The biggest mistake most flippers make can be so easy to avoid, yet so costly when it occurs. Newbies and veterans alike make it and, unfortunately, flippers rarely recognize it as a mistake at all. Instead, they tend to blame the economy, the market, or just plain bad luck.
But this mistake has nothing to do with outside factors, like the economy, and everything to do with the decisions of the property seller.
The main reason why so many flippers make this gigantic mistake is because they don’t know any better. They don’t know there is a better way. In this article, you’re going to discover the biggest mistake real estate flippers make and how to avoid it.
Little-Known Real Estate Truth
Studies show that nearly 60% of all signed real estate contracts never end in a closing. In other words, fewer than half of deals with a signed contract ever actually close. That should be a wake up call to anyone who earns any income whatsoever from selling real estate–especially flippers.
Would you like to know how to reduce your failure rate and ensure that the deal closes and you get paid?
How to Avoid the Biggest Mistake Flippers Make
The most successful flippers have at least one technique in common: They control the buyer. What does that mean?
When you control the buyer, you are the one calling the shots in the transaction. The problem is most real estate flippers are so scared of losing the deal that they let the buyer and his/her agent run all over them and call the shots–especially if they are desperate to sell the property and get paid. And holding costs can eat a flipper alive, so they usually want to get the property sold yesterday.
Investors are notorious for allowing buyers to take control, walk all over them, and push them around because they are so scared of losing the buyer. In fact, the opposite is true.
The more desperate you are, the more you need to control the buyer. If you don’t control your buyer, you will experience the 60% failure rate that is the norm. The only way to prevent it, is to control the buyer.
3 Steps to Controlling the Buyer
My mentor is the one who introduced me to controlling the buyer. I recall initially being apprehensive to it because I didn’t like the idea of controlling anyone. I don’t want to force anything upon anyone. I much prefer to let others make their own decisions.
My fears were removed when he told me that controlling the buyer actually helps all parties involved. It helps the buyer purchase a house that they want to buy. It helps the buyer’s agent get a commission. It helps the title company get their fees. It helps the mortgage company originate a loan. And, of course, it helps you get paid.
Also, it flushes out the tire kickers and time wasters. So rather than feeling like you are being manipulative when you “control the buyer,” you are actually creating a better outcome for all parties involved.
Follow these three steps and close more deals…
Step #1 – Pre-Approve the Buyer with Your Mortgage Person
You start the process of controlling the buyer before you ever get in contact with one. It all begins in the listing remarks.
We have our students add a sentence into the agent remarks on the listing that says, “If Buyer will be using a mortgage company to assist in purchasing property, although Buyer may use any lender they want, Seller requires Buyer to be pre-approved by Seller’s preferred lender upon submission of offer.”
Why? Because a pre-approval letter from a buyer’s lender is not nearly as powerful as one from your own. When your preferred mortgage person reviews the buyer’s financial situation, you will then have a much better understanding of the likelihood that the buyer will actually get a loan.
Plus, for many flippers, if you are not the owner of record for at least 90 days, other lenders may not be able to get the buyer a loan due to title seasoning restrictions. Your mortgage person probably can. (If you don’t have a no title seasoning mortgage person on your team, you better get on that right away!)
The crazy thing you will see is when buyers’ agents will drive prospective buyers around for days, weeks, even months, showing them houses and once they get knee deep into a deal, discover that the buyer can’t even qualify for a loan! It sounds nuts but it happens all the time.
Some real estate agents are so desperate for business that they will throw up a Hail Mary pass hoping for a miracle to occur in the end zone. You don’t need to tie your deal up with a wing-and-a-prayer buyer. Instead, verify with your mortgage person that the buyer can actually get a loan.
What if the new buyer is paying all cash? Have the buyer send you an official statement from their bank showing the cash is available in their account.
What if the new buyer is using a hard money loan? Talk to the hard money lender directly, verify that he/she is actually a hard money lender (and not the buyer’s cousin, for example) and finally, check that the hard money lender is willing to actually fund your deal.
What if your mortgage person thinks the buyer is shaky and getting a loan for them would be very difficult? Move on. If the buyer has an outside chance of getting a loan, don’t tie your property up with them. Have the courage to say no, or otherwise it will cost you more later. Besides, there are tons of buyers out there for your deal. You only need one.
Step #2 – Require Non-Refundable Earnest Money
This is hands down the most unheeded advice I give in real estate. I hope you aren’t the type of person who has to touch the hot stove to know that it will burn your finger. Instead, save yourself time and pain by learning from the mistakes of others.
This concept is so simple. All you do is require the buyer’s earnest money deposit to become non-refundable once the inspection period has ended. If the buyer will not agree to this requirement, they are not a real buyer at all, they’re a time waster.
“There’s a first time for everything, Mrs. Realtor…”
But you may say, “requiring a non-refundable earnest money deposit is much easier said than done.” Perhaps. It can be uncomfortable at first and it may not be the norm for non-REO, non-foreclosure listings. But it helps everyone in the deal, including the buyers’ agent.
In fact, the buyers’ agent is usually the biggest opponent to the whole idea. They will use phrases like, “In my 10 years as a Realtor, I have never done a deal where my buyer’s deposit is non-refundable.” To which, with a smile on your face, you reply, “There’s a first time for everything, Mrs. Realtor.”
When a buyer is serious about buying your property, and are confident they will get the loan, they won’t run away when you ask for a non-refundable earnest money deposit after the inspection period.
However, the more a buyer balks at a non-refundable earnest money deposit request, the more likely they can’t get a loan or they aren’t committed to buying your property.
The end result of NOT requiring 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 doesn’t go through, or they find another home that interests them more that week, they will get out of your deal without having lost anything. I could fill up a book on stories like this.
Requiring a non-refundable earnest money deposit is the most powerful way to control the buyer.
Step #3 – Your Post Inspection Response
After the inspection is complete and the report is provided to the prospective buyer, the buyer sometimes freaks out.
Why? Inspectors are paid to find problems and they sometimes create reports that point out lots of problems, even on newly built homes. The inspector must justify his existence on every job, even when the home is immaculate.
If they provide a report to a buyer that is basically blank, the buyer gets upset and wonders why they paid someone $300 for a blank piece of paper.
However, in some cases, inspectors find legitimate issues that were crucial for the buyer to know about before closing. Either way, usually after the inspection report comes out, the Buyer freaks out. Don’t worry, that’s normal. But how you respond to this freak out scene is critical to controlling the buyer.
How to Respond When a Buyer Freaks Out
When a buyer sends the seller a huge list of demands that must be fixed before closing, it is usually handled in one of three ways.
The first way, which is what most sellers do, (and the worst way to respond) is to frantically call contractors and immediately begin fixing everything as fast as possible as to not slow down the closing. This response is the opposite of controlling the buyer.
The second way is to first ensure the earnest money deposit is non-refundable and then to go to work on completing the post inspection demands with the security that, if the buyer doesn’t end up closing, you have that earnest money to offset the extra renovation costs. Although this response better than the first, its not the best response.
The third way is the one we usually recommend. Whittle down the list with the Buyer (or buyers’ agent) to just the things that must get done or they will walk away. What are “the deal killers” on the list?
Get a general contractor or handyman to determine 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 on their own if they want those things fixed after closing.
They may just 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 occur if the contractors didn’t get the work done on time.
But most people handle it the first way and once all the work is done, the buyer doesn’t close for one reason or another, and the seller is out more money and blames the economy, the market, or just plain bad luck–and vows never to deal with those types of deals ever again.
I’ve seen that unfortunate result from beginners and experts alike.
The way to avoid the biggest mistake flippers make is to control the buyer. Here’s how you control the buyer:
- Have your mortgage person pre-approve the buyer
- Require a non-refundable earnest money deposit after the inspection period
- Offer to reduce the purchase price or credit the buyer for just the “deal killing” inspection items
You’ve heard my take on this subject, what’s your response to all this? Do you agree with me? Do you have any stories you want to share about letting the buyer take control of the deal? If you control the buyer, how else do you do it?