Closing the Deal
Once offers begin to come in, be ready to negotiate. Even if the offer is at the asking price you can counteroffer, especially if you have multiple offers on the table.
When a buyer makes you an offer on your property, you have three options: You can accept the terms as they are, you can counteroffer and modify some of the terms or you can reject the offer and walk away.
Counteroffers are used most often. It’s like a tennis match between you and your prospective buyers. Each ball that comes back to your court will tell you something. Are the buyers digging in their heels on the price? If they are not moving on the price or are moving slowly, you need to either accept their price or reject it. After one or two back and forth communications with little price movement, the buyer will not move. At this point it’s up to you to accept or reject their offer.
Remember to try to figure out the buyer’s motivations for buying your property. If you understand these, you may be able to negotiate terms other than price. You can shorten the timelines for inspections and closings. You can also try to get them to pay transfer taxes or title fees that might ordinarily be for the seller. Ask them to cover a certain amount of repairs that might come out of inspection. There are lots of ways you can make the offer better for you without renegotiating the price.
During the negotiations, keep your emotions in check and don’t take anything personally. Once a contract is signed, you might still need a favor prior to closing and you don’t want to be dealing with an angry buyer because you were unpleasant before.
If you have several offers on the table you can use this to your advantage by playing them off of each other. Going back to each potential buyer and telling them you need higher and better offers gives them a chance to increase their offer price and reduce or remove contingencies. Set a date and time for when you will accept the highest and best offers. If someone is actually interested in the property, they will respond on time.
When you have collected all of your offers be sure to consider all the contingencies in addition to the offer price. Contingencies, such as a closing conditioned on the sale of another home, can cause problems. If you have an offer for less that does not have this type of contingency you should seriously consider it.
Don’t rush through negotiating a contract, but also do not drag it out too far. Ideally, the process should take two or three days. If it’s longer than that, buyers can lose interest and decide you are difficult to deal with. Make sure that whatever you agree to is in writing and that both parties sign the agreement of sale.
Closing Costs and Taxes
Make sure you are aware of the seller's closing costs. How will they affect your bottom line? You will also owe the government money from this transaction. Do you know how much?
Closing costs can add up to a significant amount for both the buyer and the seller when the real estate title is transferred. Usually, the seller will need to pay a real estate broker’s commission, closing fees, title fees, a portion of transfer taxes and all unpaid school and real estate taxes accrued during their ownership period.
Some other unanticipated costs, mostly fees, can also cut into your bottom line. Be prepared to be responsible for lien releases, mortgage prepayment penalties, recording fees, notary fees, escrow fees, attorneys’ fees and repairs. Many agreements of sale will include seller concessions, which will also appear as fees.
Fees vary greatly from state to state, and can even vary within states so it’s impossible to estimate their costs. Be warned that they can be significant. If you have a real estate agent, ask them from the beginning to estimate your all-inclusive closing costs. Be aware of what the estimate contains, so you can adjust the estimate as you negotiate over various contingencies with potential buyers.
You should also find what your tax liability will be from the sale as soon as possible. Some states require that a certain amount of the profits be held back from settlement for all out-of-state sellers. Other states require that the title companies report profits. As the seller, you will have tax liability at both the state and federal level for any profits made from your flips. It’s best to go over this with a local accounting professional who has real estate experience, as they will know about the tax laws in their state and locality.
An agent always gets a cut of the sale. What is the right percentage? Should you negotiate it down?
Depending on where you are in the US, real estate agents typically get paid between 5% - 7% of the selling price of a property. You will need to do your own research to see what the appropriate rate is in your area. Generally, the seller pays the agents’ commissions, and if there are both a buying and a selling agent, the commission will be split between them. You need to remember that although it seems like a lot of money, the agent does not get paid anything for her work until the property has successfully sold.
You may want to negotiate a lower commission for the agents, but that is not always a good idea. If an agent has a few properties to show a buyer, is she going to push the one where she will get paid less? If an agent has a number of listings that need open houses, is she going to spend her Sunday afternoon at the property that will pay her the least of all her listings? Of course not. Negotiating a lower commission may save you some money on paper, but in reality, it may cost you good offers due to the agents’ inattention.
If you really want to get an agent’s attention, offer a bonus for selling the property. Increasing the commission even 1% can get the attention of both the buying and selling agent, and may result in a faster sale for you.
Sign the paperwork to transfer the file. Make sure there are no errors. What do you do if there are? Do you need a lawyer? What does the title company do at closing?
In simple terms, the closing is when the buyer gives the seller money in exchange for the property deed. The buyer and the seller should attend the closing, along with, their real estate agents, a closing agent and their attorneys (if that is customary in your part of the country).
If an attorney is not attending with you, make sure to get all of your closing documents ahead of time. If you are new to this or you are experienced but this transaction is more complicated than normal, make sure to review all of the documents with your attorney prior to closing so that you know what you are signing and agreeing to.
There will be a disbursement sheet that breaks down the costs paid by the buyer versus the seller. It should show how much money the buyer needs to bring to the closing table and how much the seller should walk away with. Make sure the allocations are correct and that they conform to the terms of the agreement of sale. You need to make sure that you are getting what you are entitled to.
When the closing is completed and the documents are signed, make sure that the amount on the check you walk away with matches what is due to you on the disbursement sheet. If it doesn’t, don’t walk away until it matches. The disbursement sheet is a legal record of the transaction and needs to be accurate.
The title agency you are dealing with will have already reviewed the title history of the property and hopefully cleared any existing title issues. They are the party that will actually schedule the closing. The title agent will be the one making sure that all of the figures match, collecting appropriate signatures and notarizing and issuing checks. Be polite to your closer, they can make the closing go smoothly or make it a nightmare. The title company will also be responsible for recording the deed to the property with the local government and the buyer’s mortgage with the bank.
Closings can take a ridiculous amount of time if all the properties are unprepared. Getting as much as you can ready ahead of time and knowing what to expect will make it an easy experience for everyone involved. Once you have that check, celebrate all your hard work.