In real estate—unlike the stock market—you not only make money
when you sell, you can make money when you buy. In the stock market,
you can’t buy a stock for less than its market value.
In real estate these transactions occur every day. If the shares of General Motors are selling at $47 each, no investor would tell Merrill Lynch to try to find a GM shareholder who will part with 100 shares at $40 each.
But if you want to buy a $250,000 house or apartment building for $200,000 to $225,000, it’s possible that you can locate a seller who will oblige you.Why Properties Sell for Less (or More) than Their Market Value To see why you can buy properties for less than they’re worth, you need to dig deeply into the meaning of the term “market value.”
Under market value conditions, a property sale meets these five criteria:
- Buyers and sellers are typically motivated. Neither is acting
- Buyers and sellers are well informed and knowledgeable
about the property and the market.
- The marketing period and sales promotion efforts are sufficient to reasonably inform potential buyers of the property’s
availability (no forced or rushed sales).
- There are no special terms of financing (e.g., very low down
payment, bargain price, below-market interest rate).
- No out-of-the-ordinary sales concessions are made by either
the seller or the buyer (for instance, sellers are not permitted
to stay in the house rent-free for three to six months until
their under-construction new house is completed).
As you think through this description of market value, you will realize that owners who are in a hurry to sell may have to accept a price lower than market value. Likewise, an owner-seller (FSBO) who doesn’t know how to market and promote a property will not likely receive top dollar.
Or, say, the sellers live out of town and don’t have accurate information about recent sales prices. Or maybe the sellers don’t realize that their property (or the neighborhood) is ripe for profitable improvement.
In general, we can place those owners who will sell at a bargain price into eight categories. Owners in Distress Every day property owners hit hard times. They are laid off from their jobs, file for divorce, suffer accidents or illness, experience setbacks in their business, and run into a freight train of other problems.
Any or all of these calamities can create financial distress. For many of these people, their only way out of a jam is to raise cash. If that means selling their property for “less than it’s worth,” then that’s what they’re willing to do. For these people are not just selling a property, they are buying relief.
Under these circumstances, as long as the sellers believe they have gained more from the sale than they’ve lost, it’s a win-win agreement for both parties. If you are willing to help people cope with a predicament—as opposed to taking advantage of them—seek out distressed owners.
On occasion, they will give you the bargain price (or favorable terms) you want.
The “Grass-Is-Greener” Sellers
One day Karla Lopez was sitting in her office and in walked the executive vice president of her firm. “Karla,” she said,“Aaron Stein in the Denver branch just quit. If you want his district manager’s job you can have it.
We will pay you $25,000 more a year plus a bonus. But you have to be relocated and on the job within 30 days.” “Do I want it?” Karla burst out. “Of course I want it. Hope for a promotion like this is why I’ve been working 75-hour weeks for these past four years.” Will Karla Insist on Top Dollar?
Think about it. In this situation, does Karla think,“Well, the first thing I must do is put my house up for sale and go for top dollar”? Hardly. More than likely Karla will be willing to strike a deal with the first buyer who gives her any type of offer she can live with. Karla’s got her eyes on the greener grass of Denver.
Optimistic about her career and facing a time deadline, first and foremost,Karla simply wants to get her home sold as quickly as possible. Grass-is-greener sellers stand in contrast to the financially distressed.
Whereas distressed owners sell on bargain terms or price to relieve themselves of pain, grass-is greener sellers are willing to accept a less than market-value offer so they can quickly grab better opportunities that lie elsewhere.
Even Pros Give Bargains Sometimes On one of several occasions where I have been a grass-is-greener seller, not only did I give my buyers a slight break on price but, more important from their perspective, I let them assume my below-market-rate first mortgage and carried back an unsecured note for virtually all of their down payment.
On at least a dozen occasions, I’ve bought from sellers who were eager to pursue better opportunities elsewhere. Each time, I negotiated a good (if not great) price and favorable financing. If looking for distressed owners doesn’t appeal to you, turn your search in the opposite direction:
Sellers who want to graze in greener pastures (especially under a time deadline) are frequently the easiest people to work with and the most accommodating in price and terms.
When shopping for bargains, you also can find good deals among stageof-life sellers. These sellers are typically people whose lifestyle now conflicts with their property.
They may no longer enjoy keeping up a big house or yard, collecting rent, or dealing with tenant complaints. They may eagerly anticipate their move to that condo on the fourteenth green at the Bayshore Country Club.
Or perhaps these sellers would rather not go through the trouble of updating and repairing their current property. Whatever their reasons, stage-oflife sellers are motivated to get on with their lives.
In addition—and this circumstance makes these sellers good prospects for a bargain price or terms—stage-of-life sellers typically have accumulated large amounts of equity in their properties.
Plus, because they’re older, they have accumulated savings and don’t need cash. Stage-of-life sellers can be flexible. They don’t need to squeeze every last penny out of their sale. Good Prospects for OWC Given their financial well-being, stage-oflife sellers make excellent candidates for some type of “owner will carry” (OWC) financing.
Not only will OWC terms help them sell their property more quickly, but an installment sale can also reduce or postpone the capital gain taxes that a cash sale might otherwise require.
As another advantage, OWC financing—even when offered at below-market rates—will bring the sellers a higher return than they could earn in a savings account, certificate of deposit, or money market fund (or perhaps even stocks).
My Early Strategy As a college student who wanted to invest in realestate, I sought out stage-of-life owners of rental houses and small apartment buildings. These people were tired of managing their properties. Yet, at the same time, they liked a monthly income and didn’t want to settle for the meager interest paid by banks or take on the risks of stocks.
They also didn’t want to sell their properties outright for cash and get hit with a heavy tax bill for capital gains.Their solution: Sell on easy OWC terms to an ambitious young person who was willing to accept the work of rental properties in exchange
for an opportunity to start building wealth through investment real estate. This technique remains valid today. Because properly selected, wellmanaged rentals will pay for themselves, an investor who is willing to work may be able to draw on ambition and perseverance instead of a large down payment, a high credit score, and strong qualifying income.
Seller Ignorance Some sellers underprice their properties because they don’t know the recent prices at which similar properties have been selling. I confess that as a seller, I have made this mistake of selling too low because I was ignorant of the market.
In one particular case, I was living in Palo Alto,California. The rental house I decided to sell was located in Dallas, Texas. A year earlier, the house hadbeen appraised for $110,000, which at the time of the appraisal was about right. So I decided to ask $125,000.
I figured that price was high enough to account for inflation and still leave room for negotiating.
The first weekend the house went on the market, three offers came in right at the asking price. Immediately, of course, I knew I had underpriced. What I didn’t know but soon learned was that during the year I’d been away, home prices in that Dallas neighborhood had jumped 30 percent.
After learning of my ignorance, I could have rejected all the offers and raised my price. Or I could have put the buyers into a “bidding war.” But I didn’t. I just decided to sell to the person with the cleanest offer (no contingencies). I was making a good profit; why get greedy?
I love to buy from cranky landlords. These are the type of rental property owners who still think they’re living in feudal times. These owners persistently battle their tenants. They complain, complain, complain.
Eventually, they end up hating the whole idea of investing in real estate. These owners see landlording as nothing but trouble. They want out.At that point, they’re nearly always willing to give in to a lowball offer in exchange for getting rid of their perpetual headaches.
(Whoa, you say, “Is this what I’m getting myself into? Trouble,headaches, and battles with tenants?” No, not at all. That’s because in Chapter 18, you will learn the 12 secrets of successful landlording—actually I even detest the term landlord.That title no longer fits the modern, enlightened owner of rental properties.)
Preserve the Lender’s Image and Balance Sheet Banks, government agencies (FHA, VA), and the government-chartered mortgage companies such as Fannie Mae and Freddie Mac often become “don’t wanters.”
When their mortgage borrowers fail to pay back their loans, these mortgage lenders often end up with foreclosures on their books (called REOs, which stands for real estate owned). Lenders Want to Mitigate Their Losses Once lenders take back a property in foreclosure, they switch their thinking.
They no longer focus on making money. Instead, they want to get rid of these REOs on prices or terms that will cut their losses. (Banks often name their REO departments “Loss Mitigation.”)
That’s where you come in. Because a pile of foreclosures hurts the lender’s image with regulators and depresses its balance sheet with “reserves for bad debts,” lenders will frequently give investors good deals to take these properties (or delinquent loans) off of their hands.
Multiple Investor Opportunities As you will see in Chapter 10, when you learn how the total foreclosure process works in your state—the foreclosure process is governed by state law—you can play and win the foreclosure game with a variety of approaches. For beginning investors who are willing to put in the effort, lender foreclosures offer great opportunities to snare below-market deals.
Who are the possibility-impaired? This type of owner confuses his diamond in the rough with a lump of coal. These owners don’t see the potential that their property offers. Why? Several reasons explain this infirmity.
◆ The sellers are out of touch with what features buyers (renters)
◆ The sellers lack the capacity to imagine and create.
◆ The sellers have lived with the property so long that they have
come to accept their property’s shortcomings.
◆ The sellers don’t know that the local zoning and building regulations actually permit a higher and more profitable use for the
This short list does not even come close to exhausting the reason people miss the opportunities that lie before them. As the best-selling author,Wayne Dyer, says,“You must believe it to see it.” Because the possibility-impaired don’t believe their property offers great potential, they never even think to look.
1 Don’t Dilly-Dally with Due Diligence
Although good deals go fast, don’t jump in before you’ve checked to see whether there’s water in the pool. Always remember that not all bargainpriced properties represent good deals.
You have scored a good deal only if you can sell the property for substantially more than you have put into it. Beware of underestimating fix-up expenses. Beware of hidden defects. Beware of environmental problems (e.g., lead paint, underground oil storage tanks, asbestos, contaminated well water).
Beware of pouring so much cash into improvements that you’ll have to overshoot the rent level that tenants are willing and able to pay.Always temper your eagerness to buy a bargain-priced property with a thorough physical, financial, market, and legal analysis.
Especially in cases of low- or nothing-down seller financing, many beginning investors grab at a “great” deal without first putting it under a magnifying glass. Act quickly when you must. But the less you know about a property, the greater your risk.
The Disclosure Revolution
Most states now require certain types of sellers to complete a disclosure statement that lists and explains all known problems or defects that may plague a property.
But even if your state doesn’t yet mandate seller disclosure, you still should obtain a disclosure form (most major realty firms keep blank copies on hand) and ask the owners to fill it out.
In reviewing a completed disclosure statement, however, keep in mind the following five trouble points:
- Sellers are not required to disclose facts or conditions of which they are unaware.
- Disclosure reveals the past. It does not guarantee the future. By completing the statement, sellers do not warrant the condition of the property.
- Many disclosure questions require somewhat subjective answers. Are playing children a neighborhood “noise” problem? Is a planned street widening an “adverse” condition?
- Disclosure statements may not require sellers to disclose property defects that are readily observable.
- Pay close attention to any owner (or agent) statements that begin,“I believe,”“I think,”“as far as we know,” and other similar hedges.
Don’t accept these answers as conclusive. Follow up with further inquiry or inspection. Seller disclosure statements help alert you to potential problems. But even so, independently check out the property to satisfy yourself that you really know what you are buying.
Excluded Income Properties Many seller disclosure laws apply only to 1–4 unit owner-occupied properties. If you’re buying an investor-owned property or an REO, the law may not require the seller to fill out a disclosure statement.
If the seller does refuse, offset your additional risk by scaling down the top price you’re willing to pay. Also, toughen up your prepurchase inspections.
Additionally, when buying income properties,verify rental income and operating expenses. Ask the sellers to sign a statement whereby they swear that the income and expense figures that they have reported to you stand true. Beware of owners who put friends, relatives, and employees into their buildings at inflated rent levels.
These tenants don’t really pay the rents stated (or if they do, they get kickbacks in cash or other benefits), but their signed leases sure look attractive to unsuspecting buyers. How to Find Bargain Sellers Okay, now you’re ready to start finding these potential bargain sellers.
Here are five broadly defined techniques:
- Newspapers and other publications
- Cold calls directly to owners
- Real estate agents
- Information highway
Some time back I was leaving the country for several years and decided to sell my house with a minimum of hassle. Coincidentally, the Ph.D. student club at the university where I was teaching was looking for a faculty member to host the upcoming faculty-student party.
Aha, I thought, what better way to expose my house to more than 100 people? So I volunteered. The week following the party, I received two offers and accepted one of them. The buyers got a good price and excellent financing.
I avoided the hassle of putting the property on the market and did not have to pay a real estate commission. Everyone involved was satisfied. This personal example shows the power of networking.
What’s surprising, though, is that so few buyers and sellers consciously try to discover each other through informal contacts among friends, family, relatives, coworkers, church groups, clubs, business associates, customers, parent-teacher groups, and other types of acquaintances.
So don’t keep your search a secret. Tell everyone you know. Describe what you’re looking for. Why search alone when you can enlist hundreds of others? Newspapers and Other Publications When most people look for real estate, they browse the real estate classifieds with a highlighter, call owners or Realtors, get basic information, and, when something sounds promising, set up an appointment.
While this method can work reasonably well, it also can fail for two reasons:
(1) if a property isn’t advertised, you won’t learn about it, and
(2) if the ad for a property you might be interested in is not written effectively,
you may pass it by without serious notice.
Try Running Your Own Ads To at least partially overcome these drawbacks, run your own advertisement in the “wanted to buy” column.When you describe the type of property and terms that you’re looking for, you invite serious sellers to contact you.
When I began buying real estate, I used this technique to locate about 30 percent of the properties I bought. As another way to use the newspaper, read through the “houses for rent,”“condos for rent,” and “apartments for rent” ads. Not only will this research help you gauge rent levels, often you’ll see properties advertised as “lease-option” or “for rent or sale.”
These kinds of ads generally indicate a flexible seller Look Beyond the Classifieds To search for potential bargain sellers in the newspaper, go beyond the classified real estate ads. Locate names of potential sellers from public notices: births, divorces, deaths, bankruptcies, foreclosures, or marriages.
Each of these events can trigger the need to quickly sell real estate. If you contact these owners (or their heirs) before they have listed with a sales agent, you stand a fair chance of buying at a bargain price. (In addition, you might subscribe to the “default” or “foreclosure” lists and newsletters published in your
Cold Calls Directly to Owners
To learn successful cold-calling, follow the techniques of Realtors. Most successful real estate agents develop listing farms. A listing farm represents a neighborhood or other geographic area that an agent consistently cultivates to find sellers who will list their properties for sale with that agent.
Agents who cold-call typically telephone property owners with names gathered from a crisscross directory, walk the neighborhood, talk to residents, circulate flyers by mail or doorknob hangers, and take part in neighborhood or community-sponsored events.
By cultivating a farm, an agent hopes to become well known in the area. An agent positions himself or herself to be the first person property owners think of when they contemplate a sale.Take a lesson out of the real estate agent’s playbook. Cultivate a farm in the neighborhoods or communities where you would like to buy.
Circulate a flyer, for example, that reads: Before you list your home for sale, please call me. I am looking to buy a property in this neighborhood directly from the owners. Let’s see if we can sit down together and work out an agreement that will benefit both of us.
When property owners learn how they can save time, effort, and money selling direct, they may be willing to offer you a favorable price or terms. Vacant Houses and Out-of-the-Area Owners Your farm area will include some properties (vacant or tenant-occupied) that are owned by people who do not live in the neighborhood.
These owners may not see your flyers, nor will they be listed in a crisscross directory. To learn how to reach these potential sellers, ask neighbors of nearby properties or talk directly with the tenants who live in the property.
If this research doesn’t reveal the owners’ names and addresses, you can next contact the county property tax assessor’s office. There you can learn where and to whom the property tax statements are mailed.
It’s not unusual to find that out-ofthe-area property owners are actually “sleeping sellers.” That is, they would like to sell, but haven’t awoken to that fact. With luck and perseverance, you could become their alarm clock.
Expired (or About to Expire) Listings For any of a number of reasons, many properties listed with real estate agents do not sell during their original listing period. When this situation occurs, the listing agent will try to get the owners to relist with his or her firm.
And quite likely,agents from other brokerage firms also will approach the sellers. However, here’s what you can do to cut them off at the pass and perhaps arrange a bargain purchase.
When you notice a listed property that looks like it might fit your requirements, do not call the agent. Do not call or stop by to talk to the owners. Instead write the owners a letter stating the price and terms that you would consider paying. Then ask the owners to contact you after their listing has expired.
(If a seller goes behind his agent’s back and arranges a sale while the property is listed, the owner is legally obligated to pay the sales commission.)
An example: Sellers have listed their property at its market value of $200,000. The listing contract sets a 6 percent sales commission. The sellers have told themselves that they will accept nothing less than $192,500, which means that after selling expenses they would receive around $180,000.
You offer $175,000. Would the sellers accept your offer? Or would they relist, postpone their move, and hold out for $5,000 to $10,000 more? It would depend on the sellers’ finances, their reason for moving, and any other pressures they may face.
But you can see that even though your offer is low relative to the market value of the property, your price gives the sellers almost as much as they could expect if their agent found them a buyer.
(Naturally, your letter would not formally commit you to the purchase. It would merely state the price or terms that you have in mind.)
Real Estate Agents
Do not conclude from the above technique that you should never use a real estate agent to help you find bargain-priced investment properties. A top agent can assist you in many ways. However, agents do deserve to
be paid for their services. So if you’re planning to buy at a bargain price or buy on bargain terms (especially with low- or no-down-payment financing), where’s the agent’s fee going to come from?
To pursue the best deal possible, at times you may have to forgo an agent’s services and do your own legwork. Cruise the Information Highway Today’s investors not only cruise neighborhoods, they also cruise the Internet to look for properties. Thousands of websites now list properties for sale.
Property buyers (or browsers) can access the Realtor’s Multiple Listing Service (MLS) through Realtor.com. There is also a budding entrepreneurial industry that is accumulating specialized listings of everything from foreclosures to distressed
properties to FSBOs.
Going online you can locate investors looking for money—or
Virtually all real estate information that in the past has been available from Realtors, public records, newspaper ads, newsletters, and other sources is now accessible on the Internet.
Nobody today knows exactly where technology will lead us tomorrow. But electronic shopping for real estate (and mortgages) has made the MLS book as obsolete as a slide rule. (For a listing of websites useful to real estate
investors, see the Internet Appendix. For a quick check of techniques
you can use to find owners who will sell at a bargain price