How To Stop Deals From FALLING APART After Inspection!

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If you’re new to my channel my name is RJ Bates III. Myself and my partner Cassi DeHaas are the founders of Titanium Investments.

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Chapters

• 0:00 Introduction to Due Diligence Discussion
• 0:55 Sally Homebuyer Analogy
• 3:34 Wholesaler's Due Diligence Process
• 5:37 The Renegotiation Approach That Works
• 8:13 Setting Proper Expectations with Sellers
• 12:40 Importance of As-Is Comps
• 16:50 Recap and Final Thoughts

Transcript

Speaker 1: 0:06

let's talk about the due diligence discussion. Now. You're a wholesaler or a real estate investor. That's why you're tuning in on my channel today and you want to learn how to close more deals. One of the things that kills wholesale transaction real estate investing transactions is the renegotiation. When the price is incorrect and we need to renegotiate, this leads to a lot of terminations. Now, why is that the case? Now, let's use an analogy. Let's pretend you're a Sally home buyer. You're going to buy your first ever home. You're going to live it. This is going to be where you raise your kids. It's going to be where you bring your babies home.

Speaker 1: 0:53

How does this transaction take place? You're going to go out. You're going to hire a realtor. That realtor is then going to give you some sort of portal showing you all the houses that are on the market that fit your price point, the location, the school zone, everything that you want for your first home. They're going to show you all these properties and then you, sally Homebuyer, you're going to make a decision on which one of those homes you're going to go see. You're going to make a list Three, four, five, six, 30 homes that you want to go see. You're going to make a list three, four, five, six, 30 homes that you want to go see. You're going to go walk them, look at everything, look at the kitchen, living room, the yard, bathrooms and make sure it's exactly what you want. And then the realtor is going to say, based off of what we just saw and the comparables in the area, this is what you should offer for that property. So you do, you submit an offer, and then that seller finally decides that they accept your offer and it's a great day.

Speaker 1: 1:59

Now what happens on the vast majority of retail transactions, just like this one, is that Sally Homebuyer now has a due diligence period, an option period, an inspection period, whatever you want to call it, but it's there so you can do your due diligence. What does that mean? You're going to hire an inspector. The inspector is going to come out, look at all the things that you, sally Homebuyer, couldn't see. They're going to check the roof, the foundation, the electrical, the plumbing, and they're going to make sure that you're getting the home that you really want and that you deserve for your money. You're going to get an appraisal done to make sure that your loan can actually go through so you can purchase this house. All of this is completely normal. Now, if something were to come up on that inspection report, the inspector were to say hey, there's foundation damage, or I see that there's weather-related issues to the roof. Maybe some of these shingles need to be replaced, maybe the entire roof needs to be replaced. Hey, there's some issues with the electrical Repairs need to be done. What happens? You then either, one, ask for a credit, two, change of price, or, three, ask the seller to make the repairs.

Speaker 1: 3:29

Now take ourselves away from the analogy of being Sally Homebuyer. Now you're back to being the wholesaler or real estate investor. What do we do? We talk to motivating sellers that need to sell their house for a discount. We look at the comparables. We see what the property could be worth once we fix it up. We also pay attention to the as-is comps. What could that property be worth? What are buyers buying it for today?

Speaker 1: 4:01

And normally our intention is to purchase that property for lower than what the comparables tell us. We get a signed contract, they accept our offer and then we have our due diligence period. We then go out, we inspect the property, we get pictures, we send our end buyers. Maybe those end buyers have to get an appraisal done for their hard money loan and we see, is the property in the condition that we thought it was in, based off of the conversation we had with the seller. Now, this is no different than Sally Homebuyer going out, seeing the pictures online, walking the property herself. And just because she's ignorant to the roof being to be replaced or foundation issues or electrical issues doesn't mean that she doesn't have the right to come back to the seller and ask for a credit, a price reduction or the repairs to be made. Now, in our scenario, as a wholesaler and a real estate investor, almost all of our offers are made that we are buying the property in as-is condition.

Speaker 1: 5:07

We're not going to ask the seller to make repairs to the property. But, that being said, that comes with a price. See, if we were to go out and we were to find out that there's foundation issues, electrical issues, roofing issues, plumbing issues, whatever comes up, if the work exceeds what we anticipated, what do we need to do? We need to have a conversation, the due diligence discussion, about the repairs that are needed. And how do we do that? Well, we're not going to ask the seller to do those repairs, because that's our job. That's why they're selling the property to us for a discount.

Speaker 1: 5:46

That being said, it doesn't mean that the price cannot be renegotiated. That being said, it doesn't mean that the price cannot be renegotiated. This is the same way. When you're trying to acquire the property and the seller's price is incorrect, how do we get them to come down on price? It's not with mental manipulation, it's not with games, it's not because we lowball them. No, it's because we educate them with math. We show them the numbers. We say, mr and Mrs Seller, your property could be worth this. That's the after repair value. When I do this, the amount of repairs, and then I have holding costs and closing costs, then I want to make profit.

Speaker 1: 6:32

Nothing changes from the acquisitions conversation, where we educate that seller, to when we're under contract and we need to renegotiate when we've completed our due diligence. This is an ongoing conversation. It doesn't stop just because we're a wholesaler or a real estate investor. We should absolutely be having this conversation ongoing throughout our inspection period, the due diligence period, where we go to them and we say, based off of our due diligence, we're seeing that there's a little bit more work that's going to be needed to be done to the property we're going to have to discuss the price and this is how you can successfully renegotiate contracts to get it to where you need to and eliminate a lot of the terminations that are happening inside of your wholesale and real estate investing business, Because that right there is hard-earned money that you spent on that lead, the acquisitions period, and then going out and spending time during the dispositions, the marketing of it and actually getting this due diligence done. You can't let that money slip through your fingers. You've earned the right to have that conversation and really build a bridge for the seller to understand why you're coming back and having this conversation, why you're saying you need it at the price that you need it at Now.

Speaker 1: 8:02

Personally, I don't like to ever renegotiate the price until we firmly know where our end buyers are willing to purchase the property at. So let's use an example. Let's say I talk to a seller and I make an offer of $200,000 on the property. We then go out and we notice that there's several large ticket items that need to be rehabbed on the property that we did not anticipate. And our end buyers are saying that the most that they're willing to purchase this property for is $175,000. That's a $25,000 price reduction. Majority of wholesalers will look at that and have maybe a half-hearted conversation with the seller and hoping to get them down to $160 or $165 so they can make a $10,000 assignment and if it doesn't work, they send over the termination and they move on.

Speaker 1: 9:01

Here's how this should actually take place. For one, you need to have a very firm conversation with your end buyer, verifying that that number is an accurate number and they're ready to move forward once you have that renegotiation conversation with the seller. The second thing is, as you're having that conversation with your end buyer, you need to know the specific reasons as to why they cannot move forward at your original asking price. Is it because there's an issue with the after repair value? Is it because there was an issue with the amount of repairs? Or was it an issue because you did not allocate enough profit for them as the end buyer? Now, whatever that is, you need to know those numbers. More often than not, it's because there's a discrepancy there with the amount of repairs needed.

Speaker 1: 9:50

We're virtual wholesalers. We make a lot of assumptions during the acquisitions phase on what needs to be done to these properties. So once we get pictures and we send our end buyers, there's always a chance that we're going to have to come back to the seller and say the property is not what you told me it was and these are the specific items that need to be done to the property in order for me to achieve said after repair value. Now, once you know that your end buyer is willing to move forward at a specific price, that's great. You go back and you have that conversation with the seller.

Speaker 1: 10:30

Two things need to happen prior to you having this conversation. One during the acquisitions phase, you needed to set the proper expectations with the seller that this conversation was going to take place. When does this happen? When you know that you're ready to close the deal. We call it reverse rapport. You build up the expectation for this by explaining your process. Mr and Mrs Seller, once you've signed this agreement I'm about to send you, we're going to come out, we're going to do our due diligence, we're going to inspect the property, we're going to make sure that it is in the exact condition that you told me it is today. If it is, then we'll be good to move forward at your price and on your timeline, but if it's not, we are going to have to revisit both price and timeline. Does that make sense Awesome. And then you move forward with the close. Does that make sense Awesome. And then you move forward with the close. That's step one.

Speaker 1: 11:28

The second thing that needs to happen continued communication with the seller about where you are in your process. It cannot just stop there. You have to continue to communicate with the seller about when are you gonna go out, when are you gonna get pictures, when are people gonna be walking the property and performing due diligence, and what are the results? You might not know the end result, but if you have end buyers go out and say, man, this property's got a lot more work than I thought in the pictures. What work is additional that needs to be done to the property? Communicate that back to the seller. Mr and Mrs seller, based off the initial walkthroughs that we've had at the property, we are seeing that it does need a little bit extra work. We don't know what that looks like yet, but we might have to have that conversation about reducing the price. We'll let you know as soon as we know exactly what that number is. Then you go back and you have all the negotiations and the communications with your end buyers about exactly where they need this to move forward. Once you have that and you know that you have a firm buyer, that's when you go back and renegotiate with the seller. Based off of the chain of communication with the seller, this will allow you to have the best chance at renegotiating that price.

Speaker 1: 12:50

Now I use the example of getting a $25,000 price reduction. Some of you might be thinking that sounds pretty difficult, rj. I mean, that's like 12, 12.5% price reduction on price and it does seem like a lot, and there's always the chance that the seller, either one, will not be able to come down on price. And it does seem like a lot, and there's always the chance that the seller, either one, will not be able to come down on price. Maybe they owe too much, maybe they don't have any cash to bring to closing, and I understand that. But there's also going to be times where it's a choice. Maybe they wanted to walk away with a certain amount of money and you have to explain to them that, based off of the condition of the property and the numbers that exist here, this is where an investor would need to purchase the property. So if they want to move forward with any investor not just us, but any investor. This is where the numbers need to be, and if you've been transparent about this throughout the entire communication of that seller, they're going to already understand, they're going to hear the same numbers, they're going to know what the property could be worth, they're going to know what you anticipated the rehab needs, and then you can explain to them why those rehab needs increased, which is why the price needs to decrease. This is the due diligence discussion that needs to happen on the majority of your wholesale transactions.

Speaker 1: 14:13

Now, our intention during the acquisitions phase is not to just lock something up and then renegotiate it later, because, again, just like every retail transaction with Sally Homebuyer, the seller has the right and the opportunity to say no, and then it's our decision whether or not we want to move forward at the original agreed price or to terminate. This is why you need to try to anticipate the amount of repairs and the after repair value as accurately as possible, because you do not want to end up in a situation where you have to decide whether or not you're going to terminate or move forward. It would be better to just properly underwrite the deal. This is why we always want to talk about where in buyers buy. You can do a lot of this by paying attention to the as-is comps In the vast majority of the markets in the United States, you will be able to see. This is where the majority of physically distressed properties are being purchased by other investors.

Speaker 1: 15:21

Utilizing tools like PropStream, privy InvestorBase and InvestorLift, you can clearly see, hey, properties in similar condition are going to multiple investors at $50,000 to $60,000. So you already know where your end buyers are buying. This is just as important in the underwriting process at anticipating and underwriting what the after repair value is. So every time you're comping a deal, make sure you're paying attention to both the fixed up comps for your after repair value, but also what is the property value today in its condition the as-is comps. There's more and more buyers coming along today than ever before that want to just buy the property, do very minimal to it and sell it A whole tale. More people want to do that than ever before. So pay attention to what those as-is comps where the end buyers are actually buying are actually buying. So, to recap, every retail not every, but the vast majority of retail transactions have some sort of renegotiation. I can give you $200,000. I get my inspection. I get my appraisal Based off the inspection results. I either need a credit, I need you to fix this up or I need you to lower the price.

Speaker 1: 16:46

If it's okay for all those retail transactions, why is it not okay for us as wholesalers and real estate investors? I think it's because, one, we're setting improper expectations during the acquisitions phase and two, we have improper expectations for ourselves. And two, we have improper expectations for ourselves. Even if we were to go do a belly-to-belly appointment and want the property just like every retail buyer, why do we have to know the price that we're going to purchase that right? Then and there, it's okay to do more due diligence and to make sure, before you invest your hard-earned money, that you're at the appropriate price based off of everything that's going on with that property. So reset the expectations. And this all starts during the acquisitions phase and the comping and underwriting phase. This is why Cassie and I just beat it into your heads about the importance of acquisitions and comping and underwriting, because pretty much everything starts right then and there. Let me know what you guys think in the comments. Appreciate each and every one of them. Make sure you like the video. See you guys tomorrow.