The key to my rental strategy, is to buy Real Estate below market value. In order to buy Real Estate below market value, you have to be patient and willing to work hard. There are many types of properties that can be purchased below market, including REOs, HUD homes, short sales, off market properties and even fair market sales.
I just wrote a Kindle EBook with much more information on how to buy Real Estate Below Market Value. With so many articles on the blog it can be tough to sift through everything. I put together my most important articles regarding buying properties and created a 30 page EBook. Here is a link to the book.
It can take time, work and the ability to act quickly in order to get a great deal. Of course getting a great deal is only part of the equation. Check out my complete guide to investing in long-term rentals to see the other aspects. I have used the techniques listed below, to purchase homes for long-term rentals and fix and flips. In the following article I will should you how to buy Real Estate below market value.
Bank owned properties
REO stands for Real Estate Owned, and is a bank term for properties they have gotten back through foreclosure. REO properties are almost always listed in the MLS (multiple listing service), by an REO listing agent. I am an REO listing agent myself, and I can tell you each bank handles their REOs very differently. Some banks will repair homes before they list them and others will not do a thing. Some banks are willing to negotiate quite a bit on their prices, and others will hardly budge. REOs can be a great way to buy Real Estate at below market value.
If you have been paying attention to the Real Estate market in the last two years, you have realized REOs are getting harder and harder to find. There are some great deals on REOs, but usually the deals are on homes that need a lot of repairs. Here is an article on how to find a great deal on a property. If you find a great deal on an REO, don’t be surprised if you find yourself in a highest and best situation. Many banks ask for highest and best when they receive more than one offer on a property. There is a ton of competition for REO properties right now and seeing multiple offers is not rare. Highest and best gives every buyer who made an offer, a chance to raise their offer and hope it is good enough to get the property. In many highest and best situations, the winning offer is higher than the actual asking price. if you find yourself in a highest and best situation, I always suggest bidding the maximum price that will make the deal work for you. To make your offer more appealing to the seller, consider removing your inspection contingency or paying cash if possible.
Many banks will prefer a cash offer from an investor and sometimes they will actually prefer an owner occupant buyer. Sellers like Fannie Mae, Freddie Mac and Wells Fargo, only allow offers from owner occupant buyers at the beginning of the listing period. This can be frustrating for investors looking for a good deal, but there is no way around their owner occupant restrictions. It is against the law to pretend to be an owner occupant when you will not be occupying the property.
HUD homes, are properties that had FHA insured mortgages, were foreclosed on and went back to the government. The properties go back to the government, because the government guarantees FHA mortgages. HUD homes have a unique online bidding system located at HUDHOMESTORE.COM. All bids have to be entered by a licensed agent and are sealed, meaning no other buyers can see what the other buyers are bidding.
Buying HUD homes can be frustrating for investors, because HUD has a very strict owner occupied bid period that varies on different type of properties. HUD does an appraisal on each home before it is listed and the list price is based on that appraisal. The appraiser also decides if the home can qualify for FHA financing. If the home will qualify for FHA, HUD uses the term “FHA insurable” and if the home does not qualify they use the term “uninsurable”. For insurable homes, HUD does not let investors bid for the first 30 days, for uninsurable homes investors cannot bid for the first 5 days. If you are interested in a HUD home, make sure you are using a Realtor that knows the system inside and out. There are also many costs associated with HUD homes that are not associated with regular or REO sales. HUD will not pay for title insurance and it is the buyers responsibility to pay for all utilities when doing an inspection. Please check out my investors guide to purchasing HUD Homes to get more detailed information on the process.
Even with all these restrictions, HUD homes can provide great deals for investors. I personally cannot buy a HUD home, because I am a HUD listing broker. I have seen many investors buy HUD homes at well below market value.
Short sales are another great source for investors. Short sales are owned by a private seller, but the seller owes the bank more than they are trying to sell the home for. In order to sell the home, the bank has to agree to take less money than they are owed. Historically, short sales could take up to 6 months or even a year to close, because lenders were so slow to make a decision. In the last couple of years, banks have gotten much quicker at making decisions and some short sales are approved in two weeks or less. Many times on short sales, the first party to make an offer will get the home. You have to be very quick to act when a great short sale deal comes on the market. Remember, even if you get your offer accepted by the seller, there is no guarantee the bank will approve the offer. It is wise to wait to perform an inspection or start the loan process, until you have written approval of your offer from the sellers lien holders. I bought rental property number 7 as a short sale.
Fair market sales
Fair market sales, are homes owned by a private seller who has enough equity in the home to sell it, without having to involve the bank in the decision making. It is harder to find great deals on fair market sales, because the seller is usually not in a huge rush to sell their home at below market value. There are some cases where you can find a great deal on fair market sale.
I have purchased properties from estates that were great deals. Many times, estates have issues or creditors that need paid quickly and they just want to get rid of the home. I have also purchased homes that the seller had recently bought as a foreclosure. The home needed a lot of work and they never had the money to complete the repairs, but the market appreciated enough that they could sell the home.
Another situation that an investor an buy at below market value, is an investor owned home. The investor owned home is usually rented, and although it may be perfect for a first time home buyer, the first time home buyer can’t wait three months for the tenants to move out. The only choice for the investor is to sell the home to another investor for a discount.
Off market properties
Many investors buy properties that are never listed on MLS or marketed in any way. These are called off market properties, because they are not listed in MLS or anywhere. It takes money and time to be able to purchase these types of investment properties. Investors will send out direct mail, postcards or advertise with signs that let people know they buy houses. I am sure you have heard of “We buy Ugly Houses”. They use billboards, newspaper adds, and their giant trucks, to advertise to potential sellers.
Making an offer
When I make on offer on a property that is listed in MLS, I will submit it as quickly as possible. I am a Realtor so I have a huge advantage, because I can check new listings multiple times a day. As soon as I see a possibility, I will make an appointment ASAP to see the home and if it meets my criteria I will make an offer that same day. If I see a great deal, it can take me less than 2 hours to see a property on MLS, look at the property and make an offer. This doesn’t always get me the deal, but it gives me a much better chance of getting the home under contract, before other offers are received. Here is an article devoted to making an offer on a house.
There are many ways to buy Real Estate at below market values. It takes work, speed and having a Real Estate license gives you a much better chance at getting these deals. It can take me 6 months or more between seeing great deals. Do not give up after a few weeks of browsing through listings if you don’t find that great deal. Here is the link to my Kindle EBook on how to buy property at below market value, with much more detailed information.