreeable to the terms that both parties will settle on.
For those of you who may be new to Real Estate investing, or those of you who are stuck in a rut, recall that terms are things like: down payment, interest rates, length of payments, payment amounts, multiple liens, partials and the like. There are literally dozens of items we could list here. And please note, you don’t have to be only the buyer here, you can set favorable terms even if you are the seller. Terms allow both parties to have agreeable items in the paperwork that will be favorable to either party; it doesn’t matter if it’s a single-family house, raw land, apartment buildings, commercial property or anything else in real estate investing world.
Either way, terms allows you to create an answer that both sides can benefit from and after spending some time with us, you’ll see that price isn’t as big an obstacle to overcome and should be the line item used the least amount of time. We just agree to their asking price and move on. Pretty easy huh? (We bet you didn’t see that coming!) At the end of the day, seller financing can be the difference between a great deal or a busted deal.
One of the biggest topics of discussion in the investing world today is “Do investors suffer from inventory issues or capital issues?” The answer is…both. It depends on which side of the story you’re on. Think about this. If you inherited a house, or more likely got stuck with a rehab that went south on you (remember that water heater…experience?), you’ll have a real estate problem. You’re now stuck with a house that is costing you money because the numbers don’t work out to get rid of it. Or, you could just as easily be on the other side of the coin and want the house, but you may not have the capital to acquire it and preventing you from getting traditional financing.
A person who is suffering from a lack of capital will typically hold out for every penny they can get. They’ll take the highest possible price they can get because they need the funds. It really doesn’t matter why they need the money, but in their eyes, they NEED that money like the desert needs the rain.
This presents us with a question we must answer. Does the other party have a real estate issue or a money issue? Solving a money issue with a real estate issue doesn’t make any sense. It’s like going to a car dealership and ordering a pizza (if you’re hungry, why are you going to a car dealership?). You must determine which side of the equation the other party is on before you slide your offer across the table. Keep this in mind. When your offer includes a way to solve their problem, which offer do you think they’ll choose when they see offers coming in? Especially, when we are giving them their full asking price.
One of the biggest obstacles you are going to have is avoiding any pre-conceived notions of what people will except when dealing with terms. You would shake your head in disbelief if you saw some of the terms people except on a regular basis. The biggest takeaway from this article should be to ask for the terms you want because they just may except them. They do it all the time. And, be sure to be fair with them. Remember, what goes around – comes around, so always treat them fairly.
There are deals out there where you’d ask “Why would anyone agree to this?” You’d be surprised what people would agree to! So don’t be so quick to assume you have a pulse on the market and you know what people would do. In fact, according to a study just a few weeks ago by a large private equity firm, 43% of notes were created at 5% interest or less and 19% of seller-financed notes were created with 0% interest. Let’s repeat that… one in five seller-financed notes were created with 0% interest!
If you aren’t amazed by this, then maybe you have lost your spark or maybe you don’t truly grasp what this means for the future of real estate. Sellers are very agreeable to the idea of terms and are responsive to agreeing to one or more of them, so long as you give them what they want – their price! When you truly comprehend how this industry works and how you can create even more deals than you can with the traditional way of investing, it gives you a VERY big advantage in the marketplace. For you, there will be no problem at all!