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Today on MOR Financial’s REI Blog, A Shot of Baile, we are going to look at the next step in selling a rehabbed property. We’ve talked about finding the house, we’ve talked about running the numbers and making sure it is a good deal. We’ve gone into a lot of detail on the Contractor and the rehab. We’ve talked about the staging and getting it ready for sale. What we haven’t talked about is what do we do now that we have offers on the house. Which one do we pick?
The most obvious answer is, “the highest one!” Well, if that is what makes a good offer, then our strategy for buying houses is all wrong. The highest offer does have its monetary appeal, but there is more to figuring out what the best offer really is. There are several other factors to consider as well. I personally ran into one of the issues that I’m going to touch on, so I hope my experience is something we can all learn from.
This topic is currently a hot one for me as I’m getting offers in on my latest project and going over the process with my partner. We have a few offers on the table and a couple the prospective buyers got fairly creative with them. I’m not adverse to creative offers if it makes a “win/win” for everyone. Part of being good in the business is being flexible enough to see opportunities.
The best offer, of course, is an all cash offer. That is one reason that we make them. It removes the potential of the offer falling through due to financing. Also, it closes much faster, and as it’s been well documented, time is money. Additionally, I would take a slightly lower offer if it were all cash over a conventional offer. The reason is basic numbers. A conventional loan takes time to finish. Let’s just say it takes an extra 30 days. Sometimes it takes even longer, which creates even more problems, but let’s just go with 30 days. You should figure out what your holding costs are and see if it makes sense. Right now my holding cost, just for the hard money, is $350 a DAY. So, if an offer came in that was $10,000 less, but was cash, it would make sense to take it.
The other side of that is that the offer won’t fall through due to financing being denied. That would cost us at least an additional month of holding costs and the peace of mind would be well worth it.
Conventional lending is typically the way that most people buy houses, though. If potential buyers are going to go through conventional lending, make sure that they have a letter, in advance, from their bank stating that they qualify for a loan of at least the amount that the house will sell for. There are two types of letters that the bank gives. One is a “pre-qualify letter” saying that they qualify for a loan. The other is a “pre-approval letter” stating that they are approved for the loan up to a certain amount. Many new buyers come with a “pre-qualify letter.” The big difference is that the “pre-approval” has actually gone through all the necessary the credit check, and background check. They will get the loan, assuming that the house is under the amount stated and that the house is selling at or under the comparable value. So, make sure that they have a “pre-approval” letter, not a “pre-qualify” letter.
Remember when I said that we run comps the way that banks run comps? This is why. We need to make sure that the bank will approve the loan for the amount that we want to sell the house for. We set ourselves up for success by removing as many obstacles as possible from the buyer in order to purchase our property.
Then, there is the creative transaction. There are ways to exchange property for property and everyone walks away a winner. In my case, a potential buyer wants to exchange his property – which I value at approximately half the sale price of our property – along with a conventional loan for the remainder. If you are able to work with your Hard Money Lender to close one loan while picking up the other at a reasonable cost, this may be a great way to go. What it does for us is gives us the ability to close out one property – with profits – and pick up our next project without needing to go out looking for it. Granted, it is a lower cost property, but if it saves us time and we still hit our margins, then it is a “win/win” for everyone.
One bottom line that I would like to leave you with is this: Don’t be greedy. If a buyer comes in with an offer that hits your desired profits and meets the criteria to buy then take it. I have a friend who went with the, “a better offer will come along” mentality and didn’t take an offer that would have hit the right profit margins. He ended up sitting on the house an additional 6 months and lost all of his profits.
If anyone has more questions or wants more one-on-one coaching, don’t hesitate to contact me. This is a passion for me and I truly enjoy sharing what I know with others. Thanks for coming by and getting a bit of the education. Until then, remember that you, too, have that inner warrior that it takes to achieve greatness and success. Feel free to drop me a line at Coaching [at] BaileProperties.com.
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