In our previous blogs we’ve talked about the art of pricing your newly renovated rehab property. To summarize it’s all about finding the balance between setting the highest price and not letting your property linger on the market. Let’s assume you’ve carefully done your homework and – voila! You now have an offer or two to ponder. It’s an exciting news, but as a grizzled hard money lender and a real estate investor, I have some words of caution. If you give in to wishful thinking and let your guard down at this stage, you can jeopardize the timely sale of your property. You might also lower its value in the eyes of potential buyers and kiss your best price good-bye. Do NOT get euphoric. Proceed with caution.
Your task at this stage sounds deceivingly simple: select the best buyer for your property. As a hard money lender, I’d like to emphasize the word deceivingly. There is a wide spectrum of buyers with two extreme types on each end. On one side of the spectrum, is what I call “a grateful buyer.” Those buyers are not financially strong. They know it and might compensate for it by being easier to deal with and offering you better terms and prices – at least on the surface. On the opposite side is a “cocky buyer.” They are financially secure, well-capitalized and sophisticated. Both of these types tend to handle the sales transaction differently. Working with each of them has its own pluses, but they also can mess with your profits. As a hard money lender, I recommend these six strategies on how to select and manage your buyers effectively.
Plan Ahead For Seller Help In Certain Neighborhoods
The type of buyers you are likely to get depends on the area where your property is located. If it’s in a modest neighborhood, you are more likely to get a buyer with modest means. That means that this buyer is more likely to ask for seller help. Seller help can go as high as 3% of your sales price. For example, if you a selling a property for $200,000 and receive a full price offer with 3% seller help, your effective sales price is $194,000. Ask your agent to look at the recent sales in your neighborhood. If most of them include seller help, you too need to budget for it.
You can also negotiate to work all or a part of the seller help into a higher purchase price. For example, if your buyer offers 200k with 3% help, start your counteroffer at $206k with 3% help. As a hard money lender, I encourage you to plan ahead and include potential seller help when using our hard money calculator to estimate your profits.
Select a Potential Buyer Who Is More Likely To Close
As your real estate agent can testify, the MLS is full of listings that say: Back on the market, the contract fell through. The most common reason why contracts fall through is that a buyer fails to secure financing. Your number one job is to identify and avoid those buyers – no matter how sweet their offer sounds.
Your first step should be to review the financial statement provided by your potential buyer. The financial statement typically includes self-reported income, assets and existing obligations. In addition to soliciting your real estate agent’s opinion, reach out to a mortgage loan officer you’ve dealt with before and ask for their unbiased opinion.
Your second step should be making sure that your borrower is pre-approved for financing with a reputable mortgage company. Have your agent contact the loan officer on the pre-approval and ask additional questions. Keep probing to identify potential red flags that indicate that your borrower might have issues with financing down the road.
As a hard money lender, I’ve seen cases when our borrowers have been swayed to go with an offer from financially weaker borrowers. As I’ve mentioned before, these borrowers know that they aren’t the strongest and tend to compensate for it in other ways. It’s not unusual for such buyers to offer a full price, to remove or shorten the inspection contingency or to offer a very quick closing. Do not allow yourself to be manipulated. Any hard money lender will tell you that none of these elements matter if a loan fails to close.
This concludes the first part of our article on Hard Money Lender Advice on How To Manage Your Buyers. For the second part, which focuses on how to deal with picky – and prickly – A-paper buyers, please click here.