I can’t say this strongly or often enough:
You make your money on the buy.
“Well, that’s fine and dandy,” you say. “But isn’t everyone looking to buy a dollar with fifty cents? How am I going to get my hands on the bargain-priced listings first?”
There are a few different ways to find that unbelievable deal and close it: Use your connections, make a low-price offer (in-elegantly called “lowballing”), or bid on a property riddled with a problems that other buyers would find too daunting to take on.
There is a fourth way to potentially score a deal, which is to buy a house in bankruptcy or foreclosure — pre-foreclosure is an even better option if you can find it because you save the owner in potential default from completely ruining their credit with a foreclosure in their history by bailing them out before the bank takes over!
Let's start with your connections. Word-of-mouth can help you when you're searching for a property to buy. The key is to use discretion. If you announce to anyone who will listen that you are in the market for a fixer-upper or a great deal you could unwittingly make instant enemies with the Realtors who want the same type of property themselves, or with the little old lady who's in love with her house, even though she no longer needs its five bedrooms and sprawling, overgrown yard.
Still, keep your ears open. Your pharmacist may mention that her sister's neighbor was thinking about downsizing now that the kids have gone off to college - bingo! Or your banker buddy may admit that he's been thinking about selling but has so many friends who are Realtors that he is afraid of alienating or offending all of them except the one he chooses to list his place. Talk to friends you can trust; I find killer deals through my network all the time.
You've Got a Lead, Now What?
So, what do you do when you hear that a friend-of-a-friend's friend is thinking of selling, or you spot the perfect investment that just happens not to be for sale yet? Write a letter. Explain that by selling directly to you, the homeowner can avoid the hassles of open houses and inflated Realtor fees. Announce your interest, emphasize your qualifications, but don't come right out and broadcast your intent to immediately resell.
People get emotionally attached to their homes, and for good reason. If the owner raised her family there, she may feel strongly that another young family should move in and repeat her history. If the seller built the back deck with his own two hands, he may not be enchanted with your idea of bulldozing it to put in a pool. Do not lie to your potential seller! (You're building a relationship, remember? Referrals are a big part of this business.) And don't fawn excessively over the property to the point where the seller begins to wonder how many other people would be dying to park their Honda in the driveway. Simply state the facts, cordially and professionally.
Think of what you can do to strengthen your offer; then put it in writing. Your letter might sound a little like this:
Dear Mr. and Mrs. Shipwreck,
Greetings! You are receiving this letter today because I (or my spouse or partner and I) have been a secret admirer of your home for the past 15 years. Because I love your property so much, I am interested in knowing if you would consider allowing me to purchase it. I realize it is not currently on the market; however, I am prepared to make an offer that I hope will convey my capacity to facilitate a speedy and successful close of escrow.
If you would be open to selling your beautiful home, some specific components of my offer may give you the confidence to realize I can offer you what no one else can:
- No brokerage fees
- Buyer to purchase property in as-is condition with no requests for repair including Section 1 pest work
- No appraisal contingency necessary
- Seller to lease back property for 30 days at no cost
Please feel free to call me at your earliest convenience. I look forward to speaking with you!
The second way to score a deal is by making a low-price offer. Your best bet here is a house that has been on the market for a while with little or no activity (Realtor-speak for genuine offers). “Days on market” (DOM) is public information — simply ask the Realtor who has the listing. You can also ask if there have been any offers (maybe it just fell out of escrow or recently had a price reduction); a good Realtor can tell you the history of the property as well as the level of interest it has received (although don’t be surprised if you come across a few schmucks who aren’t wholly forthcoming with the facts).
Let’s say a house has been on the market for 60 days at $350,000. Comps in the area (you’ve done this homework, remember?) are going for anywhere from $325 to $365. If it is still sitting there without a “sold” sign out front, this property is probably overpriced at $350,000. Why not write an offer at $300? “But that would insult the seller!” you cry. (You gentle, kindhearted soul, you.) Maybe. But keep in mind that selling prices are usually arrived at rather arbitrarily, and while some sellers are married to their price, others all but pick a number out of a hat, or else choose one that they would love to see materialize even though they would settle for considerably less. The power of paper is amazing; sometimes not even the sellers know what they will accept until it is in writing.
You have nothing to lose by making a reasonable, yet low-price, offer. In theory, the sellers may feel their asking price is both fair and attainable. But “a bird in the hand” (in this case, your written, sincere offer) could be enough to change their mind. The seller can and probably will make a counteroffer, so if in the preceding example, $300,000 is the absolute max you would be willing to pay, consider writing your original offer for even less, say $285,000. This leaves you some haggle-room—and if you’re really lucky, they might just take it without a fight.
This is where having experienced professionals on your team can pay off. Ask your Realtor to discuss with the seller’s Realtor why your offer is fair (by pulling up similarly priced comps or pointing out the property’s flaws and drawbacks). The low-bid strategy has paid off for me countless times.
Not long ago, my housekeeper Teresa purchased her first home. She came to me and said that she and her husband, a painter, had saved $14,000 and wanted to buy a house. I was torn. In the little slice of overpriced heaven we call home, $14,000 couldn’t get you in the front door of even the most dilapidated condo in town, and Teresa had absolutely no credit, so 100 percent financing was not an option. On the other hand, I felt strongly that if she had managed to squirrel away such a significant sum, and enough gumption to ask for my help, she deserved to own a house. I assured her I would do what I could to make it happen and we set about on our search.
Following my own advice, we found a property in Teresa’s neighborhood, a nice little fixer-upper with a history of bad additions and even worse tenants. It had been on the market for around two months at $589,000 (Remember, this is Santa Barbara). We wrote an offer for $485,000 - more than a hundred thousand dollars less than the asking price — and got it. In fact, we even negotiated a thousand-dollar credit during our final walk-through three days prior to closing escrow, because the tenants had left the place in worse condition than when we wrote the offer. All in all, proof once again that sometimes even sellers don’t know what they will accept until it is in writing.
After we closed, I loaned Teresa $100,000 and my free design expertise and we set about fixing up the place, including finishing off a separate back unit that she planned to rent out to help cover the mortgage. With the help of the team of construction experts I have assembled over the years, we completed the renovations in just four weeks. Now all we had to do was refinance. The new bank appraisal came in at $800,000, leaving Teresa with over $200,000 in equity (after she paid me back, of course).
My willingness to make an “insulting” offer, coupled with the strong relationship I have with my lender (who granted Teresa and me a joint loan, helping her build credit from the get-go), resulted in the ultimate win-win. After six months of on-time mortgage payments, the loan was transferred entirely into Teresa’s name. No, I didn’t make a penny off of Teresa’s deal, but because of the many houses I’d flipped before hers, I was in a position (both financially and experientially) to help someone I care deeply about change the course of her life. I consider that one hell of a payoff.
Keep in mind that just by writing an offer, you’re not obligated to buy the house. Unearth something deal-breaking during your inspections and all you have lost is the cost of the inspection, invariably money well spent. You may have actually created an opportunity to renegotiate the price if you discover a flaw that would turn off the average buyer.
Just be certain when you write your offer that you’re not dismissing important contingencies in an effort to make your offer more attractive. Contingencies are there to protect you and your deposit, so take advantage of every last one.