There’s an old expression in real estate: “Your Price, My Terms…or My Price, Your Terms.” It’s an extremely simple idea, and provides a great, simple framework for thinking about how we can negotiate win-win deals with Sellers. In this episode, Jeff explains how to use this simple rule of thumb to be creative and thoughtful in your deal structuring efforts, and ultimately to craft more proposals that get accepted.
Sometimes, dare I say oftentimes, you meet a seller who is really fixated on something specific. Sometimes it’s a price. Sometimes it’s some element of terms like an interest rate. And so the question becomes, if you’re not super excited about that one term, if they’re so fixated on, how do you move forward? Is there a path for it? Well, in today’s episode, I want to share with you an old expression that I think is a powerful idea that we should keep in mind as we try to find a way to create a deal that makes sense for both parties. And we’ll get a yes, I think you will find this simple, back of the napkin type of rule of thumb to be super easy and super valuable for you. So let’s cue up our theme song we’ll jump right into it.
Welcome to Racking Up Rentals, a show about how regular people, those of us without huge war chest of capital or insider connections, can build lasting wealth acquiring a portfolio of buy and hold real estate. But we don’t just go mainstream looking at what’s on the market and asking banks for loans, nor are we posting We Buy Houses signs are just looking for “motivated sellers” to make lowball offers to. You see, we are people-oriented deal makers, we sit down directly with sellers to work out win-win deals without agents or any other obstacles, and buy properties nobody else even knows are for sale. I’m Jeff from the Thoughtful Real Estate Entrepreneur. If you’re the kind of real estate investor who wants long term wealth, not get rich quick gimmicks or pictures of yourself holding fat checks on social media, this show is for you. Join me and quietly become the wealthiest person on your block. Now let’s go rack up a rental portfolio.
Hey, thanks for joining me for another episode of Racking Up Rentals. Show notes for this one can be found at thoughtfulre.com/e102. Episode 102. Please do us a big favor by hitting the subscribe button in your podcast app for just two seconds there. It really does help send a message back to the platforms that people are listening in that makes those platforms want to spread the message to other fellow thoughtful real estate entrepreneurs like us who are trying to find a show like this one. Thank you so much for that; onward with today’s episode.
So like I mentioned in the intro, there’s this old expression that I think is a helpful rule of thumb. Now I wish I knew who to attribute this to but I don’t but I know it’s been around for a long time. And here it is simply your price, my terms or my price, your terms? Okay, let’s dissect this, what does this mean? Your price my terms or my price your terms, on a very simple level. What this means is, hey, seller, I will give you your price. But it’s going to have to come with my terms or if you want your terms, then it’s going to have to come with my price. Now, generally speaking, I would say I shy away from really blanket type of solutions, blanket ideas, broad strokes, concepts, I feel like most of my thinking is very nuanced. And so there’s part of me that always wants to shy away from these types of, of general rules of thumb, but I find this one is just so helpful as an overall guide. You know, it’s truly kind of a blunt instrument. It’s a very basic idea. It’s like someone took a sharpie and wrote it on the back of a napkin. But I feel like the principles behind this are so helpful and that I personally am thinking about this general concept all the time.
About maybe two weeks ago, I got a call from a seller that I had sent a letter to. And in this call, I could tell just from the initial couple things that the person said that he was a nice guy that he was light hearted. But one of the things he said pretty early in the conversation was well, this property is not for sale, but I’d sell to you if you want to pay three to four times what it’s worth, right. Okay, so for many investors who have done a lot of marketing, they’re thinking, Oh, my gosh, this is my worst nightmare. This is exactly what I was afraid was going to happen. Someone’s going to call and say something ridiculous like that. And I’m not going to know how to respond very well. But so here’s actually what I said back to him, believe it or not, I said, All right, Alex. All right, I’ll pay you three to four times what your property’s worth. If you’ll let me give you have $1 down payment, I’ll pay you $1 a year for the next 872 years. And then we’ll put the balance on a balloon payment and it’ll accrue interest at 1.2%. How does that sound?
Now I said it jokingly because he said what he said to me jokingly, as well; right now, you don’t think of thoughtful real estate entrepreneurs as being smart Alex, and that’s only kind of what was going on here. He was jokingly saying something absurd. So I was kind of mirroring him with something absurd as well, we both had a quick chuckle. And then we moved on; it kind of acted as an icebreaker. And then we had a very real conversation after that, and one that actually seems like it will be quite promising. But that conversation as sort of silly as it seems, actually demonstrates exactly what this simple rule of thumb says, my price, your terms or your price, my terms.
So here’s what I’d like you to do, if you could close your eyes. Now, don’t close your eyes if you’re driving or riding your bike, or maybe even walking your dog. But picture a spectrum, picture a line with a period on the left end and a period the right end. And it’s a continuum. And on the left end, it says your price, my terms, and on the right end, it says my price, your terms, right. So this is a spectrum of extremes. On the left side, it says okay, so there, I’ll pay you anything you want. But I will have to control the terms. And on the right side, it says I get to choose any price I want. If you want whatever terms it is that you want. Now 99.999% of deals are not going to happen at either end of this spectrum, they’re going to happen somewhere in the middle. And chances are, of course, they’re probably going to happen somewhere right in the middle of this overall spectrum. But the point is, it could happen anywhere along this spectrum, a deal that could make sense for both parties could happen anywhere along that spectrum.
So to give you an analogy, this is something I think about a lot. This is something I talk about a lot, I would be surprised if I haven’t already brought this up on his podcast many times, I like to think about playing with the terms of a deal to try to find a winning solution. Kind of like a mixing board at an audio studio, right. So if you picture like where your favorite band went to record their album, and you’ve got the audio engineer sitting outside behind the soundproof glass, and she’s sitting in front of a mixing board that has got about 10,000 buttons and knobs and stuff on and you look at it, you’re like, Whoa, that’s overwhelming. I wonder how she even knows, you know what, which ones to touch and tweak and adjust and whatnot. But she does. And when she wants to adjust the sound, she has a lot of little dials and knobs and sliders and things like that, that she can work with to customize the sound. And if she moves one, dial a bunch to the right, you know, twist it clockwise, then she won’t have to take another slider and adjust it down a little bit.
But I feel like our negotiations are very much like sitting in front of one of those mixing boards. You know, the seller says the seller points to one of the dials and wants to grab it and yank it all the way to the right. Meaning they want some extreme element in that way. And you go well, okay, I guess if we need to do that, then we can, but we’ll have to make some adjustments on other dials of the mixing board instead. So the dials are the things that you can adjust in order to move through this spectrum.
So on one end of the spectrum, you’ve got my price and your terms. On the other end of the spectrum, you’ve got your price, and my terms, but we can move our deal our negotiation across this spectrum by playing with those little dials a little bit. So here’s what I want you to sort of take away from that. When the seller tells you what is important to them, when they tell you what they want, don’t judge it. Don’t cringe and go, Oh man, I really wish that they didn’t want that price. Instead of having an initial reaction and possibly sort of shutting down mentally, and closing your mind and closing your eyes and ears to possibility. Instead of doing that, ask yourself this question. Well, if that’s what they want, then what other dials might I adjust in order to be able to give them what it is that they want?
So let’s just go through two simple and probably very relatable examples for you of a seller you might encounter and how you might think about applying the your price, my terms, my price your terms, thinking to that situation, and how you might think about adjusting the dials in a way that would allow you to give them what’s most important to them and still have it make sense to you. So let’s say that you are talking to a seller, and not surprisingly, you find that she is pretty fixated on a particular price. Now her house this is a little bit of a fixer, but she really wants $300,000 and she wants that because she saw property about a block away sell for that price. And she in her mind believes that her house and that house are perfect comps.
Now you don’t actually agree entirely with that you think that it’s not really perfect comp, you think that her property needs a little bit more work, you’re feeling like $270k is more the price you would want to be. So instead of though judging that and saying Oh, deal’s off, she wants $300k I can really only pay $270k instead of thinking that, you ask yourself the question, what other dials might I adjust in order to give her what she wants? So as you start playing with those dials and thinking about how can I move her along the spectrum, towards giving her the price she wants, but more with the terms that I want in order to facilitate that? You look at that, and you say, Well, if I were to adjust the interest rate downward that I was expecting to pay her for this seller financing note, then that starts to allow me to pay a little bit more for the property. So maybe you were thinking this was a 4% promissory note, interest rate kind of a situation. But you’re now feeling like well, you know, if she would do 3%, I could probably start to justify overpaying a little bit for the property.
Here’s the next thing. Maybe you start to play with the dial of interest accrual, you go back to her and you say, Well, I can give you that price that you would like, and I can use this particular interest rate that I can pay you. But as you know, the property is going to need a bunch of work before I can get it rented. And so what I’d like to propose is that you allow interest to start accruing 90 days after closing and that will give me the time I need to make the repairs I need in order to get it rented up so that the rent can make the payment to you. Right. So now you have deferred the accrual of interest by a whole quarter of a year at a lower interest rate. And these two things start to make a little bit more sense considering that you are paying a little bit more than you would like to pay.
And maybe the third thing you do is you say, Well, I was thinking that this might be a 10 year note. But if she really wants this higher price, then perhaps I can try to adjust the dial of the term length. And maybe this can be a 15 year note, instead of a 10 year note, which is better for me, because now I have this excellent loan in place for a longer period of time, I won’t need to worry about refinancing or selling this property for 15 years now instead of 10 years. And you look at that as a package and you say you know what? I could give her this price. It’s about 10% more than I think it should be. But it’s being compensated for by the fact that I’ve got a lower interest rate, deferred interest accrual and a longer term. And all of those things thrown into the blender together, make me feel like this deal is still one that makes sense for me. And it’s still something that gives her what she wants, which is most importantly, her price.
Let me give you just a second example. That’s kind of the opposite. This seller will call him Bob. Bob really wants his interest rate when he sells this property of 5.5%. Why? Because Bob’s brother in law, Roger, sold the property with a promissory note recently and got 5.5%. And so now it’s in Bob’s head, that that is the going rate for seller financing promissory notes, and he sure as heck not gonna let Roger get a better deal than he’s got. So he is fixated on 5.5%. And you’re thinking to yourself, that’s not exactly what I was hoping for. I feel like a much more reasonable interest rate here might be 4%. So this is quite a bit more than what I really wanted. But Bob is fixated on his terms, 5.5% interest rate. So instead of judging that and saying well, deal’s off, he wants 5.5% and that’s ridiculous, you asked yourself the question, what other dials might I adjust in order to give them more of what they want? And as you look at that, you say, Well, here’s a couple things.
The first and most obvious one is I’m going to need a different price. Now, Bob has not actually indicated he’s super fixated on price, he’s far more interested in getting this interest rate. So you’re thinking originally, that you could probably pay Bob about $400,000 for this duplex, but you haven’t talked to him about that price. And now that you know that the interest rate is the most important thing to him, you’re now thinking, well, maybe this is going to be more of a $350,000 purchase price proposal. And you’re also thinking, well, Bob wants five and a half percent interest. I can’t have an amortized loan at five and a half percent because the payments will just not be supported by the income on this property, especially at first. So now I’m going to negotiate an interest only interest rate instead, which keeps my payment much lower.
And I’m also going to negotiate a much longer term. Now, I might not choose to use that term because this interest rate isn’t that great. But I like knowing that I have the flexibility of a much longer run rate with much more affordable payments that are interest only. But primarily, what I’m focusing on is I’m negotiating down the price right now. And maybe I’m also negotiating that Bob repairs a couple things before closing, so that my overall price and the cash that I have to bring out of pocket to do this deal is less enough in a way that offsets the fact that I’m paying a higher interest rate than I would like to pay. Because chances are, I’m probably going to refinance this property sooner than later, because I don’t love the financing I’ve negotiated. But now I’m starting to love the price I’ve negotiated more. And those two things together, come into a package that I feel good about, and Bob feels good about. And now we have a deal.
So, in closing, the summary idea that I want you to take away with is just memorize this very, very simple, back of the napkin rule of thumb. When you’re the buyer, you can think, Seller, I’ll give you your price at my terms, or I’ll take my price if you want your terms. And while those are two extreme examples, the reality is the most of your deals will exist on the spectrum between those two polar opposites. And that is what the beauty is if you are a creative dealmaker, if you understand the dials you have to work with. If you have the patience and the people skills to continue to have this conversation with the seller, you will be able to adjust the dials on that mixing board. And you’ll be able to find the right spot in between the two poles of that spectrum where you’re getting enough of your price, they’re getting enough of their terms and vice versa that everybody feels good and now you’ve got a deal.
That’s it for today’s episode of Racking Up Rentals. So again, show notes for this one can be found at thoughtfulre.com/e102. Please do us a huge favor by hitting the subscribe button in your podcast app, and if you’d be so kind, just take two seconds to rate and review the show. Did you know that we have a Facebook group for Thoughtful Real Estate Entrepreneurs too? It’s called Rental Portfolio Wealth Builders and we would love to have you join us there. Just go to group.thoughtfulre.com and the magic of the internet will take you right to that page within Facebook. If you like this episode, please take a screenshot of it from your phone, post that to Instagram and tag us; we are are @thoughtfulrealestate. So I’ll see you in the next episode. Until then this is Jeff from the Thoughtful Real Estate Entrepreneur signing off.
Thanks for listening to Racking Up Rentals where we build long term wealth by being win-win dealmakers. Remember: solve the person to unlock the deal and solve the financing to unlock the profits.