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In one house I visited for a potential purchase, the woman had a lot of birdcages in her garage, and all of them had price tags.  Either she was about to have a garage sale, or she had already had a fairly unsuccessful one.  I didn’t know anything about birds, but I had this crazy thought that I could get a parrot and teach it to say, “Hi, welcome to Majestic Realty” when people came through the office doors. The idea fell through rather quickly when she told me that birds pick up almost everything they hear you say. I could just hear the bird saying things they heard from my office staff when they hang up the phone from tenant calls. “Yeah, that tenant is lying.” “Liar, Liar!”  “Yeah, Grandma died again!”  I could write another book on tenant excuses (couldn’t we all?).

Nevertheless, I continued to chat with the seller about different types of birds while looking around at the house. It’s an example of how to learn and build rapport with a seller.  People like to talk about what is important to them. It makes them feel more comfortable with you.  One of the cages was marked $20 and I decided to purchase it. I thought perhaps one day I’d get a bird, but I couldn’t take the cage with me at that time because it was rather large and wouldn’t have fit in my car.  I told her that I’d send some of my work crew back that evening to pick it up; they had a truck.  At this time, we were in a strong sellers market, and I already had a tenant buyer who wanted to buy the home. I was going to purchase this home outright directly from the market. Our market was VERY hot!  So I made an offer through the Realtor®, the very first day, and the Realtor® called me up that evening and said, “Well, we have another offer”.

I had figured it was very possible, so I simply responded “Oh…”  Homes don’t stay on the market long in a hot market, especially in that price range, and that home had just come on the market that morning.  But she continued, “Let me tell you the stupidest thing I’ve ever heard.”

I said, “What?”

The Realtor® said, somewhat angrily, “Well, she accepted your offer.”

I asked, “Well, why is that so stupid?”

“Because the other offer was $5,000 more than yours with the same terms and that’s just stupid to me, Wendy.  But do you know why she accepted yours?  She likes you.”

Did the bird cage discussion save me $5,000 or did it get me the house? I think it did both.  I didn’t buy the cage to get the house, but everything you can do to make a prospective seller feel comfortable with you will ultimately be worth it.  I always tell my students that if they are not comfortable building rapport with sellers to send someone else, because it is such a crucial element to succeeding in this business.  That seller was not in a position where she could just give away $5,000, yet it was important enough for her to sell her home to someone she liked and felt good about that she took $5,000 off of her price.  Make it a point to establish rapport and you will almost always get a better deal.

How to Build Rapport with a Seller

If you were trying to sell your house, who would you give a better price to?  The buyer who comes in saying…

“I don’t like your carpet color.  Are you going to replace it?”

“The walls won’t match my furniture… this kitchen is just not my style…”

Wendy’s Tip
When you’re in the seller’s house, tell them what you like about their house, not what you don’t like.  For example, perhaps you’ll see something unusual, like older woodwork or a nice fireplace.  Ask the seller about it.  If you see the seller likes golf, talk golf whether you like golf or not.

Always focus on the positives, the interesting things.  People like to know you like their house, and that builds immediate rapport.

…as opposed to the potential buyer who says, “I like the layout.  I see there’s a small ding in this wall.  You don’t mind if I fix that, do you?  I just want to make this my home. I love it.”  The 2nd person, of course, because they are reasonable and appear they are trying to work with you. You would instinctively want to work with them.

Building rapport with the seller is key to making a deal.  If the seller (or Realtor®) doesn’t like you, the deal will probably never happen. Therefore, if meeting people and being reasonably conversational and interested in the seller’s home isn’t your strength, take someone with you who is warm and friendly and can bridge that gap for you. The reason this is so important is because for a lease option transaction you’re asking someone to give you control of their house with little or no money down. They must feel comfortable with you.

While it’s still important to establish rapport in a rehab situation, it’s also appropriate to point out problems in the property. You will need the seller to be prepared for your lower offer when it comes.  You have to offer lower prices when using other techniques and not buying with terms like a lease option.  Buying at a low price is more critical to your profitability when doing a rehab and sale than when taking control of a property and holding via a lease option approach. In a lease option, emphasize the positive, you will want the seller on your side.

The Basics

I start out with rapport-building questions.  I quickly look around the house as I enter and look for items from children or pets, something of significance, maybe a hobby or a collection.  Anything that I can use to talk about something of interest other than just the house itself.

Once I spot something I ask about the particular items.  Maybe it’s a spoon collection or a rack of golf balls from different courses—whatever!  What I’m looking to do is to get everyone to lighten up and talking about something significant in their life.

It’s not until after that do I guise the conversation around and I ask the following question, “What is it that you’re trying to accomplish with the house as a result of my help?”

[Note: Use the word house, not home. You want to separate out the touchy, feely, warm and fuzzy of their home.]

And then shut up and listen, acknowledging that you understand with your facial expressions and body language.  I want them to see that I honestly care about them and their situation (and I do – if the deal isn’t right for them, I won’t do it).  This will pay off huge returns when we start talking about the terms of the deal.  They don’t care that I’ve been in real estate for over 25 years and they don’t care that I’ve done over a thousand deals.  They don’t care that I taught the loss mitigation for the third largest diversified lender in America how to work with investors. What they care about is if I can help them with the problem that’s in front of them.

An entire book could easily be written on negotiations with sellers, but those have already been written.  Read those books to get more details on negotiating and the psychology of negotiating.  Some of them have really helped me over the years understand people and why negotiating itself is so important to completing a deal.  This chapter will give you ideas specifically on building rapport with sellers, presenting informal proposals to sellers, negotiating terms, and handling their questions and objections for lease options.

Putting Together the Proposal/Offer to the Seller

Steps for a Proposal/Offer to the Seller

1: Keep It Simple

Sometimes we get too formal – wanting the proper letterhead and business cards and looking too official up front. This is natural, because we feel it gives us the legitimacy a seller expects. However, counter-intuitively, there are times when too much polish may in fact be detrimental to the seller who finds it impersonal.

Save the formal documents for when the deal is negotiated and needs to be drawn up in detail.  For preliminary proposals it’s best to outline several scenarios, even hand-written. There are many deals made on bar napkins, and they are legitimate and legal as long as they are signed.  It’s all about personal relationships, not just professionalism. The seller needs to like YOU, not your business card.

Putting out an offer is a lot like fishing. We’re trying to find out what’s important to the seller, where they are financially, whether they need their cash out and what terms will work for them.  If the seller is not sure, then you can use the proposal format in chapter 11 and give them a few scenarios in writing to help them evaluate different alternatives.

Many times they will know what areas are most important to them.  For instance, price might be the most important area to a seller. You then can work around price by negotiating the other areas of terms to make the deal work for you. You will have to tweak the other areas of the lease option in order to get your profit requirements, but at least you know where the seller is starting.  You know where they are firm and what is important to them.  This is where you will need to go back to chapter 5 and use the profitability worksheets to make sure that the numbers will work for you.

When you agree on the terms with the seller, then you should formalize the contracts.  When you think there is going to be a meeting of the minds, or if the Realtor® says they want everything in writing, or if the seller says “I want to see every piece of the contract before I agree,” then I put everything together, but initially I just put together a simple proposal or we discuss it verbally.  This will all be based on the seller and how they prefer it. Many times they like to just discuss it and sometimes they want it in writing.  When a seller says they want to see it in writing, they may be referring to a proposal, unless they have said the entire contact and they are clear and ready to move forward, otherwise I would start with the proposal first.  There are also times when timing is critical and negotiations must be done quickly and contracts are also drawn immediately.

2: Do Your Homework

You can’t put together a proposal without first doing some research, especially if you are in an area of town that is new to you.  You can’t base your offer purely on what you think the home is worth; you must incorporate the comparables as well. You will need to find out at what level of similar homes in the area are worth by either checking the newspaper or using the MLS.

The MLS (Multiple Listing Service) is protected by RealtorsÒ in most areas of the country.  However, it is available to the public in some parts of the country. You would need to ask investors in your local real estate investor club the status of the MLS in your area. If you have a relationship with a RealtorÒ, you can ask them what the comparables (comparable market values) are in a certain neighborhood.

Understanding the current economy is essential to making offers on lease options work, and work effectively.   For instance, are you in a strong buyers or sellers market? Understanding the differences and how they affect the sellers is key to successful negotiations. These techniques will work in either a buyer’s or seller’s market; however, it is important to know which market you are in so that you can establish your offer correctly.  These markets were discussed in detail in Chapter 3, but it is important to realize that in negotiations they will play a major role.

Offers in a Strong Sellers Market
In a seller’s market, you’re going to buy for a higher price.  When things are appreciating in a seller’s market, I would have no problem paying closer to retail for a property. There are times when you could pay higher than retail and still be profitable based on favorable appreciation and other terms. You must work the numbers yourself.  Your value in the property is not only going to come from the appreciation but also from the lease option when you sell.

Offers in a Strong Buyers Market
The opposite is true in a buyer’s market.  The economy is slow, likely with higher unemployment rates. Real estate listings aren’t moving, in which case you need to buy low  — meaning below the retail value – because you can’t count on appreciation.  When the market is slow, the buyers have less money and are less able to take on more debt.  The advantage of the buyer’s market is that you can cherry-pick your deals.

You must remember this in negotiating with your sellers: if your sellers are unwilling to give, you have to move on. They are not the motivated sellers that we discussed in Chapter 3.  The slower the market, the more you can negotiate. As more properties are languishing on the market there is a large pool of motivated sellers for you to choose from. You can be selective in order to find deals that work out for you and the seller.

3: How to Determine Your Offer

Potential Areas to Negotiate for a Lease Option

Options are such beautiful tools with which to buy and sell properties.  While there are too many variations to discuss in detail, we will cover the key areas available for negotiation. When structuring your lease option with the seller it is important to understand which of these criteria is most important for them:

  • Price
  • Length of Contract
  • Monthly Payments
  • Option Credits
  • Mortgage Buy Down – The principal adjustment
  • Automatic Renewal Periods

In addition to the criteria discussed above, I usually include terms that will limit my risk.  One such approach is to include a clause that says my lease option can be terminated within 60 days with written notice to the owner.  This provides an agreeable exit to problematic transactions.

Another method that I use even more frequently is to make the start of the lease option contract subject to finding a tenant buyer. This significantly reduces your overall risk and prevents you from having to begin funding monthly payments before you have your own funding source in place (unless you want to run the risk of winning the shark trophy I mentioned earlier!).

Multiple Offers

Sometimes you will need to create multiple offers on the same property.  This is not unusual. For example, let’s say I make an offer of three years at $225,000 and pay the seller $1,000 per month.  The seller then looks at appreciation rates and says they don’t want to lose out on all the appreciation in the next three years that I will profit from. So, I then restructure a second offer where I might offer to go five years and give them a little more on the sales price as well as a little more each month, but they have to agree to all five years.

You might also want to do a step approach based on appreciation with a lower percentage than the market appreciation, so that you aren’t giving away the entire profit.  For example, one time I purchased a home from a seller that wanted part of the appreciation, which at that time was 10 percent per year.  I asked him how much he was expecting.  He had responded with 2 percent per year.  I felt that was fair and therefore, we settled on him receiving part of the appreciation and me receiving most of it. You can still give away part of the profit and make it a win/win.

When objections arise, put yourself in the seller’s shoes and reflect on what they say.  Always try to come up with creative solutions to keep the discussion going. Find out what their concern is, and if you can fix it, say, “If I could do that for you, would you do the deal this way?”

Find the seller’s key issues so that you know what terms are more flexible for them. Whenever you give up something, negotiate something back in return.  With a seller, usually the first question asked is the most important question to them.  If they mention 2-3 different issues, find out which is the most important.

Find the Seller’s Sticking Point

 Sellers will have something that means more to them than anything else. Find out what this is so that you can structure a deal that makes them happy while simultaneously meeting your requirements for profitability.  For instance, the price of the home may be more important to some sellers than when they get the price.

For other sellers, they might want a certain monthly payment but their price is negotiable.   Sellers have an area that is the most important to them when selling their home.  Work with each seller to understand what “makes them tick,” so that you can tailor an offer to suit them best.

Handling Lease Option Sellers’ Objections and Responses

Wendy’s Tip
Time always increases motivation. Sometimes if it’s not a win/win for the seller now, it may be in a month or two.

When you provide your proposals, sometimes the sellers will accept, and other times they will shake their head and walk away. It’s best to soft-pedal their rejection with a comment such as, “Well, things might change for you, so please give me a call somewhere down the line if you’re still interested.” Many do come back to me that way. Sometimes people don’t want to act today because it’s not a win/win for them, but a few months down the road they’re feeling much more motivated.  Always handle sellers graciously and be accessible.  You never know when they will call back and say, “Ok, we now want to accept the proposal that you presented us a while back”.

Some sellers like to feel like they’re dealing with an individual rather than a company, and yet some like to know it is a company and not just one person. Each seller is different and you will need to know how to read sellers and accommodate them.  It’s more personal, and the more personal you can be with a seller, the better they will feel about making the deal.  Of course, when the paperwork comes through, it will have my company name, but when I’m talking with the seller it’s just between them and me.

Overcoming Sellers Objections

If you have properly built rapport and trust with the seller first, their objections should be minimal, and can be handled confidently and easily.  Too many seller objections usually mean you have a seller that is really not as motivated as you may have thought, however, they may just have questions that need to be answered.

Learn to LOVE objections.  Objections are buying signals.  What the sellers are saying by coming up with objections is that they need more information before they can make a buying decision.  When they have objections, they want more information!

I have gotten to the end of my presentation and the homeowner had no objections, yet still didn’t get the home.  I obviously missed either asking the correct question or didn’t pick up on the homeowner’s hot button.  There are only so many objections sellers can have and once you have overcome any particular objection that is now in your repertoire.  Once I’ve addressed an objection, I can’t wait for that question to come up again.

One technique in dealing with seller objections is to feedback their question.  Many times we think we understand the question and the intent was something else entirely.  Example:

They say, “Your offer isn’t enough!”

I reply, “My offer isn’t enough?” Then look at them and don’t say another word.

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Wendy’s Tidbit
Learn to LOVE objections – They are buying signals!

What I’m trying to do is see if the question is a smoke screen or if there is another objection.  It could be that my offer isn’t enough money up front; it could be that my offer is for too many years.  By feeding it back I put the ball in their court and can get more information so that I can give them a correct answer and not bring up another objection they hadn’t thought of.

There are, however, a few objections and questions that you need to be prepared to handle.   Here are my recommendations on how to handle each of these objections and questions.

Objection #1: I don’t want tenants in my home

Possible Solution: The #1 objection for sellers who are doing FSBOs is that they don’t want tenants in their home.  They need to understand that future home buyers are people who want a home to take care of.  Let the seller know that you understand they might be concerned about tenants in their home.  “I want you to know that I really screen my tenants and they are hand selected by me.  I also am not going to put just any ‘tenant’ into your home. I am putting a future home buyer in your home. This type of tenant takes better care of homes, because they are planning to purchase the home.”

Objection #2 – What if you don’t pay my mortgage payment? I am not sure that I like the idea of you making my mortgage payment.

There are several ways you can answer this one.  Use which one is the most comfortable and fitting for your situation (and true):

Possible Solution AI understand your concern.  I have been in this business a long time and can give you references from other sellers like yourself if that might make you more comfortable.

Possible Solution BI understand your concern.  What would make you more comfortable and yet protect us both?

If they insist on making the mortgage payment keep in mind in this situation they must then provide proof to you of their payment. You will always want to have bank authorization to check this out yourself. This requires a document that is signed by the seller along with all of the other contracts for the lease option. There should also be authorization in your contracts that if they don’t pay on time that you would have the right to change the payments from the seller to the mortgage company. You must protect yourself.

Possible Solution C – I understand your concern. I could make your payments to the mortgage company and then mail a copy of the receipt to you. This way I am protected and so are you. Would this work for you?

Objection #2 – Why won’t you put more down in the option?

Possible Solution – If I were to put a lot more down, I wouldn’t be able to buy more homes, and I’d like to help more sellers just like you. If I put all my money down on your home, then I wouldn’t be able to invest in more properties. I am really focused on helping several people right now. Then get a question or something back to them about why they are in their situation – like “You had said you put the home on the market for rent because it didn’t sell, right?  I want to help you rent it and sell it.  You do want to sell right?”

Objection #3 – What if you don’t buy?

Possible Solution – Explain to the seller that if you don’t purchase the home, then the home reverts to the owner in equal or better condition.   Of course you can’t just leave someone in the home and give it back to the seller that way – unless all parties agree.

Objection #4 – What happens if you die?

Possible Solution – The contract provisions allow for either if I died or the seller died that the contract still binds our heirs to continue on. It’s a good question!

Lease Option Questions the Seller will Ask You

There are a number of other important questions that will come up from the seller as the transaction comes together.

  1. How long does it take for you to buy the home? – “Most buyers close between 18 to 24 months.” Be honest.  Because tenant buyers may come and go before one settles in permanently, you need to give yourself time to close the deal, and 18 to 24 months is usually how long it takes for a deal to finalize. We hold the buyer’s hand all the way, walk them through the mortgage process and do everything we can to make the purchase occur.  We are not, however, mortgage brokers, and offer no mortgage advice.  If the first tenant buyer doesn’t buy, we need time to be able to find another one (which is why we will want 3-5 years from our sellers).

 

  1. Why do you need X years to buy this home? – “I need time to find the right tenant buyer and get them through the mortgage process.” Approximately half of my tenants end up exercising, so, it’s very important to have enough time to make it work, since with each new tenant at least a year is needed for them to clean up their credit to qualify for a mortgage.
  1. How do I change the insurance on the sales contract? – “Call your insurance agent and they will take care of it for you – it just has to be turned into a non-owner-occupied insurance policy.” It doesn’t affect the rates much (if any), and in most areas it’s about the same rate, but the seller does need to change it so they have the proper insurance.  Be willing to even do a 3-way call with the seller and the seller’s insurance agent to make sure they get the right coverage.

 

They should also put YOU on as an additional insured.  Why additional insured? Because you have an interest in the property.  You will want liability insurance.

As an additional insured, you also get notice if the policy ever lapses.  If their insurance does run out, you have the right to go buy insurance and then bill the seller for it.

  1. What kind of people are going to rent my home? “The best kind. I am looking for a future home buyer for your home.” Some sellers want to discriminate regarding the types of tenants that move in, but I have to tell them that by law I can’t discriminate.  If discrimination issues are important to the seller, I tell them I’m not the right person to sell their home.  On the other hand, I’m going to take care of their property and put someone qualified into their home. [Note: There is more information on Fair Housing later on].
  1. What if the tenants trash my home? Naturally, this is a major concern to any seller.  “I can understand this would be a concern of yours, but I want to assure you that I really do screen my tenants carefully.  I am not putting just any tenant in your home, I am putting a future home buyer in your home.  But if anyone does any damage to your home, then I would take care of it.  I am fully responsible for your home.”  If they need further assurance you can let them know that their home is also your investment, so you’re looking out for it very carefully.
  1. Can my attorney review the contracts? “By all means; I recommend it!

 

  1. May I list my home with a RealtorÒ since you’re not ready to commit yet?Absolutely, go ahead and list it but please make sure you list my name as an exclusion because if I do buy it during this time period, you don’t want to pay a commission on me.”

 

  1. Can I come look at the property during the lease period? “Absolutely, and it says so in the contract, but you need to go through me to do it.”  You won’t be able to stop by unexpectedly or drop in on the tenants because that would violate the tenant’s rights.  You’ll simply need to call me to coordinate that.