There are many ways to buy real estate below market value, including buying REOs, short sales, estate sales, HUD homes, off market properties and even fair market sales. I have 16 long-term rentals, buy 10-15 fix and flips a year, and I have to buy houses below market value for my income. In order to buy real estate below market value, you have to be patient and willing to work hard to find deals.
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It can take time, work and the ability to act quickly 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.
How do you determine market value on real estate?
It is not easy to determine market value if you are not a real estate agent. I wrote another article that gives some tips and tricks on how to determine market value here. I would not count on Zillow to give an accurate market value because they can be way off! Another thing to remember with market values is how to value homes that need repairs. I want to buy homes 15 percent below market value or more. If a home is worth $150,000, and it needs $30,000 in repairs; buying the home for $120,000 is not a discount. I would want to buy that home for at least 15 percent less than $120,000, because $120,000 is market value once you discount the repairs. There is no benefit to buying a home at market value minus the exact amount of the repair cost. I would rather buy a fully repaired home, and not have to hassle with the time and effort it takes to repair a home.
How to buy bank owned properties (REOs) below market value
REO stands for Real Estate Owned, and is a bank term for properties that have gone through the foreclosure process. REO properties are almost always listed in the MLS (multiple listing service) by a REO listing agent. I am a REO listing agent myself, and I can tell you each bank handles their REOs very differently. Some banks will repair homes before they list, 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 below market value.
If you have paid 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 a 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. Here is a great article with more information on how the REO process works.
How to buy HUD homes below market value
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 occupant bid period that varies on different types 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 15 days, for uninsured 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 cannot buy a HUD home because I am a HUD listing broker. I have helped many investors buy HUD homes at well below market value.
How to buy short sales 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.
How to buy fair market sales below market value
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 below market value. There are some cases where you can find a great deal on a fair market sale.
I have purchased properties from estates that were great deals. Many times, estates have issues or creditors that need to be 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 can buy 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.
For more information on getting great deals, check out my book: Build a Rental Property Empire: The no-nonsense book on finding deals, financing the right way, and managing wisely. The book is 346 pages long, comes in paperback or as an eBook and is an Amazon best seller.
How to buy off market properties below market value
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 for sale. 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 ads and their giant trucks to advertise to potential sellers.
Making an offer on below market value properties
When I make on offer on a property that is listed in MLS, I want to submit the offer 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 better chance of getting the home under contract, before other offers are received. If you are not an agent you need to make sure you have a great agent who can act quickly for you.
There are many ways to buy real estate at below market values. It takes work, speed and patience to get a great deal. Having a real estate license gives you a better chance at getting these deals as well but it is not necessary. Do not give up after a few weeks of browsing through listings if you don’t find that great deal. If you are having trouble finding a great deal on a house, check out my books on amazon or my coaching programs here.