Have you heard the saying “Everything in real estate is negotiable?” Well, that’s quite true. In real estate you can negotiate the price of an income property, the payment conditions, the payment period, the rental income, the furniture that comes with the rental property, etc.
Negotiations are particularly important when you are buying an investment property because that’s the most appropriate way to score the best deal for yourself as a real estate investor. While new real estate investors might still lack the vital negotiation skills for real estate investing, experienced ones – and especially those successful – are likely to be professionals in negotiating the best deal. In order to help you on your way to mastering the art of negotiations in real estate investing, here are some negotiation tips for buying an investment property:
1. Check your finances carefully
Just like any other form of investing, real estate investing is all about how much you can afford to invest in order to make the most money. Before you enter the process of negotiations, sit down and check your finances (available cash and other financing options including a mortgage). Even prior to buying an investment property, make a budget to see how much you expect to spend on the income property (taking into consideration both one-time costs and recurrent expenses), how much you have available, and how much you expect to make from the property in the form of rental income. Don’t ever forget that you must aim for positive cash flow from month 1. This means that you cannot afford buying an investment property that is too expensive for your budget and will risk bringing you negative cash flow. So, once you’ve gone over your finances, you will now quite well exactly how much you can afford to spend on an income property. After you enter the negotiations, remember to stick to this price because it will determine your profitability.
2. Perform a comparative real estate market analysis
Once you’ve liked a property and are ready to move forward with buying an investment property, perform a comparative real estate market analysis in order to get all the comps for your new purchase. Find out exactly how much similar properties in the same area (neighborhood, street, etc.) were sold for in recent months or weeks. Try to figure out the selling prices rather than the asking prices because these would be better estimates of how much your new income property is worth. Mashvisor’s investment property calculator will be of great help in this endeavor as it will show you the prices – at least the asking ones – for thousands of properties across the US, along with the main features (square meters, number of bedrooms, number of bathrooms), including in your target area. When you are done with the market analysis, you will have an excellent idea of how much you should be aiming to buy the rental property for in the negotiating process.
3. Identify the kind of market
In order to be successful in the negotiations, you need to know in what kind of market you are negotiating: a buyer’s market or a seller’s market. Some common indicators – such as trends in the number of listed properties, inventory duration, time which listed properties spend on the market, listing prices vs. selling prices, trends in house prices, and overall closing percentage – will help you decide whether you are buying an investment property in a buyer’s or a seller’s market. Buying an investment property in a buyer’s market is very different from buying an investment property in a seller’s market, and that’s something you should keep in mind during the negotiations. In a buyer’s market, you can take more time before closing the deal, you can offer a lower price, and you can ask for more favorable terms (the previous owner to do some repairs, to leave some of the furniture, etc.). To the contrary, in a seller’s market, you have to act fast, to be ready to pay a relatively higher price, to offer more attractive conditions, and to not expect much to come with your new income property. Competition among buyers is strong, so you wouldn’t have much bargaining power in the negotiations.
4. Hire a real estate agent
While real estate agents cost money, they will get you a much better deal than you can get yourself. This holds especially true for new real estate investors, while more seasoned ones might be able to make the purchase on their own. But in general, your agent will be speaking to the seller’s agent, rather than you talking to the seller directly. That’s just how real estate investing works.
5. Find out why the seller is selling the property
Before the negotiations, try to figure out the reasons for which the seller is selling his/her property. Being more knowledge about the seller and the property will give you leverage in the negotiations for buying an investment property. You will know better where you can press harder and where you will simply have to give up.
6. Negotiate about everything
Once you’ve decided on buying an investment property, negotiate about everything, not only the price. Discuss the closing costs, the closing date, financing contingencies, home warranty, appraisal contingency, repairs, furniture, appliances, and others. Remember – everything in real estate is negotiable. While you might not be able to get the price that you were hoping for because it is a seller’s market and there’s nothing you can do about that, you can try to score a good deal by getting some other benefits among those listed above. Eventually, these could add up important value to your income property and to your profitability.
7. Be reasonable
This holds two ways. First of all, don’t try to get more from the seller than what you can reasonably expect. For example, if a similar single-family property with no pool, no fireplace, and no furniture sold for $500,000 in this neighborhood 2 weeks ago, don’t try to buy yours with a pool, a fireplace, and some furniture for less than that amount. Second, regardless of how much you like the rental property, don’t settle to pay more for it than what you can afford. You are buying an investment property after all, not your own home, so it is purely business. During the negotiations, make only decisions that make sense from an investor’s point of view.
8. Be ready to compromise
In the negotiations for buying an investment property, you will have to make some compromises, especially in a seller’s market. Try to offer these compromises in the form of compensation to the seller, he/she will like this and will be more likely to bring down the price in return. However, don’t compromise things you cannot afford, such as accepting a higher price than your budgeted one. Compromise reasonably!
Buying an investment property is one of the most important steps towards becoming a real estate investor or expanding your real estate investment business. Thus, you should do everything possible to get the best deal out of your purchase. The tips above will be of great help in negotiating the price and the rest of the terms for buying your new income property.