Financial Negotiation Can Determine Cashflow and Profit

Topics: Negotiating

Only a relatively few salespeople have the ability or inclination to negotiate either buying or selling transactions. What passes for “negotiation” boils down to a series counter-offers ferried back and forth between buyers and sellers by eager salespeople. These invariably focus upon price, and rarely mention financing terms. When an impasse is reached, as often as not, no deal is concluded. The salespeople wind up with little to show for their time and effort. In a cash market, creative financing has become a lost art that few salespeople even remember.

Negotiating a transaction must pander to the egos of those involved. Sellers stake out a position as to the price they expect to receive when they list a property for sale. Buyers have budgetary limits as well as limits on the amount of mortgage money they can borrow. When a clash of egos takes place, very few transactions are completed. Through trial and error, I discovered that being able to structure financing could create a way for a buyer to pay more, and a seller to take less, and to save face in the process. Here are a few examples of how this might be applied to close the gap between buyer and seller:

1. Seller has painted himself into a corner by telling all his friends and neighbors that he won't sell unless he gets a full price offer of $150,000 for his house. This is too high for the market. Consequently, the house has been on the market for a full year without any offers. The Buyer can meet the lender's cash down payment, but can barely qualify for financing to be able to pay $130,000. Both want to make a deal, but neither is willing to yield on their price. Here's what they do: The Buyer offers to pay $125,000 in cash, plus $25,000 in the form of a zero interest, zero payment Note secured by a Second mortgage loan. Balance will be due in full in 5 years. With a lower loan amount and no payments to make for five years, the lender agrees to finance the property. To motivate the Seller, the Broker agrees to take the Note in lieu of a cash commission. Why did they do this?

Although the Buyer is paying more, he is saving $5,000 in cash needed to complete his purchase, making the loan much easier to qualify for while lowering his monthly payments. The Seller is meeting his price objectives, and he has no need to pay any of the cash out in brokerage fees. Since, he is selling his personal residence, there are no negative tax consequences. The broker must wait five years to be paid his 6% commission, but instead of receiving $9000 he will be paid $25,000 at the end of that time. If this sum were discounted over 5 years at the current market rate of about 9%, the present value would be $16,248. The broker doesn't wait until then. Instead he immediately sells the note to a Roth IRA for the $9,000 that he had expected to receive. By paying only $9000 for the Note, the Roth IRA will earn a tax-free compound annual yield of 22.67%. Everybody is happy.

2. The retiring Professor owned a $100,000 rental house on which $23,000 remained unpaid on a high interest rate mortgage. With a long term lease, he couldn't get the tenant to cooperate in showing the property, so elected not to list it for sale. The market for this house boiled down to other landlords. He priced it at full fair market value and insisted upon a full release of loan liability. He received no offers at all. As time wore on, he became more willing to listen to a creative solution. He was agreed to a $100,000 price, but with $50,000 cash at closing and $50,000 payable in full in 5 years. Let's dissect this deal to see who got what:

The Professor had the satisfaction of selling his house without a broker without compromising on price and without disturbing his tenant; plus he had enough cash to pay off his loan; with $27,000 in cash left over. He'd get another $50,000 in 5 years. The buyer got a house already rented to a long term tenant with about $9,000 per year in net rents. The buyer could easily borrow the down payment, then refinance the house in 5 years to pay off the balance. But, if he used his own cash reserves to pay for the house, in five years, he'd have accrued just about enough to pay off the remaining $50,000 out of rents. The present value of $50,000 discounted at 8% for 5 years is only about $34,000; so I effectively only paid $84,000 for a $100,000 house; less if he bought back his note at discount.

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