The largest error most flippers make can be so simple to avoid, yet so expensive when it occurs. Beginners and experienced flippers alike make it and most regrettably, they seldom recognize it as an error at all. Instead, they often blame the economy, the market or just simple, bad luck when it happens. The truth is that this error does not have anything to do with outside factors like the economy and everything to do with the choices of the property seller. It’s likely, the prime reason why so many flippers make this huge mistake is because they don’t know any better. They don’t realize there is a superior way. In this article, you’re going to learn how to avoid making the largest error that flippers make.
The Almost Unheard of Real Estate Truth
Studies show that almost 60% of all signed real estate contracts do not end in a closing. This means, less than half of the deals with a signed agreement really close. That should be a giant red flag to anyone who earns any profit at all from selling real estate, especially flippers. Would you like to learn how to minimize your loss rate and make certain that the deal closes so you earn your paycheck?
How to Avoid the Largest Error Flippers Make
The most accomplished flippers have one method they all share. They lead the buyer. What does that mean, “to lead the buyer”? When you lead the buyer, you are the one taking charge in the deal. The issue is that a lot of real estate sellers are so terrified of losing the transaction that they let the buyer and his/her agent take the driver’s seat in decision making. This is particularly true with flippers because time and again, they are in a hurry to sell so they can earn a paycheck. Also, holding costs can tear a flipper apart on a deal so they typically want to get the property sold immediately. Investors are well-known for allowing buyers to take the lead and hold the reins because they are so fearful of losing the buyer. This is actually completely false thinking. The more unnerved you are, the more control you need of the buyer. If you don’t lead your buyer, you will experience the 60% failure rate that is the norm. The only way to avoid it, is to be in control of your buyer.
3 Steps to Taking Authority over the Buyer
My mentor is the one who got me acquainted with the concept of controlling the buyer. At first I was uncertain of the idea, because I didn’t want to control anyone. I would never want to make anyone feel obligated to do something. Instead, I would rather someone make their own choices and decisions. My fears vanished when he explained that taking control of the buyer actually helps everyone involved. It succeeds in getting the buyer the property they truly want. That in return gets the buyer’s agent, title company, mortgage company, and last but not least, you ALL PAID. It also helps to eliminate the indecisive, time wasters that make up a large portion of the 60% of deals that never go through. So instead of feeling like you are being sneaky or inconsiderate when you “control the buyer”, you are ensuring better results for all parties involved. Here are the three ways to help you control your buyer:
Step #1 – Pre-Approve the Buyer with Your Mortgage Contact
You initiate the process of controlling the buyer before you ever get in contact with one. It all begins in the listing remarks. We always have our students insert a sentence into the agent remarks on the property listing that says, “If Buyer will be using a mortgage company to help in purchasing property, although Buyer may use any lender they choose, Seller requires Buyer to be pre-approved by Seller’s preferred lender upon completion of offer.” Why? Because a pre-approval letter from a buyer’s lender is never as compelling as one from your own. When your preferred mortgage contact goes over the buyer’s financial background, you will have a clearer picture of whether or not that particular buyer will receive a loan. Plus, often times if you are not the owner of record for at least 90 days, other lenders may not be able to get them the loan because of title seasoning restrictions. Meanwhile, your mortgage contact most likely can (if you don’t have a no title seasoning mortgage contact on your team, I suggest getting one right away!).
The insanity is, you often see agents that drive prospective buyers around for days, weeks, even months, showing them properties and once they are committed to signing a deal, they learn that the buyer doesn’t even qualify for a loan! It sounds absurd but it happens time and time again. Some real estate agents are so desperate for a paycheck they will wish on a shooting star that everything will just work itself out. It is a giant waste of time and money to try to find a home for someone that will not be able to get a loan so always make sure that a buyer qualifies with your mortgage person first.
What if the new buyer is paying all cash? Always ask the buyer to send you an official statement from their bank showing the money is available in their account.
What if the new buyer is using a hard money loan? Talk to the hard money lender yourself to verify that they really are a hard money lender (and not the buyer’s relative, for example) and finally, make sure that the hard money lender is able to actually fund your deal.
So what happens if your mortgage person thinks the buyer will not be able to qualify for a loan? Move on. If the buyer has a slim to no chance of acquiring a loan do not waste your time. Have the courage to say no, or otherwise it will be more costly in the long run. There are plenty of buyers out there, you only need one.
Step #2 – Require Non Refundable Earnest Money
This is spot on the most thought out advice I give in real estate. I hope you aren’t the type of person who has to touch the electric fence to see if it is on. Instead, save yourself time and pain by learning from the mistakes of others. This idea is easy as pie. First you require the buyer’s earnest money deposit to become non-refundable once the inspection period is over. If the buyer will not agree to this stipulation, they are not a real buyer at all, but likely, a time waster.
But you may say, “Requiring a non-refundable earnest money deposit is much easier said than done.” Indeed, it can be awkward at first and it may not be normal for non-REO, non-Foreclosure listings, but it succeeds in getting everyone the deal, including the buyer’s’ agent. The buyer’s’ agent is actually typically the biggest challenger to the whole idea. They will make comments like, “In my 15 years as a Real Estate agent, I’ve never done a deal where my buyer’s deposit is non-refundable.” In reply, put a big smile on your face and say, “There’s a first time for everything, Mr./Mrs. Realtor.”
When someone is serious about buying your property and also, certain they will get the loan, they won’t skip a beat when you ask for a non-refundable earnest money deposit after the inspection period. However, the more a buyer hesitates at a non-refundable earnest money deposit request, the more likely they can’t get a loan or they aren’t truly dedicated to purchasing the property. The problem with NOT stipulating a non-refundable earnest money deposit is that a buyer will tie up your property for 30 days or more and then, when the loan falls through, or they find another home that they like more, they can walk away from your deal without consequence. I could fill up a book on scenarios like this. Requiring a non-refundable earnest money deposit is the strongest way to control the buyer.
Step #3 – Your Post Inspection Reaction
After the inspection is complete and the report is provided to the prospective buyer, the buyer sometimes has a meltdown. Why? Inspectors are paid to find things wrong and often they create reports that single out lots of issues, even on newly built homes. The inspector must prove their worth on every job, even when the home is perfect. If they turn in a report that is pretty much blank, the buyer gets ruffled and questions why they paid someone $300 for a blank piece of paper. However, in some cases, inspectors find real issues that were critical for the buyer to know about prior to closing. Either way, typically after the inspection report comes out, the Buyer freaks out. Don’t worry, that’s to be expected. Although, how you respond to this melt down is very important in controlling the buyer.
When a buyer sends the seller a large list of stipulations of what must be fixed before closing, it is normally handled in one of three ways. The first way, which is what most sellers do, (and also the most detrimental option) is to desperately call contractors and begin fixing everything as quick as possible as to prolong the closing. This response is the opposite of controlling the buyer.
The second way is to first confirm the earnest money deposit is non-refundable then proceed to completing the post inspection demands knowing that if the buyer backs out, you have that earnest money to balance out the extra renovation costs. This option is better than the first, but is still not the best response.
The third option is the one we typically suggest, which is to trim down the list with the Buyer (or buyer’s’ agent) to just the things they consider necessary for them to not walk away. These are what we call “the deal killers” on the list. Next, with guidance from a general contractor or handyman, conclude the cost to fix just those items. Then, give the buyer a credit or reduce the purchase price by that amount and let the new buyers decide for themselves if they want those things fixed after closing. Often they take the reduced sale price (or credit) and leave it as-is. Meanwhile, you didn’t have to come out of pocket to fix anything or deal with any further delays that could happen if the contractors didn’t get the work done on time. Most flippers handle it the first way and then, once all the work is completed, the buyer doesn’t close for some sort of reason, and the seller is now out more money, blames the economy, the market, or just simple bad luck and then commits to never dealing with those sort of deals again. I’ve seen that doomed result from beginners and experts alike.
Largest Error Flippers Make Summary
The best way to avoid the largest error flippers make is to control the buyer. You control the buyer by having your mortgage contact pre-approve the buyer, require a non-refundable earnest money deposit after the inspection period and propose reducing the purchase price or crediting the buyer for just the deal killing inspection items. You’ve heard my opinion on this subject, what’s your response to all this? Do you think I am correct? Do you have any stories you want to share about letting the buyer take control of the deal? How else do you find you can control the buyer?