_House #3 – Pasadena: The Art of Negotiations Part 1

Monday 04/04/11 time 5:23 pm - Jay Khor » No Comments

I’d like to rewind to the beginning of March when we first made our offer for the home on Pasadena. By this time, we already performed our financial analysis (built in eventual sales price, construction costs, holding costs, closing costs, and profit margin) to arrive at our maximum offer. Prior to submitting our offer, we had a lengthy conversation with the listing agent and learned that this particular home had multiple offers and required our highest and best offer by the end of business day.

For those of you who are not familiar with the process of purchasing a bank owned home, when you receive a multiple counter offer addendum from the listing agent, you are given a chance to submit your highest and best offer. This “highest and best offer” relates to anything having to do with improving the terms of your offer. Examples of this include but are not limited to increasing the purchase price, shortening the close of escrow date, removing contingencies, or eliminating concessions. When the bank reviews these offers, they are mainly concerned with two key components:

1. What is the net to the seller? (What is the seller’s bottom line after closing costs, maintenance costs, and buyer concessions?)

2. What is the probability that the buyer will close? (Cash deals are most likely to close–no financing contingency)

It’s easy to know what the bank is looking for. The hard part is the unknown, what other buyers are going to do. Not knowing what the competing buyers are going to do is much like playing chess against an invisible component. It’s difficult to accurately determine a comprehensive strategy when you don’t know how the opponent will counteract. Are they cash or financing? What does their financial model allow for an offer? What is the quality of redevelopment that they intend to implement (this would determine how high or low their construction budget would be)? If there’s any one constant that you can consistently count on in the real estate market, it’s the fact that buyers act irrationally. We don’t know any answers to the questions above and all we know is to expect irrational behavior so what do we do? Before we move on however, I want to say that its important to stick with what you do know and ignore what you don’t know. It’s easy to get caught up in the adrenaline and emotions involved with acquiring a property but you need to stick with what your models and strategy tell you and never waiver from that.

So what do we know?

-We know that the current list price is $81,600

-We know that whatever offer we make, the 3% in buyer’s commission will be rolled back into the purchase price (Offer Price – Offer Price*(.03) = Actual Purchase Price)

-We know that the financial models tell us we can only offer list price

-We know that we can close in 2 weeks or less

-We know that we have a cash deal and do not require any financing contingencies

-We know that we are not asking for any concessions (buyer closing cost assistance, home warranty plan, repairs, etc.)

-We know that we don’t require a prolonged 10 day inspection period

-We know we can offer a high earnest money deposit

-We know that with our team of contractors, we can offer higher quality redevelopment projects at equal to or less than the costs our competitors can achieve

Based on the above information, we decide that our competitors might have some similar terms but more than likely will not have all of the same terms. Because we lack competitor motives/information, the best thing we can do is sweeten our offer as much as possible. In conclusion, our highest and best offer is as follows:

-$84,048 Cash Purchase Price (List Price*(.03))

-$20,000 Earnest Money (Typical EM is ~$5,000 at the most)

-14 Day Close of Escrow

-5 Day Inspection Period (Typically 10 days)

-No Financing Continency

-No Concessions

So what did the bank end up saying to our offer???

Tune in tomorrow to find out the decision…

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