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Many real estate investing
courses and books (mine included) tell you to find a motivated seller.
That's where you get your good deals. As a rule, that's true. The higher the
motivation, the more likely you're going to get a good price, good terms, or
both. But generally, when you find a motivated seller offering a good deal,
you should take a moment to "look that gift horse in the mouth." Ask hard
questions about why a seller is motivated.
Here are some examples of "good opportunities" that shouldn't necessarily
motivate you to buy.
Caveat Emptor: "Let the
Buyer Beware"
The seller advertises a
fixer-upper, but it isn't. Yes, it could use new paint. New carpet would
make it look tremendous, but that isn't the real problem. The reason they're
trying so hard to sell this turkey is because the floor plan doesn't work.
In fact, it's what we call functionally obsolete. When you buy a house to
live in, you pay a lot of attention to the floor plan. Unfortunately, many
people looking for rental houses or small apartment units don't pay enough
attention to the floor plan.
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Look through the property
as if you were going to live in it. Would you be happy having to go through
the kitchen to get to the master bedroom? Or through a bedroom to get to the
kitchen? How about a bathroom that is attached to your kitchen? A ceiling
less than 7' high? A house that's literally sitting on the ground with no
concrete slab blocks or piers underneath?
I have seen all these problems in houses, and so has everyone else who has
looked at more than a few properties. I saw a house recently with 33 rooms.
About two-thirds of them were added on as more relatives joined the family
and were constructed properly. Most were just sitting on the ground and the
additions jutted out in all directions from the original building. I felt
like a rat in a maze just walking through the place. The sellers had
refinanced and had 15% equity.
I can't picture anyone buying it, but maybe they'll get lucky and a family
with a herd of kids will come along and want it. When I visited the
property, there were nine families living there. I wouldn't even take a deed
for free if I had to promise to make the payments. Your tenants and buyers
won't like these houses either, which will make them harder to rent or to
sell. This is not a fixer-upper; it is a major problem.
Too many people get into fixer-uppers when they're not prepared, and
over-doers do the wrong things. The point here is learn to tell the
difference between a fixer-upper which needs rehabilitation or modernizing
versus a property with major problems that a rehab won't fix. Similarly, a
lack of knowledge about what appears to be major problems can cost you big.
For example, most investors will not take on houses with structural
problems. Having the knowledge to do repairs, but not doing them, can be a
costly mistake.
What are structural problems? Basement walls caving in, houses on piers that
are sinking, concrete slabs cracking and sinking. I could go on and on. All
houses must have a foundation. These are most commonly constructed of either
concrete or wood. These are relatively cheap materials and the labor to
replace them isn't nearly as costly as some of the the horror stories you've
heard.
If you use the right people and do a little front end due diligence, you
should be able to get a good deal. It's no different than any of the other
repairs. You can hire one roofer out of the yellow pages and pay him $2,000.
Or you can call the guy on the next page and pay him $5,000 for the same
job. That's rehabbing, baby. If you insist on being a sheep, you can count
on getting sheared. Watch a guy jack up a sinking house sitting on piers,
and you'll understand how little work it really is. It's easier than
changing a tire on your car. If you don't understand this, you'll overpay
and that guy will be laughing at you all the way to the bank.
Nothing Down
"Owner anxious, will
accept nothing down." I love that. Even if I'm willing to put cash down,
this ad would catch my eye. These people have declared themselves as numero
uno flexible sellers.
Or have they? Again, you need to analyze the seller's motivation. Why are
they offering such a good deal? Do they have to compensate for something
drastically wrong with the property and can't be changed, like a bad
location? Maybe the house is the one property in the subdivision that backs
up to the expressway on one side and the convenience store on the other. The
sellers had two options, either cut the price drastically or improve the
terms. And the easiest way to sell is to offer it for nothing down. The
seller knows that the less money you're able to put down, the less
particular you can be. If the only thing you think about is nothing down,
you can be easy prey to a poorly located property, or a bad floor plan, or
major repairs.
Right Things Wrong
If you're going to look
for good deals resulting from property problems, look for a property with
all the right things wrong with it. My favorite problem is filth. I love
filthy properties. You can't sell a filthy property for what it's worth
until it's cleaned up, and the discount is far more than it costs to clean
it.
I love rotten wood, overgrown shrubbery, tall grass, broken glass, peeling
paint, bad roofs, missing doors, broken toilets overflowing with waste,
cockroaches, fleas, spider webs, dead animals in the house, and the smell of
cat urine. In fact, I want the house to smell so awful that most people
won't go inside. I like it when you open the door, the odor takes your
breath away and makes your eyes water. All these problems are easy and
relatively cheap to fix.
If you can visualize the repaired house and calculate its value compared to
your purchase price, that's when you are able to purchase houses for 30-60
cents on the dollar. It's like that old saying about not being able to see
the forest for the trees. Look past the obvious problems. Learn to recognize
the opportunities.
When It's Not the House That's Wrong
One example of the kind of
seller motivation you CAN live with would be a change in circumstances. A
classic example is sellers who puts their house on the market knowing they
are going to be transferred in 90 days. They find out several days later
that the transfer will be in nine days.
The company needs them at the new location early, and the homeowner agrees
to go if the company will absorb the difference between what they sell the
house for and the recently appraised value. By the time you run across them,
they're running around like a bird with its tail feathers on fire looking
for a bucket of water. They want a buyer, and they want one fast. Not only
is this seller motivated, they don't have to worry about how much is lost in
the transaction, within reason.
I can think of lots of examples. These would include health, divorces,
marriages, new babies, job opportunities or firings. But here I'm talking
about a person who wants to sell the property to solve the personal problem,
not a person with a problem property who wants to pass the problem on to
you.
The "I Quit" Syndrome
Some sellers finally give
up. I've seen them lose hope, throw in the towel, and throw the price out
the window, all at the same time. Let's build an example.
The sellers have the house on the market for $120,000, but it's only worth
$105,000. They have a loan balance of $95,000. There are literally hundreds
of houses available in that price range, so no one even bothers to make them
an offer. With things selling left and right around them and the listing
expiring for the third time, they finally decide to do a "for sale by owner"
at $95,000. You come in and offer to take over their loan "subject to" and
they finally say, "I can't stand it any more. I quit. It's yours." Now it
would seem there is no way to make yourself available for a deal like this
unless you try to be the last person to make an offer. There is a way you
can be.
Persistence in All You Do
If you find a property you
like with a price you don't like, go ahead and make your offer, but make
several copies of it. Every two weeks, send the sellers a reminder that
should they come to their senses (more politely), then you're standing by to
make the offer.
Maybe a better approach, one that I have used, is to send the offer every
two weeks and say, "Today--and today only--I am going to reoffer what I
offered before. Sign it within 24 hours and we have a deal; otherwise look
elsewhere." If you contact them a couple times like this, you might be
surprised. One day they just might sign what you sent them.
In many cases people don't buy until they've been asked to buy several
times. I suppose this is the same with sellers. If the sellers aren't
getting exactly what they've asked for, they want to sit around and find out
what other offers will be made. When the offers stop, their mood changes. If
they are feeling disheartened because nobody has given them a realistic
offer, and you've been consistently interested, they might just call you.
All sellers' minds will change with time and circumstance.
Fictitious Appraisals
Now let's talk about
another gift horse you need to watch out for. I have seen a lot of houses
lately in the upper price range (200K and up) with absolutely fictitious
appraisals. sellers calls you with a deal and say their house appraised
recently for $450,000. They have a loan balance of $360,000 and just need
debt relief. You see $90,000 in equity just waiting for you to come and get
it, so you go get the deed or lease option and agree to start making the
$2,800 payment.
After the dust settles and the excitement dies down, you start doing your
due diligence and learn the value is really nowhere near that $450,000. In
fact, you can't find any evidence it's any higher than the loan balance.
Then you discover the appraisal the seller showed you was done by a lending
institution for refinancing. You then see your $90,000 blowing away on the
breeze. Now all you need to do is find someone to unload this turkey--the
first person who'll offer you more than the loan amount. Not a bad seminar,
but a hard lesson nonetheless.
Always independently verify the value of a property yourself, especially on
high-priced houses. Never accept an appraisal from the seller as reality.
It's not that the seller was pulling a fast one. Usually they don't even
know. The problem is that there's such a glut of money available for funding
loans, the competition is fierce and lenders are really pushing hard to
close loans. I can't honestly say I know exactly where the weak link is or
why it's become so common. But I can tell you within the last six months,
I've seen high-price house deals cave in because the value was not there,
yet a refinance appraisal said it was.
Wear Two Hats
Real estate investors have
to wear two hats. They have to be optimists and chase down every potential
property, especially those that look like a bargain. But they also have to
wear the hat of the pessimist and learn to ask enough questions and listen
closely enough to the answers, to find out why the sellers are motivated.
Persistence pays and bargains are to be had. Just make sure you find a true
bargain and not somebody else's problem. You don't want to make it yours.
