Palos Verdes, CA. When I first started buying and selling rental income property, I put an offer in on a building. I had my appointment set at 1:00 PM and I had to wait until 3:00 before the seller would see me. So, I sat in the office for nearly two hours anxious to present my offer. When I finally did get into the seller’s office to present the offer, he looked at it and started laughing. He pulled a stack of offers about 3 inches deep out of his lower left-hand desk drawer. He said, "You’re kidding. Get me another offer". Right then and there, I should have asked for a counteroffer, but still being new at the game, I went back and rewrote another offer. Unfortunately, I didn’t get the property.
About a year-and-a-half later, the same seller had another property for sale. I presented the offer, but this time I made sure he was on time. When I presented the offer to him, he started laughing and again he reached in his lower left-hand drawer, pulling out a stack of offers and said, "You’re kidding. How can you offer me this; get me another offer." I said, "May I see them?" After a brief tug-of-war, I was able to look at them. They were for other properties and some of them were two or three years old. He was playing "real estate poker."
I sat down with him and said, "If you want to sell, we want to buy; I have offers on two other properties." Actually, we didn’t have any. Nevertheless, I was playing "real estate poker", too. We negotiated. He got the price he wanted, and I got the terms I wanted. I made a substantial profit on it and I saved money on my taxes.
Why is the seller selling? Finding the answer will give you the negotiating edge. For the most part, being in a weak market is enough motivation in itself. However, there are other circumstances beyond depressed market conditions that motivate owners to sell; it could be poor management, seller’s personal tragedies, retirement, tax problems.
• POOR MANAGEMENT: It’s possible that the owner is doing a terrible job managing the property, and there might be more vacancies than normal for the area. Maybe the building is run down and the seller just doesn’t want to put any more money into it. The seller could be an absentee owner without a competent local property management company, or one that simply doesn’t know how to delegate.
• PERSONAL TRAGEDIES: Death, divorce, bankruptcy, or illness could force the sale of a property. These are trauma situations for the seller. We’re not suggesting that you take advantage of people in distress. You should certainly treat them fairly.
In personal tragedies, the seller usually wants cash-which is diametrically opposed to your standard operational procedure. Your investment plan calls for leverage created, in part, by seller financing. However, if the price is right, you can still maintain leverage by structuring the transaction with outside financing. You’ll probably be negotiating with a trustee, and the trustee’s primary goal is to get as much cash as quickly as possible for the beneficiaries. Be prepared to act quickly when working with personal tragedy circumstances.
• RETIREMENT: When some people retire, they want to pack it all in. They don’t want the problems of management. The motivational key is the monthly income check. If you can structure your purchase to give the seller the required monthly check, you will have an excellent chance at the deal. Notice I said required monthly check. Monthly payments can be in any amount. However, you must arrange them to give you the maximum cash flow and tax write-offs.
• TAXES: Taxes are one of the most compelling motivations in real estate transactions. A seller might want to trade his or her building for another piece of real estate to defer taxes. The seller might want your property or might have another property in mind. If you’re able to accommodate the seller in a trade, you might be able to gain advantages in other areas such as price and terms.
The seller might be amenable to selling on an installment basis with little or no money down and carry back accrued paper. This financing package ideally fits into your plans.
Whatever the seller’s motivation, be flexible enough to explore all avenues of approach. Try to work and rework the transaction to suit everyone’s needs. Your success depends on finding the right motivation and the degree of intensity. Don’t attempt to negotiate any real estate transactions unless everyone is motivated. Ideally, the more the other party is motivated the better it is for you.
