Once you have decided you want to acquire a property, it is time to negotiate a purchase agreement. You will also hear this referred to as a purchase and sale agreement or a PSA. Many new real estate investors do not realize there are many negotiable points in a residential purchase agreement. If you fail to negotiate, you are likely leaving a great deal of profit on the table.
Before you can negotiate a purchase agreement, you need to know what one is! A purchase agreement, also sometimes referred to as a residential purchase agreement or a purchase and sale agreement (PSA), is the offer made in writing by the buyer (in real estate investing cases, the buyer will often be you, the investor) to the seller. The PSA details every aspect of the transaction. It should include details on what is included in the sale, when the buyer will take possession, and who pays for transactional fees and closing costs.
Different states have different purchase agreements, and different investors use different formats for their purchase agreements. Find out from your real estate attorney or other real estate professional or educator whether your state requires you to use a specifical residential purchase contract or you can use one of your own.
Once you have made contact with the owner, you should meet with them for further discussion about the property. As part of this meeting, or a later one, you should arrange to walk through the property to make sure it meets your criteria as a buyer.
Because owners in foreclosure may not have the money to make repairs to their property, you might be willing to buy the property “as is.” But you still want to keep a tab of estimated repair costs and subtract them from your purchase offer. Your willingness to put some “sweat equity” in the property after you purchase it will increase the chances of realizing a good bargain.
If you and the owner both agree to proceed, you need to negotiate the terms of a purchase. These negotiations will involve you, the owner and possibly the foreclosing lender. A real estate agent can be a valuable resource during the negotiating process.
If the loan in default is assumable, you may be able to pay off the amount in default and take over payments under the current terms of that loan. If not, you will need to pay off the full amount owed on the loan. If the property has other liens placed on it, you’ll need to make sure those are cleared out as part of the purchase agreement. If the owner has equity in the property above and beyond the liens, then you can offer to split the equity with them, allowing them to walk away with cash and you to acquire a property below market value.
Owners might be more willing to work with you if you are flexible by helping them out in creative ways that address their situation. You could offer to let them stay in the house for a certain amount of time (possibly paying rent) until they find a new place to stay. You could offer to pay their housing costs for the first month or more after they leave the property. If you’re purchasing the property as an investment, you may let them stay and pay rent until you decide to resell the house. There are myriad ways to work out an agreement that benefits both parties. Remember, just selling the property during pre-foreclosure allows owners to avoid a foreclosure-marred credit history, making it easier for them to find a new place to live.
While negotiating the purchase agreement with the owner, you should also contact the foreclosing lender and any other lien holders. You want them to know you plan to purchase the property and satisfy any liens against the property. You also may be able to negotiate a lower payoff amount to satisfy the debts owed. Since you’re saving them the trouble of pursuing and collecting the debt owed them, some foreclosing lenders and lien holders will clear liens on a property for less than 100 percent of the amount owed. This is another way to realize a bargain during pre-foreclosure.
The goal for you as a buyer is to purchase a property at least 20 percent below full market value, although better deals are often possible. When determining the final purchase offer, you should also take into account the rate of real estate appreciation in the area and the potential for increasing the house’s value by making repairs and improvements.
Many real estate investors feel guilty when they start to negotiate a purchase agreement. It is important to remember that you are creating a solution to a problem for the homeowner if you buy their home. Listen to the seller so you can understand best how they will benefit from you buying their home, but remember that it is important for you to walk away from the deal as a “winner” also.
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