Hey guys, Sean Terry here. So I recently received the question on how to cancel a contract. So now you’re in contract with a seller and for some reason you can’t sell the property and you want to cancel. So I’m going to be answering that question right now. So if you could do me a favor, press the like button, subscribe right now because I’m going to give you not only a way to make money on a potential canceled contract, but also get you out of the contract too. So you can do that.
So here’s the thing. First off, number one is what I’ve realized in real estate was from doing this now for is for the last 17 years and doing thousands of houses is that when it comes to real estate is that price drives everything. So if you have a deal and it’s not moving and you’ve got eyeballs on it and you have buyers looking at it and you can’t get the property sold for whatever reason, it’s primarily due to price unless it’s in Flint, Michigan, you’re getting it for $1000 and it’s impossible to sell.
Now we’ve run across properties like that before, but the majority of properties across the country it’s pricing. If you modify the pricing, you can get that property sold. So let’s talk about that real quick, then we’re going to talk about the contract and the verbiage and then we’ll talk about canceling the actual deal. So what if you got a deal and you want it before you cancel, you want to modify the price. So how do you do that? Well, first off you have buyers. You want to get eyeballs on the property. You want to get as many people to see the property and you want to get feedback and you want them to make an offer.
So let’s say theoretically you have the property out there for 150,000 and you hear you send people over there and they just they’re like, ” … I don’t know. I just can’t make the numbers work. It doesn’t work.” You want to solicit offers from the buyers. You just want to get them to give you a number. So at our Monday morning meetings, we have our dispo team and then they say, “I got five people in there. We just can’t get the property sold.” And I say, “Great. What’s our highest and best offer?” “Well, we haven’t got any offers from it.” “Well, go find the offers. Have the buyers tell us where they need to be on the property.”
So let’s say you’re at 150, but then you go back and you call all the potential buyers that looked at the property and they say, “Honestly, we need to be around 130, 135 to make our numbers work.” Okay, well guess what? Maybe that’s market value. Maybe you missed the mark slightly and now that real market value is 130, 135.
So now what you do is you go, “Hey, listen, Mr. Buyer, okay, I’m going to go back and I’m going to negotiate with a seller. And I’m going to try to get you that 135 price. If I can get you that 135 price, I want to know for 100% that you’re going to commit and you’re going to be able to close on it. Can you commit to close on it if I can get you 135? Okay, great. So what I’m going to do is I’m going to send you a purchase contract right now. And if you could just sign it for the $135,000 price, I’d like to get that. As soon as I secure that price for you, then we can go open up escrow, you can send your earnest money and we can be off to the races. So let me go back. I’m going to go back to talk to the seller and then I can see if I can negotiate.”
Now, what you’re going to do now is go back to the seller and you’re going to negotiate. Now, all the feedback that comes from the buyers you’re going to use to negotiate with the seller. It might be the age of the roof. It might be the interior needs a complete renovation. We have a fire damage house in it. It needs a lot more work than was anticipated on the fire damage. It could be whatever the case may be. It could be the location of the property, it’s around a bunch of rental properties and the rents aren’t good in that area for whatever reason. Or it’s on the wrong side of the train tracks if you heard that one before.
So whatever the reason might be, you want to use that, whatever the objection is from the buyers, and use that to negotiate with the seller. So then you go back to the seller and you’re going to give them two options. Number one, you’re going to say, “Hey, listen, Mr. Seller, talking to our investment team about your property, talk to our funding partners. After looking at it and doing our due diligence through our inspection period, we’re at a point right now where 150,000 is not feasible. It’s not feasible for us as an investment to move forward. So we’ve got two different options, Mr. Seller. We can move forward and close the property next Friday at a 125 purchase price. Or I can send you a cancellation notice. I can do a 125 and close it next Friday or a cancellation notice, which would you prefer?”
And that’s called the closing question. And now you shut up and you let them answer. So now about 80% of the time, they’re going to pick the closing next week. It’s called the bird in the hand. And about 25% of the time, they’re going to want to cancel the contract. And then you’re going to say, “Well, let me ask a question. Where do you need to be to get the deal done today?” And they might say, I can’t do 125, but I can do that 130.”
Well, guess what? Now you’re delivering at 135. At 130, you’re still going to make five grand on the deal. They might say, “Forget it. I’m not selling it less than 150.” And now you can cancel the contract and then you’re out. You tell the buyer, “Couldn’t negotiate, deals dead.” Now, that’s your two options and that’s how we negotiate with the seller and potentially save a deal. 80% of the time, they’re going to be, “Let’s close Friday. Let’s get the deal done. This way it works.”
Now, what if it comes down to the point you have to cancel the contract because it can’t sell it, they’re not going to negotiate, then what do you do? Well, you come back and you send an email with a document, it’s a cancellation notice. And that cancellation is essentially an addendum that references the property, references you the buyer, the seller name on there, the date and the buyer elects to cancel this property during the inspection period. Because after inspecting the property, it’s not financially feasible as an investment, and then date it and sign off on it.
And that is because the way our contracts are structured, the way we have an inspection period, we typically do a 30 to 45-day inspection period and you can cancel at any time, no harm, no foul during that inspection period. So all you got to do is in a letter or an addendum or an email, you can send out that you’re going to cancel based upon your inspection period, the property’s not feasible and I want out. And especially if you approach them with I got option one or option two and if they pick option two, well, guess what? There’s a cancellation notice. And it makes it very easy to be able to do that because they’re the ones picking to cancel because they don’t want to negotiate the deal.
So that is how we handle situations. And we get properties all the time that we get it under contract and it’s too high of a contract. And we find out market value from talking to the buyers is lower, then we have to go back and negotiate. It happens. It’s part of the business, especially when you’re doing deals nationally and knowing how all these little markets, you don’t really know actual market value until you get five people in the house. And now you get offers come in and they’re all around the same number. You know you missed your mark if you’re at 150 and you got people coming back at 130, 135, you know you missed your mark on pricing. So guess what? Now you have to go back and renegotiate.
So it’s part of the business. It happens in the normal real estate world. My wife’s a realtor. They have buyers that go through, they do their inspection, they do all this stuff and they come back for a price reduction. Or guess what? They need something fixed. Now I know in 2021 it’s crazy. The market’s nuts, inventory is low, but that is part of the business. So if you like that and you think that helped, we got more posts coming. So we’ll talk soon. Have a great time out there. Talk to you. God bless.
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