Q: I live in a market that’s so hot that houses go on the market and get a close-to-full-price offer in less than a week. I can’t buy properties here for less than full value, and no one is willing to carry terms, since there are thousands of qualified buyers looking for houses. Do I just wait for the market to slow down, or what? S.R, Philadelphia
A: We all live in the hot market you describe, and have for a long time. The National Association of Realtors has been reporting record-setting sales for three years; mortgage money is plentiful; anyone who wants to work is fully employed in the tightest labor market this century. These factors add up to enormous competition among potential homeowners for properties in nearly every price range. Competition drives up prices, and a “seller’s market” results.
Yet, at the same time, real estate investors are buying properties for pennies on the dollar, negotiating low money-down seller financing, and generally prospering along with everybody else. Why are others making deals when you aren’t? I’d like to suggest that a large part of the reason might be that you’re looking at the wrong properties, and don’t have enough strategies in play for finding the right ones.
Obviously, a seller who has a nice-looking house in a decent neighborhood and months to sell is not going to agree to your 70% offer or carry sweet financing terms. Why should they? Your competition for this type of property—the homeowner wannabe—is ALWAYS going to outbid you, because they buy for different reasons (school system, aesthetics, love of the zip code) than you do. These sellers are always the most readily identifiable, since they generally list with agents, or at least put a “For Sale by Owner” sign in the yard. However, the obvious sellers are not the ones that the professional real estate investor in this type of market looks to deal with. Despite the good economic times, and despite the fact that many properties are selling for 100% or more of asking price within 30 days, there are still sellers out there with problems that make it impossible to sell quickly (or at least quickly enough to meet the seller’s needs!) or for full price. It’s these sellers that you need to work with, because, in solving their problems, you will be able to make a profit from their properties.
Don’t expect to find these folks through the multiple listing service. While the MLS is still my favorite way to find junker properties to flip, anything in half-decent shape is being aggressively marketed by agents to homeowner and investor clients. Instead, run ads. Distribute flyers. Write letters to people who have estate properties. Find ways to reach these sellers and let them know that you can help them. My last 4 deals involved 2 estates, a divorce, and a frustrated landlord, and were purchased via a loan assumption, a land contract, and two cash offers at 60% of value. Three of the 4 came from calls on an ad in the paper; the fourth was a referral from another investor. Investors in my market— even those with years of experience—have complained to me about the same situation you describe. Yet they’re still making deals. So maybe it’s a little tougher to find cooperative sellers than it was 10 years ago; as in every business, you just adapt your methods to the market. And by the way, things are slowing down. Interest rates are up, mortgage brokers are laying off salespeople, foreclosure rates are accelerating, and every major lender is opening a “short sale” department to negotiate lower payoffs on defaulted mortgages. There—that’s all the hint I’m giving you. Now get out there and make some hot market deals!