Constructing OffersPosted on December 30, 2013 by
Last month, we discussed Prescreening Prospects, so this month we’re going to talk about constructing offers to sellers.
Once the seller is called by either you or your virtual assistant using our property information sheet, the prospects will come at you in one of four categories:
- they’ll be free and clear
- there’ll be a mortgage with lots of equity
- there’ll be a mortgage with a small amount of equity, or
- they’ll be over-leveraged
All prospects will fall into one of these categories.
So, now our job is to look at the property information sheet and figure out what to do next after we receive this information. In this lesson, I will go through each of these and provide the script for you to make the call with the information sheet in your hand.
Let’s start with free and clear houses. You’ll know they’re free and clear because the seller will tell you that when you ask, “How much do you owe?” Once you have this information, you have a prospect that will either give you a “yes” answer or a “no” answer to the owner financing question on the right side of the property information sheet. If it’s a yes answer, it’s a prospect. If it’s a no answer, it’s a suspect. If the seller will not take their equity in monthly installments, this is a dead deal unless they answer yes to the lease purchase question. If they do say yes to monthly installments, it’s now just a matter of calling them and verifying the facts you have on the property information sheets, assuming you weren’t the first to talk to them in collecting the information. When you make that call, there’s a script you can use to determine which of the two categories they fall into:
- They will either be willing to sell with little or nothing down and a low monthly payment or
- They will want a substantial amount down with a higher monthly payment.
Fortunately, you can work with either in today’s market since the advent of ACTS.
Of course, I’m going to be looking more for the ones with the small monthly payment and the small down payment so I can stay in the deal and install a lease option tenant buyer in the house, and collect a substantial upfront fee as well as a monthly spread for years to come. Here’s an example of that kind of a deal: the seller has a house worth about $200,000 in excellent condition, and they want $200,000 for it, so we arrive at about $185,000 purchase price with $5,000 down and $1,000 a month and perhaps a 5-year balloon or longer if we can get it. Once we sign that up, we now immediately plug in a lease option tenant buyer for about $220,000 with $25,000 down at $2,000 a month. Now, we have gained a net profit of $20,000 and $1,000 a month for years to come. It’s obvious why this is my favorite kind of deal.
The second will be one where the seller is not so flexible. Perhaps, they want $200,000 and won’t budge, and they want $1,500 a month for a payment and $20,000 down. Well, since the advent of ACTS, you can give them exactly what they ask for if you can’t talk them into anything less. Our goal here is to go sign it up on a purchase and sale agreement for the $200,000, the $1,500 a month, and the $20,000 down and simply find a buyer who would love to buy with owner financing and give us $30,000 down and take over our contract. That means, we’ll net $10,000, and we’ll be out of it. Now, of course, I don’t have anything against the $10,000, but there will be no residual income on this kind of deal. So what it comes down to is the sellers’ answers to your questions will determine what kind of a seller financing deal you have. Basically, they are constructing and presenting the offer to you, so it’s up to you to accept it or not accept it.
I think you’ll agree after reading that script it makes the job of determining whether the seller’s in or out easy. Now all you have to do is make the appointment if you like the answers you get from the seller. If you don’t like the answers, you don’t make the appointment.
Now let’s move onto houses with a mortgage and lots of equity. First, the seller must say “yes” to the question in the middle of the property information sheet which says that they will lease option the property. If they do say yes, you have a potential prospect because they’ve shown flexibility. Now your goal is to get on the phone with them, verify the facts on the property information sheet and then have a little discussion about this lease option thing. Your objective here is to create a price and a monthly payment that you can put into the market place and quickly get a tenant buyer to accept your offer. Your offer to the market will depend on your agreement with the seller. In the case where the seller has a lot of equity, it gives you more room to construct a lower monthly payment than in the case where they don’t.
Let’s use an example. Let’s take a $200,000 house with a $142,000 loan on it with a $1,150 PITI payment. In this case, you can see the seller’s got a lot of equity so you have room to negotiate their asking price of $200,000 down some. However, since their payment is $1,150, if the seller’s asking any more than that, it’s clear you can’t stay in the deal, and you’ll have to get out of it because the market won’t bear much more than that. I’m guessing in most markets that house would bring about $1,500, so there is $350 a month in there if you choose to stay in it, but frankly, it’s pushing the envelope a little depending on where you live. So, our objective is to simply ask the seller if they would do a lease purchase if we can agree upon the terms, and if they’re okay with our rent covering their payment for some length of time. So, it’s a simple question, and when you get the right answer, you make an appointment.
Okay, once you get the answers to these questions, now you can quickly see whether it’s going to be a sandwich lease option (where you stay in it and collect monthly income) or whether it’s going to be an ACTS deal. For example, if the seller will perhaps lease option it to you for maybe $185,000 leaving you a little equity in it and let you make the $1,150 payment, you might decide to stay in it and sublease it out for say $210,000 with a $10,000 or $15,000 non-refundable deposit and $1,500 or $1,600 a month. That will give you a nice lump of cash now and monthly income for a long time.
On the other hand, if the seller says, “No, I want $200,000 and I want $1,500 a month,” you can still sign it up on a lease purchase, making sure the seller understands your objective is to find a tenant buyer that they can approve and then you will collect whatever assignment fee you can get out of them and just assign them your contract. Of course, that’s an ACTS deal. But, the questions from the script (above) will determine whether you go see the house, whether it’s a sandwich lease or an ACTS deal. So again, the seller has made you the offer. All you have to do is either accept it or slightly tweak it and the math will determine whether it’s a deal or not a deal.
That brings us to a mortgage with a little equity. In this case, we’re actually looking to buy the house for what’s actually owed on it. And, either we’ll take over the debt subject-to, which means the seller will deed us the property and leave the loan in their own name, and then we’ll begin making payments on it two or three months later depending on what we can negotiate with the seller. Let’s look at an example. We have a $200,000 ARV with a $182,000 loan and a $1,480 payment on it. The seller is asking $190/$195,000. Regardless, when we see this little amount of equity, our first instinct is to ask them if they’ll sell for what they owe on it, which is the question on the left side of the script in the middle of the property information sheet.
When you get a yes, you know you’re either going to take it over subject-to or lease purchase it for the amount of the debt. Which one of these two you choose, depends largely on which state you’re in, the closing costs required to take title, your desire to actually own the house, and whether or not you want to stay in it.
If you want to stay in it, you might strongly consider taking the title subject-to which means you’ll own it and never have to have any more communication with the seller. If you want to lease purchase it, then you have to decide whether you’re going to just ACTS it, which is assign your contract and get whatever you can out of a buyer or whether you intend to stay in it. And, in this case, I would not advise staying in it because your payment is about as much as the market is going to bear. Whenever you see that is the case, the best thing to do is exit quickly, get a check and move on.
So, by asking the simple question, “Will you sell for what you owe on it,” you determine whether you need to move forward or not, and the script we use (below) is the one we would use if we think we want to stay in the deal and buy it subject-to.
Before you go to the house and determine whether you want to take it subject-to, you want to make sure the seller understands the loan will stay in their name if you do so. However, once you get a yes to the question of “Will you sell for what you owe on it,” the seller has actually made you the offer. You now just have to decide whether it’s going to be a lease purchase or a subject-to. More on that when I see you at Quick Start Real Estate School, where I dig into that in depth because that is an important question that will require some thinking on your part. But, as usual, the seller has made you the offer. Now, you just have to decide how you want to proceed from here.
Lastly, we have our over-leveraged deals. These are houses where the seller owes more on them than they are worth. Let’s take our $200,000 example and assume it has a $220,000 loan on it with a $1,720 payment. When you see these numbers, you immediately know it’s an ACTS deal. There is no equity in it, and there’s no monthly spread possible, so there is no reason for you to stay in it.
Your goal is very simple. Just get on the telephone with the seller and read the ACTS script (below) to them, and determine whether you want to go put the property under contract to lease purchase and find a tenant buyer to assign the contract to.
Once the seller has acknowledged they’d like for you to come take a look at the house, and you’ve made it clear by reading the script that your intention is to lease option it and find a tenant buyer to install with their approval, then your path is clear to set the appointment. Again, the seller has made you the offer based on your questions. Now, of course, you need an appointment script to make the appointment and to make sure you’re not wasting your time. You’ll find that below.
As you can see, the seller’s intention is clear here and you will need both parties present before you can get any agreement signed. And, I always want to know the seller is ready to do business when I go out to the house.
Well, that’s about it for now. That’s enough for you to try to absorb, and it is by no means a complete course on constructing offers, but it’s enough for you to get out there and get some contracts and hopefully get some deals to put a few thousand dollars in your pocket. I want you to get to Quick Start Real Estate School as soon as you can. It will be the turning point for you, and where all of the information that you’ve read here will become crystal clear as we do it with dozens of prospects live in front of the class brought in by our students.
Next month, our discussion will be on presenting offers, how we handle the visit to the house and deal with the seller.