Negotiation Tips

Negotiation Tips

Everyone likes to negotiate! We may say we don’t, but we all do. Think about this: If you were to offer a price for something and the seller said “Yes” right away, how do you feel? Good you got your price, but you are feeling bad because maybe they would have accepted less. Negotiating is key to getting any good deal in real estate also. Here are some ideas to help with negotiation:


7. Offer and expect commitment. The bond that keeps deals from falling apart is the commitment to deliver on both sides. This should be offered as a level of comfort to others. Avoid deals where the other side does not show commitment to deliver. Also, if they are not motivated, move on. I like to say, “NEXT”, if the owner is not willing to negotiate on anything.


8. Don't take on the other side’s problems. In a negotiation you will often hear all of the other side's problems and reasons they can't give you what you want. It is a tactic to get their problems to become yours. It is best to deal with each problem as they are spoken about and suggest ways for the opposite side to solve them.

Excerpt from Top 10 Negotiation Techniques for Buyers and Sellers: Tips for Negotiating Real Estate, Written by Wendy Patton.

Rent-to-Own, Your Lifesaver in a Drowning Market

Rent-to-Own, Your Lifesaver in a Drowning Market


Here are some reasons rent-to-own can be beneficial for you:

1. Higher Purchase Price – Rent-to-own sales typically command a price premium over traditional saes. The buyer is paying extra for the flexibility he recieves by not having to do an outright purchase immediately.

2. Higher Rent – You may be able to charge more for monthly rent in a rent-to-own than you would for just a straight rental.

3. Cash Flow – If your monthly payments are less than the monthly rent, the difference goes into your pocket.

4. Option Fee – This upfront fee paid to you by your buyer is what secures the purchase price down the road. If the buyer closes on the home, it would be applied towards the purchase price. If the buyer elects to not purchase the home, the option fee is forfeited and still remains yours. Eitehr way you win. If you were to just rent the home, then the tenant would put down a security deposit. The option fee is different than a security deposit. A security deposit is owned by the tenant and can’t be used by the owner, except for repairing damages, unpaid rent and other provisions as mandated under state laws.

Excerpt from Rent-To-Sell: Your Hands on Guide to SELL Your Home When Buyers are Scarce.



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Your Standards

Your Standards


It is federal law requirement that landlords put their rental standards in writing. If you don’t have your standards in writing (and, unfortunately, few landlords do), you are liable to end up in a pickle if someone accuses you of violating this rule. Your standards do not have to be complex but should be able to be produced if someone at a local or federal agency, or anyone off the street, requests a copy of them. Written standards can be as simple as this:

Qualifications for Tenant Selection for Majestic Realty, LLC—Lease Options


• No landlord tenant judgements unpaid.

• Ability to pay all outstanding judgements/collections.

• Good landlord reference.

• Gross monthly income equal to three times monthly rental rate.

• If any bankruptcy, it must be discharged.

• Option fee available or must be negotiated/financed.

• Prefer they have spoken with a mortgage representative.

On my lease option standards I don’t put a credit score, but I do state that if they have a bankruptcy it must be discharged. I also don’t put length of employment, but you can. These are only my standards for lease options—my standards for my regular rentals are stricter. You must establish your standards and they must be in writing.



Excerpt from Investing in Real Estate with Lease Options and "Subject-to" Deals.

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Setting a Budget – How Much House Can You Afford?

Setting a Budget – How Much House Can You Afford?

The first step is talking with a mortgage broker. Even if you can’t get approved for a mortgage right now, he can still help you determine how much you can get approved for later. He has formulas that calculate the maximum amount you can qualify for in a mortgage. These formulas are based on your income and debts. Most mortgage lenders use a debt-to-income ratio (DTI) of 28/36 and FHA limits are typically 31/43. Let me explain what those numbers mean.

The first number in the debt-to-income ratio (DTI), 28 (or 31 for FHA) is called the front ratio. The front ratio is the percentage of income that can count towards housing costs, or PITI, which are Principal, Interest, Taxes and Insurance. That means that 28% (or 31% for FHA) of your gross income (before taxes are taken out) can count towards these costs.


The second number, 36 (or 43 for FHA) is called the back ratio. The back ratio includes the amounts from the front ratio (PITI) plus any other recurring debt payments, such as car loans, credit cards, student loans, child support, alimony or legal judgements. This does not count things like groceries, utilities and so forth. Again, this means that 36% (or 43% for FHA) of your gross income can count towards these costs.


Let’s take a look at an example. Suppose your annual household income is $60,000 per year. You divide that amount by 12 months, which equals $5,000 per month (before taxes). Here is how we calculate DTI.



Front Ratio

$5,000 gross monthly income X .28 (the front ratio) = $1,400

$5,000 gross monthly income X .31 (FHA front ratio) = $1,550



Back Ratio

$5,000 gross monthly income X .36 (the back ratio) = $1,800

$5,000 gross monthly income X .43 (FHA back ratio) = $2,150



Excerpt from Rent-to-Buy: Your Hands-on Guide to BUY Your Home When Mortgage Lending is Tight.

Matching Motivated Sellers with Lease Options

Matching Motivated Sellers with Lease Options


As discussed previously, subject-to sellers are usually, but not always, motivated by bad debt and desperation to restore their credit. Conversely, lease option sellers have good credit, and the sellers that would even consider a lease option fall into two categories:




1) Sellers who don’t need their cash out of the home to move on.



2) Sellers who have no equity in their home—they are financed 100 percent.



I prefer a seller in the first category. Why? This seller has some cushion financially if problems arise later. The second category of seller does not have a cushion, and therefore if they get into financial trouble, they are more likely to botch up the deal—either permanently or for a period of time until things can be resolved.

 
 
Excerpt from Investing in Real Estate with Lease Options and "Subject-to" Deals.
 
 
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My Market isn’t drowning—Is this Still Useful for Me?

My Market isn’t drowning—Is this Still Useful for Me?

Scenario 1 – No Equity



If you need to sell your home and you have no equity, how do you do it? In other words, you owe as much on your home as it is currently worth. How can you pay the real estate agent a commission and also other closing costs? Sometimes we don’t always have the option of waiting until we can afford to sell, even in good markets.






You can try the “For Sale by Owner” route, but even in good markets that tends to have only modest success and, let’s face it, is fraught with pitfalls. Selling on a rent-to-own basis can allow you to get a higher purchase price than a conventional sale. This can help give you some room to cover the cost of selling. Plus, having a tenant-buyer in place for a year or two paying your mortgage can help pay down the principal giving you some equtiy as well.



Excerpt from Rent-to-Sell: You Hands-on Guide to SELL Your Home When Buyers are Scarce.

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How the “Credit Crunch” Affects You – the Buyer

How the “Credit Crunch” Affects You – the Buyer

While this housing slump is making it tough for home sellers, there is a balancing factor that’s making it tough for home buyers. I call it the “Credit Crunch”.




With the severe tightening of the mortgage lending industry, buyers are having a harder time getting mortgages. The subprime mess we’ve all heard about means that many buyers who could qualify for mortgages before are no longer able to. This may be your situation.

This “Credit Crunch” directly impacts you as a potential homebuyer. Unless you have A+ credit or a very large down payment, getting a mortgage may prove difficult. If you haven’t already spoken with a mortgage broker, you should do so to find out if you can currently qualify for a mortgage. If you have already spoken with a mortgage broker and you know you can’t qualify yet, you know about this “Credit Crunch”.



Many would-be buyers despair after talking to a real estate agent and a mortgage broker who tell them that they can’t help them because they can’t qualify right now. This is why you, as a buyer, would need to do something like a rent-to-own. It gives you the opportunity to get into your future home now, before you can qualify for a mortgage.

You can get your next home NOW without having to qualify for a mortgage until later. This is the solution you need until you can qualify for a mortgage. This is the solution home sellers need because they can’t find mortgage qualified buyers.






For more information on the “Credit Crunch”, read Rent-to-Buy: Your Hands-on Guide to BUY Your Home When Mortgage Lending is Tight.





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Subject-To Risks and How to Avoid Them

Subject-To Risks and How to Avoid Them

The biggest controversy for a subject-to is the violation of the due on sale clause. This clause is a provision in the mortgage documents that says if the home is sold or transferred, the mortgage will be paid in full or the lender could call the loan due in full. This means that when the sellers deed the home to you, the lender can demand payment in full on the loan. However, most lenders will never know the seller transferred their title to you, as long as you make the payments on time. Most lenders are only concerned with receiving their regular loan payments in full and on time.




In my opinion, the best and most ethical way to handle a subject-to deal is to be completely honest. Let the lender know you did it. Send the lender a certified letter informing them of the ownership change. Keep proof of the letter and return receipt in your files. If the lender doesn’t respond (most won’t), then the law may hold that they have accepted the change by ignoring your letter. If they try to foreclose, then you may need to pay off the existing mortgage and refinance the property into your own name. If the property doesn’t have enough equity to justify refinancing into your own name, then it probably was not a worthwhile deal to begin with.

 
 
Excerpt from Investing in Real Estate with Lease Options and "Subject-to" Deals.
 
 
 
 
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Can I Possibly Avoid Foreclosure?

Can I Possibly Avoid Foreclosure?


If you are in the difficult situation of falling behind on your mortgage payments and trying to sell your home, offering it on a rent-to-own basis may help you stay out of forclosure. The last thing lenders want right now is to foreclose on your home. They have gotten pretty flexible in working with homeowners to find solutions. Be sure to include them in the process when trying to find a resolution. Critical factors to consider are:

• Monthly Payment Adjusting Up? If your monthly payment has adjusted upwards, will you be able to rent your home to a tenant-buyer for enough to cover the new payment? If not, you will have to cover the difference yourself or get the lender to agree to a reduced payment. There are lenders that will work with you on your interest rate. This is called a loan modification. They usually won’t change your balance but they might change the interest rate and length of loan. Talk to your lender to discuss your options.


• Home Prices Dropping? Do you live in one of the areas where home prices have dropped dramatically? If so, is your home worth much less than your current loan amount? If this is the case you won’t be able to sell it to a tenant-buyer for enough to pay off your mortgage. Do you have the extra money to pay off the difference? Do you need to consider foreclosure? Maybe a short sale is your solution versus a rent-to-own. A short sale is when you get your mortgage company to accept a lesser amount on the payoff of your mortgage than you owe when you sell your home. This is called “shorting” the mortgage. Many people and lenders have had to consider this alternative with the housing market decline.


• Behind on Your Payments? How much are you currently behind in payments? You will need to catch up on this one way or another to stop the foreclosure. The option fee from your tenant-buyer may be enough to cover this. If it isn’t, you might be able to use the option fee to cover part of it and then establish a catch up plan with your lender.




** I recently worked with Tax Expert, John Hyre, on a webinar about "How to Handle a 1099 from a Foreclosure". Check it out!**





Excerpt from Rent-To-Sell: Your Hands on Guide to SELL Your Home When Buyers are Scarce.



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More Negotiating Tips

More Negotiating Tips


Tired of endless back-and-forth disagreements with your buyer and/or seller? Here are a few negotiation tips that can help.



• Set your rules. Many people likely have a set of rules or values that they just won't compromise. If you find negotiations breaking your rules and going against your values, it may not be worth negotiating.



• Ask. Don't be afraid to aim high but do not make any ultimatums. Usually these types of offers are out of place. If you don’t ask the answer is always no.



• Be willing to compromise. Expect to make compromises and plan what terms you are willing to compromise on. Even if the first offer is better than you'd hoped for do not take it. Take time to “think about it” or make a minor change back. If you accept the first offer they might not feel good about the deal they made with you. Everyone wants to negotiate and feel they got a good deal.






I want to share a few companies with you that I personally work with and trust. The products and services these companies provide are specifically for the real estate investor and are meant to save and make you more money.



Negotiation Tips taken from "Top 10 Negotiation Techniques for Buyers and Sellers: Tips for Negotiating Real Estate", By Wendy Patton.





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Screening a Good Buyer

Screening a Good Buyer

Screening a buyer is extremely important, and yet some of us investors still go by instinct or illegal decisions. Screen a tenant by reviewing their application thoroughly. Check it for accuracy and make sure they did not lie to you. If someone lies to me, they are denied the occupancy. Check their name—get a copy of their driver’s license. Check their landlord history. The current landlord may want to get rid of them, but the previous landlord has nothing to hide. Call them both. Confirm it is the real landlord in one of two ways: check it on county records, or call the person and mention a different amount of rent than on the rental application.

Check their employment, too. I use the same technique when I verify their income as I do their rental amount. When I contact the employer I say “Joe put on his application that he is making $16 per hour—is this correct?” when he actually put $12 per hour. If the person you reached is his employer and not his buddy, they will correct you on this one. On occasion I will also ask the applicant for recent pay stubs to put in the file. This information is also handy to have in case you ever have to garnish wages. Be sure to verify the hours they work and time on the job as well. Also check their banking information—you might need it later.

 
 
 
Excerpt from Investing in Real Estate with Lease Options and "Subject-to" Deals.
 
 
 
Wendy Patton Official Blog

Extra Ways to Protect Yourself in a Lease Option: Place a Deed in Escrow

Extra Ways to Protect Yourself in a Lease Option: Place a Deed in Escrow

This approach can be used along with the filing of a Memorandum of Option. The seller would actually sign the deed at the same time that they sign all of the lease option contracts. However, the deed is not yet recorded on the title. Instead it is held in escrow by an attorney or title company with instructions for its release. While this approach does not protect the title against the potential filings of liens, it tends to give sellers the feeling that they have deeded, or sold, their property, so they are much less likely to try to back out later on their lease option agreement. It can also allow the investor to close on the home without the seller being present.

The instructions included with the deed in escrow specify how and when the deed can be released and recorded. For example: “When Wendy Patton pays $155,000 in certified funds to Joe Smith, this deed can be released to her. These funds must be paid by (date).”



Excerpt taken from Investing in Real Estate with Lease Options and "Subject-to" Deals Book.


Wendy Patton Official Blog

Helpful Negotiating Tips

Helpful Negotiating Tips


Everyone likes to negotiate! We may say we don’t, but we all do. Think about this: If you were to offer a price for something and the seller said “Yes” right away, how do you feel? Good you got your price, but you are feeling bad because maybe they would have accepted less. Negotiating is key to getting any good deal in real estate also. Here are some ideas to help with negotiation:

1. Be Prepared. If you enter a negotiation without the proper preparation you've already lost. This process begins with you. Be clear on what you really want out of the negotiation. Also, research the other side to get a better understanding of their needs as well as their strengths and weaknesses.


2. Ask Questions. You’ll want to do this both before and during negotiations. When you ask questions, practice silence after your question. Let them talk and listen for clues. You will learn a lot more if you zip it (your lips that is) and let them talk. You will learn so much when you listen and they talk. You want to ask them open-ended questions to give them room to talk and give you details. Try not to ask a question that requires a yes or no answer. You can learn a lot by their answers.



3. Timing is everything. Timing is an important key in any negotiation. First you must know what to ask for and then you have to know when you ask for what you want. You have to know times that you should press forward, and times that you should be patient and wait. When you are doing your best is the time to pull for what you want. Be cautious of pressing too hard because it could potentially ruin long-term relationships and prevent new relationships from forming.




Excerpt from Top 10 Negotiation Techniques for Buyers and Sellers : Tips for negotiating Real Estate, By Wendy Patton.



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Happy Independence Day to All!

"May the sun in his course visit no land more free, more happy, more lovely, than this our own country!"

 ~Daniel Webster



Enjoy these fireworks and I hope you all have a great holiday!





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Lease Option Risks and How to Avoid Them

Lease Option Risks and How to Avoid Them

The biggest risk for a lease option is the possibility of the seller having a problem financially. Although in the beginning we only lease option from financially strong sellers, there are things that could go wrong in a seller’s life. A lease option is control without ownership. Because the owner stil holds the deed to the property, if they incur a financial problem, there is a chance the title/deed could have a lien placed on it. A lien can usually be placed on a piece of real estate if a person owes someone money, when certain procedures are followed. This may cause a problem such that it may not be possible for the seller to sell the home easily. Fortunately, there are several things you can do to assist in preventing the repercussions of these things on you as the buyer.






1) Make sure the seller is solid when doing a lease option with them. If they want to check your credit, ask to check theirs too. You can also have a private investigator check them out if you are not sure.


2) Make sure you record a memorandum of option. This is a document that gives the world notice that you have an interest in the property. Then the seller can’t refinance the home or sell it to someone else.


3) Focus on and pursue primarily sellers with equity. If the seller has a lot of equity in their home, then even if something bad did happen to them, they would have some cushion to fall on.



 
 
Excerpt taken from Investing in Real Estate with Lease Options and "Subject-to" Deals.
 
 
 
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