One of the most fun things about purchasing an investment property is negotiating! Are you a “Let’s figure out how to meet halfway?” kind of person?
It had been a little over a three years since negotiating for an home. This time, the home being an investment property. And…boy…did this not disappoint! Time to detail out the negotiations!
First, let’s look at some details on the property:
- Asking Price: $240,000
- Bedrooms: 4
- Bathrooms: 3
- Private Pool
- HOA: $351/month
- Days On Market: 91
Second, let’s better understand what price points I could make work for the property. A 4BR/3B home in this area should be able to bring in $120 per night on average throughout the year conservatively. The area occupancy rates for a home like this are between 70-85% depending on how well you advertise.
After running my numbers on the property, it was time to figure out what the highest number I would buy at. My target return on investment (ROI) was 10% or higher. With this in mind, I developed a spreadsheet which calculated a max buy price of $215,000. At $215k, I would be able to hit the 10% expected return target.
With all negotiations, if you go in with the first offer being your highest and best, you are setting yourself up for a L!
I asked my agent to put in an offer for the property at $200,000. That is right, asking for a $40k off the top price decrease or roughly 17% off asking price.
With a signed offer in, I was off on a flight to Dallas for a friends wedding. When I landed in Dallas, I received a text from my agent stating the seller countered at $215,000. I knew at this point the seller was serious about selling. When you drop the price the same day of the offer, you know things are looking up for negotiations.
Now I knew the seller was serious. I bumped my next counter offer to $210,000. I was hoping to meet the seller in the middle (more on their side) as I was still short of my number.
Shortly after, my agent notified me the seller was staying firm at $215,000. Okay. Perfect. I now knew the selling price was no longer something that could we could negotiate. The next thing to negotiate was concessions from the seller. I had an inspector walk the home and notate anything that would need to be fixed at the property.
The Inspection Is In!
The inspection report was finally in! There was definitely some deferred maintenance on the home, but nothing crazy. All small stuff. AC needed to be serviced. The outlet outside the front of the home wasn’t working. The foyer light wasn’t working (a bad bulb).
Like I said, all simple things and not costly to fix. These were all things I was going to have to fix or address on my own. I leveraged the inspection report to get the seller to agree to $2,000 in concessions at closing.
What Does Seller Concessions Mean?
This effectively means the seller and I have agreed to the $215,000 asking price, but they will take off $2,000 of my closing costs. That means I saved $2k by simply showing them the inspection report. BOOM! Simple win. Perfect.
I thought this was it. I thought we had everything locked in, at least it seemed.
Another Curve Ball!
Everything was going swimmingly, or so I thought. I received a call from my lender three weeks before closing. My lender told me the appraisal done came back at $196k when I had the property under contract at $215k.
What does a lower appraisal mean? There are two things that can essentially happen.
- I can challenge the appraisal and show data on why the appraisal is wrong.
- If I really want the property, I could pay the difference ($19k) out of pocket.
Instead of doing either of those, I went back to look at comps. I found a property in the same neighborhood that sold for $207k the month prior. That property didn’t have granite countertops or stainless steel appliances. That property also wasn’t an end unit lot with a private pool. With those things in mind, I knew my property was probably worth around what I was paying for at $215k.
How I Saved An Additional $5k – Final Negotiations!
Here is where the fun continues! Ok, so now I know my property is worth around $215k. This is what I was thinking though. If I have an appraisal that came back $19k below the agreement price, what if I went back to the seller saying I would back out if they didn’t drop the price lower?
I had the leverage at this point. I asked my agent to go back to the seller with the appraisal and ask them to drop the price to $196k. I knew that was ridiculous, but it was worth asking. The seller was definitely frustrated, but then I got a call back saying they agreed to drop the price to $210k! LET’S GOOOOO!
Just like that, I had dropped the purchase price another $5k! I was pumped. It had been a while since I had negotiated something. I would grade myself as a B for this negotiation.
- The negotiation isn’t over until the final paperwork is signed!
- Leverage new pieces of information for negotiating the price lower and lower.
- Realize the purchase price is not the only thing you can negotiate. There are terms, seller concessions, repairs and many more I am sure I will learn along the way!
But wait…there’s more. Tune in next week for some more excitement in how I learned about the importance of addendums!