by Attorney William Bronchick
In real estate there is a saying that you don’t make your money when you sell, you make your money when you buy. The name of the game is finding amazing deals and then keeping them for the long term or turning around and flipping for a handsome profit. Of course, if great deals were that easy to find, everybody would be doing it. The forces of supply and demand would inflate the price of properties to the point that there would be no deals left! Naysayers claim that this is true of today’s housing market, but in reality, there are endless deals to be found almost anywhere at almost anytime. Finding these deals takes experience and talent, but this article serves as a head start for novice investors, or a refresher course for old pros.
Distressed Owners Make for Distressed Properties (And Vice Versa)
What is a great deal? Quite simply, it’s when you buy a property for well below its actual value and/or with favorable terms. The only way this can happen is for the seller to be ignorant of the market, completely uninterested in profit motives, or extremely motivated to sell. Your chances of making a career out of finding homes owned by people who don’t know any better or who don’t care are slim, so it’s best to concentrate on identifying motivated or “distressed” sellers. After all, only someone who absolutely needs to sell is going to price his or her home well below market value and/or accept unusual financing arrangements. These are the ingredients of a great deal!
So what makes a person a motivated seller? Divorce, death of a relative, job transfer, and serious financial distress are the items that top the list. While you might feel guilty for “taking advantage” of people in such a situation, you shouldn’t. After all, they need to sell – you are helping them! You and the seller are finding a mutually agreeable price point and terms. You are getting a great deal and they are unloading a headache. It’s a win-win situation.
How to Find Distressed Sellers
The first place to look is the newspaper. Don’t bother searching through the fancy ads with pictures placed by real estate agents; go right to the classifieds instead. Look for listings with “for sale by owner” in the text, or that appear as though they are being sold without an agent. Technically, real estate agents must state that they are agents in all advertising materials, but the less scrupulous ones frequently disobey this rule. Also look for key phrases such as “must sell, fix-up, needs work, vacant,” and of course, “motivated sellers” (although agents often advertise “motivated seller” when in fact their client isn’t all that motivated!). Be prepared to make a lot of calls and not to spend much time with each seller – finding deals is a numbers game, and you have to make a lot of calls to find that one special deal.
But you shouldn’t limit yourself to FSBOs (homes that are “for sale by owner”). Instead, draft a letter on professional letterhead and fax it to all of the real estate offices in your area. Explain that you are a real estate investor looking for distressed properties and that you can close quickly if the price is right. This way, you can have an entire army of real estate agents working for you, free of charge. If one of them finds a property for you, the seller of the home will pay the agent’s commission. You owe them nothing, it comes off the seller’s side.
Another idea is to call the owners of rental properties and offer to buy. Many income property owners are reluctant landlords and will certainly entertain the offer. If they say no, leave them your name and phone number and tell them to call you if they’re ever interested in selling.
Finally, you can place your own classified ad. A simple headline like “We Buy Houses for Cash” works best. Don’t worry that other investors use the same ads, it’s a numbers game. Sometimes people will sell to you because they like the way you sound or they trust you over your competitor. How many advertisement do you see in the paper for mortgage companies, car dealers and retail stores selling the same product? There’s enough business to go around, and so long as you get the phone ringing, you’ll learn to get good at converting them into deals.
By knowing what you’re looking for – distressed owners – and following these strategies, you will already be way ahead of most beginning real estate investors. It takes work, and lots of it, but the rewards are worth it.