205: Negotiating Deals in the Lehigh Valley
Episode Transcript
Welcome to Episode Five of Season Two of the Growing Empires Show. Today we're going to talk about negotiating deals in the Lehigh Valley. Stay tuned.
00:10
Welcome to Growing Empires hosted by real estate entrepreneur and trusted investment advisor, Jennifer de Jesus. Growing Empires provides insight to building wealth through passive income producing real estate investments for those who want to build and manage a more profitable real estate portfolio.
00:29
So how do you find and negotiate the best deal in the Lehigh Valley? Today we're going to talk about some tips and tricks of what you can do to make sure that you successfully secure the best deals in the Lehigh Valley. So let me start off by talking a little bit about what you can expect when locating deals in the Lehigh Valley. So the Lehigh Valley has very limited inventory right now. And that means that there's a lot of demand for properties that make sense and then you're going to find other properties parties that sit and sit and sit on the market. And the likely cause of that is the property is just overpriced. But in any market when inventory is low and the demand is high, people get excited. And they start to price properties, anticipating the natural appreciation. So currently in the Lehigh Valley, you're going to find an abundance of properties that are not priced well, meaning that they're overpriced. And with a lack of inventory for an investor, it's really always about getting the best deal. So I usually encourage our investors to look in opposite directions of where everybody else is looking. That's certainly not to say that some of the deals that you can find on market are not the best, it just means that you're likely going to compete with other investors for those deals.
01:40
So if you're in a multiple bid situation, let's talk about some of the things first that you can do to make your offer more attractive. One of the tricks that I like to use is something called an escalation clause. For an investor, I think it's crazy to just bid blindly. Meaning you really don't know who's on the other side, you really don't know if they're even telling the truth, you don't know how many bids there are, and you don't know the nature of those bids. So to always just throw out your highest number, I think is a little bit risky. Because ultimately getting the deal at the best price is the driving force behind finding the best investments. It always starts with the first price, it always starts with the sale price. So one of the things that we do that I like to offer to clients is we like to use escalation clauses. And what an escalation clause does, is it allows you to increase your offer based on another offer. So it requires the seller to have another offer for you to actually compete against. So it cuts out the ability for somebody to make up stories. And it cuts out the ability for you to be throwing numbers out blindly. And how an escalation clause works is, you will determine how much money you want to invest over and above another offer with a ceiling. So for example, let's just say you wanted to offer $100,000 for a property, but you did not want to exceed $125,000. But you're willing to pay about $2,500 over the next best offer to secure the deal. So the escalation clause would look like this. My offer is $100,000. I'm going to beat any other offer by $2,500, not to exceed $125,000 in sale price. And I have found that that's a great way for investors to compete in a very competitive market without giving everything away. And that's just one method. Now let's talk about some of the strategies for negotiating deals when you're not competing. If the property's even been on the market for two or three weeks, likely, all of the investors that were interested at one point passed by this property for one reason or another. And then you certainly can find properties that are on the market six months, a year, maybe even longer. Those are great properties to target, because the seller at that point is likely frustrated that they didn't get a deal done, or maybe they had a deal that fell apart. And those are great opportunities to capitalize on when you're trying to negotiate the best deal. If you're using an experienced real estate advisor or broker, likely that broker has a great reputation with the other colleagues in the industry. And likely that broker, as I have done many times in the past, can call up the other agent and kind of pry for information, for lack of a better word. Sometimes that information can give you a great start on where your offer needs to be to really get it accepted. But I highly advise that if the property's been on the market for a period of time, longer than the initial couple of weeks, that you always start out with an aggressive offer.
04:32
The days of people looking at cash as the driving force between why somebody takes an offer or not really have long been past. Cash is really no longer king in our market, because financing is not really a challenge. And in many cases, investors can obtain financing in a very quick manner. So some of the things that you can do to increase the likelihood that your offer is accepted his offer a higher deposit, an escrow deposit, that escrow deposit is the money that you put down to say, hey, I'm serious about this offer. I'm serious about being invested in this deal. And I'm willing to put X amount of dollars on the line to assure you that I'm not going to default on this contract, and I definitely recommend your escrow deposit be somewhere around 1-2% of the purchase price. And in some cases even more than that, if you know that you're competing against other investors. The more money you put down, the more serious you appear. And as long as you follow and abide by the terms of the contract, your deposit in Pennsylvania is fully refundable. The second thing that I suggest that you do, and of course, you're going to need to talk to your real estate advisor about this strategy, you might want to consider waiving inspections. Now as an investor that you do take or any buyer for that matter, you do take some risk when you're waiving inspections and the risk is you could potentially have deferred maintenance or capital improvements that are necessary that were not identified by a site inspection. Inspectors typically go a little bit more in depth with the analyzation of the property, and they are certainly more qualified as to the overall components of the home to help you make an informed decision. But for a seller that contingency period, or due diligence period, for inspections comes with a lot of risk. So I have found that sometimes sellers are not necessarily going after the best price, they're occasionally going after the best terms and sometimes a combination of both, because an inspection period is also an opportunity for you to renegotiate price in terms. Keep in mind that the seller has had the property off the market now for a period of time. And the risk of that deal not going through is much greater for that seller. So in many cases, they like the idea of no inspections because a) they know that nobody can retrade them or negotiate for anything, and the deal is much more secure and more likely to get to closing. The number one reason why deals do not stay together is usually inspections.
06:54
So if you have somebody that can help you look at properties a little bit more in depth, when you have the opportunity to look at them, you might want to consider doing a no inspection deal or moving your due diligence period to a much shorter time period. In the Lehigh Valley, a typical due diligence period for one to four family properties is roughly seven to 10 days, sometimes as long as 14, but roughly seven to 10 days. For commercial properties, you're going to see it anywhere from 14 days to about 30 days. But again, keep in mind that the longer that the property is off the market, the more risks the seller has. So if you can shorten that due diligence period, that offer is going to be much more attractive to the seller because it presents itself with less risk. Keeping your timelines tight is also a great idea when negotiating deals. And by keeping your timelines tight, what I mean is that in this goes for anybody, especially if you're coming from a different market, you want to be able to first understand when you're negotiating what is normal and customary for that market. Because I find that when people come and invest here in the Lehigh Valley and they come from specifically out of state, the way the deals in real estate are negotiated in those states does not always reign true for this state, Pennsylvania. And when you bring something to our marketplace that is abnormal for this marketplace, it's going to really make people back away and be on edge.
09:14
The episode will continue in just a moment.
09:18
As a real estate investor, understanding the nuances of the market is critical to sourcing the right property for your portfolio. Knowing what a market will support in terms of lease ability and potential rental income is a vital part of that equation. You want your property to be in good condition and in a location that's attractive to high quality tenants. If you wish to acquire a property that becomes the gem of your portfolio, you're going to need help to do it right. The good news is you have a great resource who can help you slice through the challenges of finding your ideal property and that's me. So whether you're just getting started and are unsure of which market to start with, or whether you know the market but can't find the right property, I can help. Visit GrowingEmpires.com and schedule a call with me today. One simple conversation can help you avoid wasted hours, days and weeks, and also help you avoid costly mistakes that will weaken your portfolio. Schedule that call with me today at GrowingEmpires.com, that's g-r-o-w-i-n-g-e-m-p-i-r-e-s.com, and I'll make sure that I help you find that home run property to add to your portfolio.
09:20
Let's talk a minute about the timeframe for the Lehigh Valley, what is normal here? So in Pennsylvania, all the dates run parallel with each other. Okay, so you have your contract date, which is the date that both the buyer and the seller sign the contract, and that's your execution date. And all of the timelines begin from that particular date. So if I executed today, tomorrow is day one. I'm going to have an inspection period, potentially. I'm going to have a mortgage contingency period, potentially. I'm going to have an appraisal contingency, possibly. So let's say I had all those three things in the deal. If my inspection period is 10 days and my mortgage commitment is 30 days and my appraisal is 45 days, they are all running parallel to each other inside that timeline. And if my settlement date is 60 days from contract, how that's going to play out is I'm getting my inspections done at the same time I'm submitting an application with a bank. A few weeks later, roughly around the time that my due diligence period is over the bank is ordering the appraisal for the property. Mortgage commitment comes in. The appraisal is usually a condition on that mortgage commitments, and the appraisal comes in and a lot of times it's only a week or two before closing, and then you go to closing. On average investment deals are purchased between 30 and 60 days from contract to close. On average an appraisal contingency is about 30 days. On average, the inspection contingency is about 10 days. And usually mortgage commitment is 30 days or less depending on your timeline to close. Keeping that in mind when you're trying to negotiate a deal is going to really help you know whether or not you can shorten any of those timeframes and make your offer more attractive to the seller.
11:01
One last thing that we should talk about in regards to negotiating deals in the Lehigh Valley is most of our investment properties are located in inner cities. And because of that each of these cities has specific requirements for what they call occupancy, we refer to them as a certificate of occupancy. And for resale in Pennsylvania, most of these municipalities require that the property gets a resale certificate. Now, the inspection is done by the code officials in that respective city and more so the way that the contract reads in Pennsylvania, the contract automatically reads that the seller is to get the inspection, get the report of any violations and then provide that report to the buyer with what the sellers intentions are. Is their intention to clear the report or is their intention to not clear the report, and that provides the buyer with another opportunity or an out to the contract if the buyer does not want to take on the list of violations. However, if the seller agrees to clear the violations, the buyer does not have an out in the contract, you'll find that a lot of times we're negotiating that topic ahead of time, because we want to make clear what our intentions are. So your real estate advisor may ask you do you want to clear CO or not? And what they're referring to is do you want the seller to pay for, get the inspection, and then clear all the violations? Or are you accepting the terms of the state contract which state that the seller will get the report and then determine whether or not they're going to correct the violations or not. So what are these violations that the towns are coming up with? Well, really what they are in reference to is fire and safety. They want to make sure that in the event of a fire that the tenants can get out safely. So they're going to check things like smoke detectors, carbon monoxide detectors, windows, do they open and close properly, doors, they are going to make sure there's no double locks on doors, meaning that you need a key for both sides of the door because in the event of a fire, that's a safety hazard. They're going to make sure that there's no trip hazards, they're going to make sure that you have handrails on any kind of staircases, the concrete outside of your home has to be even, they're going to check to make sure that water is not penetrating the building. They're going to make sure that you have the proper forms of egress. So if you're buying a building with a clear CO, certificate of occupancy, you should feel confident that the town has already been in and inspected and from a fire and safety perspective, they feel that the building is habitable and safe. Now it may not be cosmetically appealing for one reason or another but it's habitable and safe. If you choose to take on the responsibilities of that occupancy, post settlement, as a buyer, just keep in mind that there's going to be a specific timeframe that you're going to be required to get those items corrected. And once you do the repairs, the code official is going to need to come back out to the property, reinspect it, and verify that you are in compliance with their ordinance or their housing code. So my advice for negotiating deals in the Lehigh Valley is a couple of things. One, don't try to do things that are abnormal to the marketplace here. It's only going to put the seller on guard and make your offer look less appealing. Two, try to strengthen your offer with things that are not necessarily price. Because to negotiate the best deal you want the lowest price as an investor. So consider putting a higher escrow deposit, figure out what your threshold of tolerance is for repairs and maintenance. But keep in mind if you're going in to any investment, you should expect that you're going to contribute some money to renovating or rehabbing the property. A great seasoned professional real estate advisor who has good connections can also help you get in contact with the people that can look over the properties for you without the need for a home inspector or a long due diligence period. And lastly, if you're forced into a multiple bid situation, I would highly recommend that you consider using something like an escalation clause so that you can prevent yourself from bidding against yourself.
15:00
I hope you found this episode to be very valuable and certainly if you have any questions, you can feel free to reach out to me and I'm more than happy to talk to you about negotiating the best deals in the Lehigh Valley. Until next time, take care. For more information about how Jennifer can help you plan, develop, and manage a strong real estate investment portfolio, visit GrowingEmpires.com.
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