As investors, we buy properties one of two ways: cash or terms. If we use cash, the property has to be sold at a significant discount on the current market value. Remember, we create profit when we buy the property, and we receive the yield when we sell it. To the seller, a cash deal means that we agree on a price, and regardless of where we get the cash, the seller receives the agreed upon amount. A terms arrangement usually means the seller is participating in some aspect of our financing. Knowing the seller’s needs will help you determine what terms the seller is likely to accept.

We first need to be sure we are working with a motivated seller. If the seller is not motivated, there is no reason that they would be interested in accepting a significant cash discount or terms arrangement. If you are working on a terms arrangement, it is imperative that the seller trusts you. When you find a motivated seller, find some common ground and begin to build a rapport. This will enable you to begin to discover what the seller wants, what they truly need, and where they may have flexibility. This is the knowledge you will use to create an offer the seller is likely to accept.

Through conversations, find out if the seller needs the money from the sale up front or not. For example, if the seller lives in the house you are trying to buy, he or she may need the proceeds for the down payment to purchase a new home. If so, the seller will be looking for a cash offer and his or her situation, debt, and time frame will determine how motivated they are to consider your below-market cash amount. If the seller is going to buy another home whether the one he is in sells now or not, if the property is vacant, or if it is a rental, he may not need all the money from the sale up front and a terms arrangement might be agreeable.

Creative financing comes into play when you are using terms to acquire property. There are numerous ways to structure an offer using a combination of alternatives to cash, such as promissory notes, deferred payments, reduced real estate commissions, lease with purchase option, land contracts, simultaneously selling off part of the property, cross-collateralizing, sweat equity, trading services or products, loan assumptions, wrap-around mortgages, or subordinated mortgages.

Negotiating the terms is a matter of understanding the seller’s needs, combining them with what makes the deal work for you, and presenting the information in a way the seller perceives the value and the benefit to him as well. Keep in mind, a seller’s perception is his reality—he must be able to see how the terms meet his needs.

Many investors use a Letter of Intent (LOI) to outline the major points of a purchase under which the buyer and seller may enter into negotiations. It is intended as a starting point, not as a binding contract. Make sure your form or letter is written in a way that clearly makes this point, and have your attorney review it. A LOI basically says, “I’d like to purchase your property for this amount under these terms. Would you like to talk?” Using a LOI allows you to gauge a seller’s interest. It is an easy form of communication and response, and it does not have to be prepared by an attorney. However, it does not take the property off the market, and the seller may use it to counter another offer from another buyer. It may also delay entering into a formal purchase and sale contract, although including an agreement to enter into a formal contract within a certain number of days may help minimize that disadvantage.

The formal agreement for Offer and Acceptance or Purchase and Agreement will create the binding agreement with specific terms and contingency clauses after the buyer and seller both execute the contract. General practices, forms, and requirements vary from state to state, so be sure to consult with the appropriate Power Team members in the area in which you invest. Making offers and receiving counteroffers may be necessary before coming to a final agreement. Keep in mind that if an offer is rejected and a counteroffer is presented, that deal is still up for grabs to another buyer until there is an acceptance. Make sure everything is spelled out in writing along the way. In real estate, if an agreement is not in writing, then it does not exist!