How to Find a Below Market Value Property
How to Find These Owners
So now that we know they types of owners who are most likely to be flexible with the price of their property its time to learn how to find a below market value property. We’ll start with an obvious but largely overlooked method for finding bargain properties.
Word of Mouth
Yes I know it should be obvious, but tell people you are looking to invest in property, ask them to keep an ear open for anything that sounds like it might be right for you. Ask who? Everyone, ask your friends, your family, your co-workers, the person standing in front of you in a line, the random drunk who sat himself down at your table last night when you were having after work drinks, it doesn’t matter who they are, they all have connections and it only takes one connection to give you the inside scoop. It’s not often you hear a friend tell you they have just bought a home they first heard about from another friend or a co-worker who just started working at her office. Due to the effectiveness of this technique it surprises me that so few people use it, but at the same time there is something
about human nature that is afraid or too embarrasses about asking for help.
So bite the bullet and ask, you don’t even have to ask just tell people you are looking and see how long it takes before you find out that your cousins, friends, co-workers daughters teacher’s grandmother is selling her old rental property and is willing to take the loan on herself.
Turning to the newspaper has been the bread and butter of the real estate market practically forever, you scan the For Sale section with highlighter in hand marking anything that looks promising. Then you spend the afternoon ringing lead after lead after lead until the disappointment and frustration becomes too much and you throw the classifieds into the bin before you’ve even exhausted your list. While this technique may work for some, for me it’s just an unwanted hassle that takes up too much of my time.
If newspapers are the way you want to go then a better option would be to write your own ad and place it in the Wanted To Buy column. Here you can outline exactly what it is that you are looking for, size, bedrooms, location, price. Smart sellers tend to start here when looking for a buyer—if they can sell a property privately they can save on sales commission—before approaching a realtor to professionally sell their property. Doing it this way the seller’s will actually call you, and if you have outlined precisely what you are looking for in your ad most of these leads will become possibilities that you can look into further.
Another trick to finding quality leads is to look under the rental column and look for something like “for rent or sale” or “for rent to sale” these types of ads are a good sign that the owner may be willing to sell you the property outright.
Looking Beyond the Classifieds
Another great section of your local newspaper you should keep an eye on is the Public Notices, in particular the births, deaths, divorces, bankruptcy and foreclosures.
These people see selling their properties as a way of moving on, whether is to sell a deceased parents home or to move to a larger home to accommodate a new born. While at first it can be difficult, feeling like your intruding in someone else’s private matters cold calling these sellers can be a quick and profitable method for finding available homes.
We’ve all flicked through the mail when it arrives and found a small pamphlet or postcard from a local realtor asking if we would like to take up an offer for a free property evaluation or if we are contemplating selling in the near future. Realtors do this to put their name, or at least the company name they work on behalf of into to into your mind so when you do decide to sell you will think of them or may have kept the pamphlet and call them as your first point of call.
The simple fact that realtors have used this technique the world over proves that it is a successful technique and one that you too can harness to improve the quality of the leads you receive. All you need to do is follow their example, write a short letter outlining exactly what is it that you are looking for and that you would love to purchase a home in the local area. Add that you would like to buy the property privately rather than going through all the added costs and hassles that come with working with real estate agents. Add your phone number and your email at the bottom of the postcard or pamphlet and print some copies—make sure you include an email, you can even create one especially for this task because some interested sellers will be too shy to call you but will be more than willing to send you an email and let you make the first real contact.
When you agree to let a realtor sell your property you are agreeing to give that realtor exclusive rights to seel the property for a specified time period, if the home is not sold prior to this time expiring you are free to find another agent, stick with your current one, hold onto your home or even sell it yourself privately. This agreement gives the realtor the confidence to market your home knowing that if they find a willing buyer you and the buyer wont come to a private deal and undercut the realtor.
If you find a home you are interested in but it’s currently listed by a realtor don’t despair, secretly slip the owner a note and wait. Because the realtor has exclusive rights to the property the owner cannot sell it without paying the realtor sales commission even if the owner finds the buyer themselves. If it can be proved that a buyer and seller were working towards a private sale at this time, even if the transfer does not take place until after the listing has expired the realtor is still legally entitled to commission.
All you have to do is send the owners a letter telling them that you are interested in purchasing the property and tell them how much you are willing to pay—offer a lower price than you are prepared to pay to leave room for negotiation. Also tell them that if the house does not get sold and the listing expires for them to contact you, impress upon them that they are not to contact you until the property is no longer listed.
If the house does not sell within the listing period the owner will have two choices they can either call you or relist the property and try again. The fact that you are a willing buyer should make you the front-runner because they could list the property again and still not sell it. Think about it, you are trying to sell your family home for $500,000 through a realtor who will accept a commission of 5% this is the lower end of the national average. This means that you will get $475,000 and the realtor will make a $25,000 commission on the sale. If someone privately offers you $475 000 for the home would you take it? Not only do you get what you were expecting but the buyer also wins because they have saved themselves $25,000 on the home. Of course the more astute buyer will offer them a lower price of say $450,000 and see what happens. The owner will either go for the firm sale thought it means selling for $25 000 less then they had hoped or they could relist the property with no guarantee that it will sell for the asking price or that it will sell at all. In this situation so long as you offer a fair price more times than not they will go for the firm sale and move on with their lives.
As with everything else in our lives properties can now be found on the internet. Not only do realtors have their own sites displaying available properties but there are also sites that show available properties from across the different realtors allowing you to search for everything from the comfort of one site. An added bonus of the internet age is that real estate sites are becoming more niche orientated, focusing on particular types of properties such as listing of foreclosure sits within a specific city and For Sale by Owner (FSBO) properties.
When a person files for bankruptcy the case it is put on the public record making publicly available all the properties that must be sold as part of the bankruptcy process.
The need to satisfy the creditors means that properties associated with bankruptcy are almost always heavily discounted.
You can access details of local bankruptcies from your local bankruptcy court where a quick skim of the papers will tell you if the proceeding will include properties.
While the media makes it seem like it is only the banks that are repossessing family homes, if you scratch the surface a little you will find a long list of government departments that can offer you a bargain if you know where to look.
Federal Saving and Loans Insurance Corporation (FSLIC)
Originally set up to insure deposits made at saving and loan association. When a saving or loan is failing the FSLIC steps in. Over time they become the owner of many unwanted properties that they need to sell.
The Federal Deposit Insurance Company (FDIC)
The FDIC is similar to the FSLIC but they insure deposits made at banks. Just like the FSLIC they end up with many properties from failed or struggling banks.
The Veterans Administration (VA)
They also insure some loans that are made by banks and mortgage companies. Once a loan turns sour the relevant bank or mortgage company takes possession of the unwanted property. These properties sometimes end up in the possession of the VA.
The Federal National Mortgage Association (Fannie Mae)
Fannie Mae buys loans from banks and other mortgage companies. Once they have foreclosed on these properties the need to sell them.
Internal Revenue Service (IRS)
Haven’t paid your taxes? Well if the amount owed is large enough you could be saying goodbye to your home and other possessions that the IRS feels appropriate. For the keen investor it can signal a bargain. For information about these properties simply contact your nearest district office of the IRS.
Finally don’t forget about realtors. Reading the above you may get the feeling that I am in some way against realtors and that I’m against using them but a realtor can be a big help, especially if you are just starting out in investing. Lets face it a realtor makes it much easier. They will often know the local area better then your do and for a nominal fee they will do all the legwork to find you a property letting you focus on other more pressing issues. A realtor can also handle all the legal work saving you on legal fees.
When working with a realtor you must have a clear, quantifiable idea of what you are looking for and once you have outlined what you are looking for you need to stick within those parameters.
If a realtor spends their time looking for a property that fits in with your requirements but upon viewing the property you change the parameters—you decide you now want a four bedroom home not a three bedroom—the realtor will quickly lose interest in working with you as they can find easier money working with someone who has a concrete idea of what they want.
For the same reason you need to give the realtor a clear picture of what you are looking for. Don’t just tell the realtor you want to buy an investment property for less than $250,000 and it must be in a nice suburb. The scope is so wide it would encompass a large proportion of listed properties, meaning you will constantly reject everything the realtor brings to you, which again will frustrate the realtor.
Instead give the realtor a description such as “I’m looking for a three bedroom, one bathroom single family dwelling that is close to an elementary school and has a below average crime rate.” I like to find properties that are close to elementary schools because they tend to attract younger families looking to live near a reputable school, as opposed to a property that is within walking distance of a college which is likely to attract college students who would prefer to live off campus.
Buyers Brokers Agreement
Just as a seller who lists their property with a realtor gives exclusive selling rights to the realtor, when you enlist the help of a realtor to find you a new investment property you will often need to sign a Buyer’s Brokers Agreement which state that you cannot work with another realtor on a specific property for a predefined time. As with the sellers this is to ensure that you will not undercut the realtor once they have found you a property that meets your needs.
Realtors fear putting in the hard yards and then watch as unscrupulous investors undercut their earnings. Once you have signed the agreement realtors are much more likely to go the extra mile to get you the best deal that they can.
In property as is the case with most thing a bargain is not always a bargain, sometimes the reason an owner is willing to offer you such a cheap price is because that’s what the property is actually worth. There are renovator delights and there are health hazards, there a nice and neat little homes and there are homes infested with termites—if you know where to look.
Outside of inspecting the property as best as you can—most of us aren’t electricians, structural engineers or plumbers—another option you have to learn about any problems the property may have is to ask the owner for a Product Disclosure Statement. These are a great way to find out about issues that may not become obvious to you through a simple visual inspection. A product Disclosure Statement is a written statement whereby the owner outlines all the problems and faults with the property that they are aware of, these statement do not cover you for problems that the seller genuinely does not know about.
In many states the seller is legally obligated to sign a Property Disclosure Statement, but in states where there is no mandatory requirement to do so you can still ask the seller to fill one out. Copies of blank statements are available from most good realtors or you can search online.
If you are looking to purchase a property in a state that does not mandate these statements and the owner refuses to fill one out for you I would become suspicious of them and be very cautious about further negotiations. This is not to say every seller who refuses to sign a statement does so to hide problems but it does destroy trust and that makes doing business with them harder.
Investing in property is not a short term business, you must have a long term goal and plan in place before you can begin, but that does not mean you can’t save yourself some cash in the short term by targeting the right buyers. If you can save yourself $30 000 on a new property through negotiation think of it as profit, a profit you never have to pay tax on.