Sitting at the kitchen table there were three people, two sellers and the buyer. I wanted to buy their house but did not have the $40,000 cash to do it… now. The presentation from my side went just like I had planned. From the Seller’s prospective it was too good to be true. They were unfamiliar with investing in residential real estate. They did have other investments like a 401 K. They let other people handle their investment accounts. They haven’t touched it or changed their investment direction in 20 years and they had lost money during the recession. When the 401K and investment statements came in the mail they never opened the envelopes to see what they had. What they had was HOPE! They had a mortgage and had owned two houses prior with a mortgage. They had never heard of private real estate investing and getting an interest rate as high as I was proposing.
What I wanted to do was to buy the house. The house had a first mortgage of $120,000 and equity of $40,000 for a total financing of $160,000. I wanted to keep the first mortgage in place, have a $40,000 second and pay an interest rate of 8%. My exit strategy was to buy, fix and sell the property, just like they do on TV. It would be for one year, then I would sell the house and the mortgage would be paid off. This method of financing was going to save me $16,600 in interest fees and costs. I could pay a higher price for the house with the owner financing. It would be a lower price if I paid all cash.
They wanted something they could understand. They wanted a deal in which they could get their price and not be tied to the property. They wanted to be able to take their cash and put it into a bank and earn .75%. They had already bought a house and did not need the income or the money. They wanted the money just in case. They felt safer knowing the money was in the bank rather than relying on someone to pay them. They don’t want to save up and manage the payments. They just want to be able to write a very large check to fund their dream vacation, or use for an emergency, etc.
When you are meeting with prospective investors you will need to have the confidence and focus to build trust quickly. One of the fastest way to build trust was described in the book “the Speed of Trust” by Steven Covey. In the book the secret was to put your agenda away and listen (put the cell phone down)! Really listen to them and be present in the conversation. The second most important technique for raising capital is to ask great questions which will move the meeting along and get them closer to funding your project.
Do you see the chance of this meeting coming out with a win- win? Are the parties too far apart? Put yourself in the buyer’s position, what words would you use to persuade the Seller to take the buyers offer of owner financing?
Here is what I did to change the conversation. In any presentation we should talk about the benefits to the seller. I suggested benefits such as: no more maintenance, no more big utility bills, no more mortgage payments, they will have a potential of making an additional $3,200 on the sale of their house for a total of $43,200 if they delayed getting paid in 30 days. Did they plan on any big vacation trips in the next 90 days? How much did it usually cost when they vacationed? $10,000 or $20,000? Did they expect to have an expense greater than $5,000 in the next 90 days.
In all presentations we should talk about the concerns of the seller. We discussed concerns regarding:
Will I make the payments? (I have a track record) Will I pay off the mortgage in one year? (I have a track record) Will I repair the house and be able to resell it? (I have a track record) Would I destroy their credit by making the payments late? What happens if the bank decides to foreclose using the “due on sale clause”?
After I laid out the opportunities and addressed their concerns, we came to a consensus on price and terms. The lesson I learned was having confidence to listen to what the client wanted and confidence in my strengths to turn the situation to a win-win.