Hello, Lee Arnold here with an important question:
How come you lost that deal? How come another investor came in and offered to pay less on the same property than you did? And they got the deal and you didn’t?!
Ok, that’s 3 questions, but the answer is simple: They didn’t come at the seller with just 1 option.
See, we’re seeing a trend in the real estate investing market where if you don’t have cash, you can’t participate. And I’m telling you, it’s all these cash offers that are making my life so much easier, and yours so much harder… especially if you’re trying to invest in real estate and don’t have any cash.
Now, years ago, I was introduced to a concept around how and why people make choices. And when they’re presented with different options, they make different decisions.
So I thought, ‘How could this apply to real estate investing?’
For years, I had been doing what everybody else did. I would go to a homeowner, and they’d say, “I want $300,000 for the house,” and I’d say, “I’ll give you $180k.”
I was lowballing the seller. That’s what everybody does. That’s not in the best interest of the seller.
And when you do what all your competitors are doing, what sets you apart? What makes you different?
So I thought: I wonder, what if instead of a single, all cash offer, I was to provide the seller with 3 different, varying options where they then could choose which was in their best interest?
Said differently — you can’t be so one dimensional in the way you approach a property or how you analyze the way you’ll finance it or make it cash flow. You’ve got to be buying properties in a way that you’ll be able to get the greatest rate of return on the investment of time, effort, and energy, as well as return on capital.
And it doesn’t always mean lowballing the seller.
You’ve got to give the seller more than 1 way to sell their property. You do this by making offers rather than just one-price offers.
3-tiered offer option
Ok, the 3-tiered option offer is pretty simple. We begin by giving the seller an offer like we always would. They want $300,000, I’ve got to pay $180k to be able to buy it at a price that I can rehab it, fix it up, and sell it… and still make a profit.
So option 1 is all cash.
But there’s a 2nd and a 3rd option that must be considered.
In the 2nd option, we’re going to give them some cash, but we also ask that the seller carry a portion of the purchase price in what’s called a seller-financed mortgage note. And we offer them a rate of interest of 2%, 3%, 5%, it doesn’t really matter.
So option 2 is some cash, some financing.
Then, we take them to option 3.
This is our 100% seller-financed option, where we offer them no cash up front, but they carry the entire purchase price on the property.
I recently closed on a deal of a five-acre property in a nice area of town. The guy wanted to sell it, but he wanted a higher price than the property would qualify for. So he’s asking $550,000.
My cash offer?
$380k.
Because if I’ve come up with all cash to purchase that property, $380k is what I’ve got to pay. Because if you don’t have cash of $380,000, you’ve got to go borrow it from a private money lender, a friend, or a family lender, and they’re going to want 8%, 9%, 10%, 11%, 12% interest, which means your payments are going to make that deal unfinanceable or uncashflowable.
So instead, I said, “Mr. Seller, I can give you $380,000 in cash, or I will give you $50,000 cash down and you carry back a mortgage for $350,000 at 3% interest, or I’ll give you your asking price — the $500,000 that you want for the property, but I’m not going to put any money down, and I want you to carry the financing at 1% interest.”
Now, if I would have simply presented with option 1, it would have been a waste of time. If I would have presented with option 2, it would have been a waste of time.
But when he saw option 3, where I was offering him the very price that he was asking, he went, “Hey, option 3 works for me. I’m asking $500k, you’re offering $500k.”
That’s a good deal!
Now, if I’m you reading this, I’d be thinking, ‘So you just paid retail price to buy the property?’
And my answer to you would be, ‘Absolutely, I did! Because a half-million-dollar property with income is flowing from the rentals of $4,800 a month and a 1% interest rate. That property cash flows.’
Final thoughts
See, as real estate investors, we get too focused on the price we’re paying, and we never consider how we’re paying.
A retail price purchase at a low rate of interest with zero money down — even if your cash flow is marginal — is still an infinite rate of return because you didn’t put any money down.
And that is my smart, 3-tiered offer approach in a nutshell… and why my offers get accepted!
Remember, if you’re only using 1 strategy to make offers on properties, you’re gonna get left behind by your competitors who are more creative than you. Real estate is a very flexible industry, and the more creative you can get, the better your chances are of finding great deals that will make sense for your business!