REISkill - When Buying - Qualifying Sellers

Pre-Qualifying Sellers Over The Phone

When dealing with private sellers, you should always pre-qualify them over the phone to make sure they are motivated, before going out and looking at their property. You don't want to spend two hours chasing a dead-end deal, when you could have spent two minutes pre-qualifying the seller over the phone.

What Is A Motivated Seller?

By the term "motivated seller", we are mainly talking about private homeowners, but this term can include other investors and landlords. These are private sellers who don't just want to sell their property, but for one reason or another they MUST sell and are highly motivated to do so. These sellers are willing to do just about what ever it takes to get rid of their house. Even if it means selling it well below market or being highly flexible on the terms under which they will sell.

Flexible Sellers

However, not all sellers have to be highly motivated to make them flexible on the terms they are willing to accept. A flexible seller may not give a steep discount on the price of their property, but their flexibility on the terms and willingness to work with you, can be the key to creating a no money down deal.

As a real estate investor you're mainly going to be looking for motivated sellers and the occasional flexible seller. Whereas, if you are a homebuyer, flexible sellers will be more of a target for you because your objective is to get good terms and not necessarily a cheap price.

What Makes A Seller Motivated?

There are many things that can happen in life that will cause a homeowner to become a motivated seller. Some of the most common reasons include a divorce, job-lose or a job transfer, an estate sale, or even tenant problems.  

Problem Owners, Not Problem Properties

Usually the problem is with the owner and not with the actual property. This could be because the owner can no longer afford the property or that the owner no longer wants the responsibility of owning and managing the property.  

Even if the property is in run down condition, most of the time it got that way as the result of poor maintenance by the owner. Again, either the owner couldn't afford to keep up the maintenance or they didn't want to handle the responsibility. This means, with a little elbow grease and the proper management, most properties can make a good investment.  

Deal Only With Motivated Sellers

Make sure that you deal only with motivated sellers. As a part-time real estate entrepreneur, you may have limited time available to you. You don't have time to waste dealing with unmotivated, inflexible sellers. Nor, do you have time to spend trying to make sellers motivated when they aren't motivated to begin with.

Your Objective

Your objective when dealing with private sellers is to try and buy the property at a great price first. If you can'tget a great price on the property, you must then see if you can get some great financing terms.

There's an old adage in this business where the investor tells the seller ...  

"You name the price and I'll name the terms, or you name the terms and I'll name the price. "

What this means is if the seller says they want "all cash" as the payment terms, you as the investor must determine at what price you are willing to pay all cash for the property.

If however, the seller says they want full market value as the sales price, you as the investor must determine under what kind of payment terms would you be willing to pay full market value.

For example, having to put no money down and having a low monthly payment.

So, remember these two variables when dealing with sellers.

Your objective will always be to either get a great price on the property, or great financing terms.

Identifying The Sellers Needs

Always try to identify the reasons behind why a seller is selling their property and what their needs are. Try to figure out if the seller is needing money, needing debt relief, looking to save their credit by stopping a foreclosure, or what ever the reason may be. Then, create a solution designed to fulfill that seller's needs while at the same time, fulfilling your needs as an investor.  

Create A Solution Based On The Sellers Needs

A seller will only let you get what you want when they have received what they want. Which means you must solve their problem first.

When talking to the seller, try to listen closely to figure out what the seller's needs really are so that you can structure your offers to solve their problems. If you pay attention to the seller's needs and structure your offer accordingly, you have a higher chance of getting the offer accepted, because most sellers just aren't going to accept an offer if it does not solve their needs.

For instance, if the seller needs $3,000 so that they can move to another city, don't make them an offer that only gives them 500 bucks.

You must also keep in mind your needs as an investor. This means the offer you make should work for you based on any limitations you have financially (or credit wise), and your short term and long term goals.

As a real estate investor you are not going to take advantage of people, you're going to work to solve their problems and put together a solution that benefits you both. So, if the seller seems inflexible or unwilling to negotiate to create a solution that solves both your needs, then you are simply dealing with the wrong seller and need to move on.

Pre-Qualifying Sellers Over The Phone

Get On A First Name Basis

When you get on the telephone with a seller, start by asking their name and then tell them your name. The most important word to anyone person is their name. As you're talking to them, call them by name and try to build an atmosphere of friendship and rapport. 

Ask About The Property

Next, ask them to tell you a little bit about the property. Then let the seller talk.

This will give the seller a chance to answer many of your questions without you even asking, such as the property's location, number of bedrooms and bathrooms, how big the home is, if it is frame, block or brick, and any special amenities the home may have. If you are calling on ads in the newspaper, some of the information about the property will already be in their ad for you.  

As the seller is telling you about their property, try to fill in the information they give you on your Property Information Worksheet. 

Once the seller has finished, if the seller didn't tell you about a certain aspect of the property that you need to know about, then ask them some specific questions but try not to sound like you are reading questions from a list.

At some point, find out if the seller is living in the property or whether or not the property is vacant. This can be an indication of how motivated the seller is if they are having to make mortgage payments on a vacant property.

When To End The Conversation

If at any point the seller says something that gives you the indication that you aren't going to be interested in buying the property, you can end the conversation by simply saying ... "Thank you, but the home you have is not what I was looking for and I appreciate your time." Don't waste any time on the telephone with a seller if you know that you are not going to be interested in buying the home.

If you feel there is the possibility of a deal there, then you'll need to determine if you can either get a great price on the property or some great financing terms.

Can You Steal It?

Once the seller has told you a little bit about the property, you want to determine if you can steal the property by getting a low enough sales price that you can either wholesale the property, retail it, or make it a rental unit.

Now, you're never going to actually "steal" someone's house from them or take advantage of them. Nor, are you ever going to stick a gun to a seller's head and say ... "Sell me your house dirt cheap, or else." If the seller is in a position that they are willing to sell their house dirt cheap, then you're going to solve their problem and give them the cash price they are willing to take.

Their Sales Price

If the seller hasn't already told you what the sales price is that they are looking to get, ask them how much they are asking for the property.

Then ask how they came up with that price.  

Sometimes the seller will tell you that they just want to get what is owed on the property.

Other times, they will say that their sales price was based on what the property is tax assessed for.

If this is the case, you'll know that their sales price is below market, because properties are rarely tax assessed for what they are actually worth.  

What Is The Property's Value?

Next, if you are not familiar with the properties location and don't know what the property values are in that area, ask the seller what they think the property is worth and how they arrived at that number. Whatever value the seller gives you, you have to assume that is what the property is worth until you can figure out otherwise.  

At this point, you'll have a pretty good idea of whether or not the seller's price is at, or near, full value. This will give you an idea of how much negotiating you must do to get a great price, if at all possible.

What Is The Seller's "All Cash" Price?

To determine whether or not you can steal the house, or if the seller is willing to drop their price, ask the seller the following question ...  

"If I pay you all cash and close quickly, what is the least you could take for the property? "

If the number the seller gives you is anywhere near full retail value, you know you probably won't be able to steal the property.

At that point, you switch from trying to get it wholesale to trying to get seller financing.

One quick note though ...

 

Can You Create No Qualify Financing?

If you feel you can't get a great price on the property, you must next figure out if you 'can create some no qualify financing with little or no money down, that you can either pass on to your end-buyer or use for yourself.  

Before you can come up with a creative financing solution, you must first understand a little about why the seller is selling, and their existing financing. You will then be able to create a solution that solves the seller's problem, based around the existing financing.  

Start by making the following statement to the seller ...  

"Based on what you have told me about the property and your sales price, I won't be able to pay you all cash. Therefore, the only other way I might be able to purchase your property is if we can create some finance terms. "   "Are you willing to work with me to create some type of seller financing?"

The seller will probably then ask what they would need to do, or what type of scenario you are proposing.

Rather than giving a direct answer, tell the seller that you will need to get a little more information about their existing financing and what the seller is looking to get out of the deal, so that you can create a solution that fits their needs as well as yours.

Why Are They Selling

Continue the conversation by trying to figure out why the seller is selling or why they are having to move.

To slide into the question without offending the seller, simply ask. ..

"If you don 't mind me asking, why are you selling?"

They mayor may not tell you the true reason why they are selling.

But if they do tell you the true reason, it will help to give you an indication of how motivated they are or may be becoming. Their answer can also give you an idea of the type of problem you must solve for them.

The Existing Financing

Next, you'll want to find out a little bit about the underlying financing the seller has. Your objective is to figure out how much equity the seller may have, if they are willing to accept payments on that equity, and if they are wanting any cash now. In addition, you'll want to find out if the seller is behind on their payments, which is a clear indication that they are becoming more and more motivated.  

The following is a short list of questions to ask ...  

1. "Is your loan assumable?" (Even though you may not be planning to assume the loan, it is an icebreaker for talking about their financing.)  

2. "Are you current on all the mortgage payments?" (This will indicate if they are facing foreclosure and don't have much room to negotiate. )  

3. "How much do you owe on the loan (or loans) against the property? "  

4. "I see you have some equity. Are you willing to accept payments on the equity between your sales price and how much you owe?"  

5. If the seller says they won't accept payments, ask. .. "If I get you part of your equity in cash now, would you consider financing at least part of your equity?"  

How the seller answers these questions will give you a clear indication of how deep they are willing to go into their personal situation and if you will be able to create some type of seller financing with them.

Truly motivated sellers will have no problem answering any question you may have. If the seller does have a problem with answering a certain question for you ...  

again, simply apologize and say that you were just trying to figure out if you could create a solution based on the existing financing and their needs.  

If it doesn't look like there is any chance of getting the seller to do some type of seller financing, end the conversation by thanking the seller for their time, but that with the answers they gave, you don't see a way that you can create a deal that works for you both.  

If the answers the seller gives leads you to believe you may be able to create some seller financing, continue on to see just how good the terms may be that you can get.  

Determine The Seller's Equity

One of the first things you'll want to determine is how much equity the seller has and how much cash they are looking to get.

To do this,

1. compare the amount the seller owes on their loans to how much their asking price is. (That is, assuming the seller would tell you how much they owed.) This will give you the amount of equity they have coming to them.

For instance, if their asking price is $100,000 and they owe $80,000, they have $20,000 coming to them.

You'll then proceed accordingly through the seller financing strategies.

 

Starting At The Top

You always want to start at the top of the finance strategies in the Seller Financing Section.

2. This means that you'll first want to see if the seller is motivated enough to deed you the property "Subject To" and walk away.

 If they aren't motivated enough, you'll proceed down the list of seller finance techniques by seeing if they will do a

• Seller Held mortgage,
• an Agreement For Deed-Land Contract,
• a Lease Option, and finally,
• offering to do a Standard Option.

As you go down the list of techniques, you as the investor/buyer are giving away a little more control with each step and the seller is gaining a little more control.  

Assume The Property "Subject To"

If the seller has indicated that they don't have much equity or are looking to simply get out of their existing loan, ask them if they will sell you their house for what they owe on it.

This is a key question to figuring out if the seller may be interested in deeding you the house "Subject To" the existing mortgage. This is very easy to do when the seller has little or no equity and/or is facing foreclosure.  

Remember, you can still offer the seller some moving money if the deal works for you. If the seller sounds interested, be sure they understand that you won't qualify to assume the loan and that there is a slim possibility that the bank could call the loan due.  

The seller may ask why you won't qualify to assume the loan. It is best not to tell the seller that you can't qualify because you have bad credit (if that is your case). Instead, it is better to tell the seller that you are trying to keep your credit freed up and that it is your company policy not to qualify to assume loans on properties that have little or no equity.

If their answer is "no" to deeding you the property "Subject To", it is usually because they are either credit conscious, or are looking to cash out some (or all) of their equity. Your next step is to then figure out if the seller will still create some type of financing on their equity if it makes them feel safer about their credit.

Seller Held Mortgage

The first way to pay the seller their equity is with a seller held mortgage. A seller held mortgage is best used when the seller has indicated that they own the property free-and-clear. It is rare that you'll find a seller who owns their property free-and-clear, but they are out there.

You can also offer to take over the existing loan "Subject To" and pay the seller the remaining equity they want as a note. This is assuming that the seller is not concerned about the lender calling the loan due.

Offering A Lease Option

If the seller is concerned about the loan getting called due because of the due-on-sale clause, you should offer to do an agreement for deed or lease option.

Because most sellers are not very familiar with an Agreement For Deed, it may be to your advantage to start off by seeing if the seller will do a lease option. Many sellers will be more familiar with this term and will feel more comfortable in considering doing one. Once it is time to actually do some serious negotiating on the terms, you can then present them with an Agreement for Deed.

Even though an Agreement For Deed still violates the due-on-sale clause on most loans, many sellers will feel more confident that the lender won't call the loan due because the title to the property has not transferred yet.

To see if the seller may be willing to do a lease option, ask them the following question ...  

 "If I guarantee your payments and take care of all the maintenance on the property, would you consider leasing the property to me with the option to buy?"  

If you are looking to sublease the property to another buyer, you'll want follow-up with the following question ...  

"Until I can get my buyer qualified to purchase the property, they will be living there. Do you have a problem with someone living in your property until I get it sold?"

 

The Down Payment

If the seller indicates that they are interested, you must next figure out how much the seller is wanting as a down payment and if you can lease option the property for what is owed on the mortgage. A lot will depend on how much equity the seller has and how much money they have indicated they want to get now.  

Your objective is to give the seller as little as possible as a down payment. If the seller's idea of a small down payment does not match your idea of a small down payment, make the following statement to the seller. ..  

"Well Mr. Seller, I can tell you now that I can't pay you that much down. "  "As you know, I am an investor. One of the ways I make money is in the difference between what I give you as a down payment and the down payment I get from my buyer. "  

"With this in mind, should I still come look at your property?"  

This statement is assuming you are planning to sub-lease the property.

If you are buying the property as a home for yourself to live in, you can make a similar statement, but let the seller know that you don't have the amount of money they are looking for. Then follow through by asking if you should still come look.

The seller will either say that you shouldn't come look, or

they will ask how much you can put down.

When the seller asks how much you can put down, state that you won't know until you actually see the property but that the amount you can put down will not be near what they are asking for.

Again, follow through by asking if you should still come look.  

The question of whether or not you should still come look is a very powerful one.

It lets the seller know that if they don't come down, the solution to their problems is about to move on.

 

You'd be surprised how many sellers will call you knowing that you are an investor and then get upset when they find out that you intend to make a profit on their house.  

Make sure the seller that