The Most Important Concept in Finding Real Estate Deals
A few years back I had an investor client in town to check on some of the deals I put her in. It was our first time meeting and we had a lot of lengthy conversations.
One thing she asked me got me thinking, and I thought it would maybe help some of you out to post it here. She said to me, "Steve, how do you find all these deals?"
It's actually a question I hear a lot. Many investors have a hard time finding a deal, especially that "first" deal. Many agents out there have no idea what to look for when trying to get an investor client a deal, and fewer still know how to properly estimate the rehab costs to decide if a deal is even worth presenting.
I told her this one simple thing. "I don't find deals, I MAKE deals."
Let me unpack that a bit. There are a TON of deals in every market, on every MLS, readily available for investors regardless of what their goals are. You just need to know how to FIND them and EXECUTE them.
So what am I looking for? Generally 3 things:
Value (ideally hidden value)
Quite often there's hidden value in a home that can be unlocked pretty easily. When I'm searching my local MLS for my clients, a really simple one to look for is houses that have total square footage much larger than their heated square footage. This usually means there's a porch or Florida room that can be brought "under air" to increase the total square footage of a home and drive the price WAY up from the purchase price.
Enclosing an open porch to add square footage
Also, and I can't emphasize enough how important this is, put some thought into your design. Layout and finishes are a huge deal to buyers. Look on websites like Houzz.com for inspiration. You can often find low cost materials that still give the appearance of a high end finish. A client of mine had a house where a contractor tried to put $25/sq ft tile into her master bathroom. She made him return it and found a "faux-marble" tile for $1.50 a sq an put that in. House sold in 6 days for full ask. The buyer is a neighbor who had no intention of buying a new home but as soon as they saw it decided they had to have the house. Putting thought into your designs creates value.
Lastly, there is a huge market difference between 2 bedroom and 3+bedroom homes. I often look for any 2 bedroom with at least 1,300 sq feet because I know I can most likely add a 3rd bedroom and increase value substantially even with the same sq. footage.
I almost never look at a home unless it's vacant. I want a house that is costing someone money every month. I want someone to WANT to unload it. I love houses that have been on the market a while.
Even better, I love houses that have fallen out of contract. Every morning the first thing I do is go and check the "BOM" (Back on Market) properties on my MLS. These people have often been given a dose of reality with their deal falling through. The houses likely have issues that came up during inspection (issues we would normally repair during the flip process: aluminum wiring, galvanized steel plumbing, termite infestations, etc.) and the owners are often open to a deal.
Once I've identified a house that the owner may need to get out of, I start running my numbers. My goal is never to have one of my clients make a "lowball" offer, but to make a realistic offer based on what the rehab costs will be while still leaving some profit for them. My offers are often the best that a seller is going to get from an experienced flipper. Plus the deals close cash (often hard money) within 3 weeks.
I recently had a discussion with another agent regarding a house my client had made an offer on in a multiple-offer situation. The seller took a higher offer and lo and behold, the house fell out of contract, likely because an inexperienced flipper hadn't properly estimated their rehab costs. The listing agent came back to me and asked if my buyer still wanted the house at their initial offer. We said yes. She then informed me there were multiple offers again. I made a point to her to look at my stats over the last 6 weeks on the MLS. Just from the 1st of the year I've closed a TON of investment deals. I explained to her that we don't make unrealistic offers, my buyers know what they are getting into and we know what our rehabs are going to cost. I told her she may have a higher offer, but she should use her gut when deciding to go with it. If the house fell out of contract a second time, my buyer was not going to be willing to give her the same price.
We locked up the contract the next day, and the house turned out to be an amazing project.
Now I'm not just talking about leverage in the traditional sense of how a property is financed. When I speak of leverage, I'm referring to creating situations which give my clients an advantage in negotiations both with sellers AND with contractors.
Often times I'm finding houses right next door to each other with the same owner. These are in neighborhoods that were traditionally rental properties but with home values soaring and all the jobs that have come to Tampa Bay are now filled with owner/occupiers. What I like to do when I find these is have one investor buy out both or sometimes all 3 houses. I make the offer contingent upon them selling all the properties to us at once. This does a few things:
It allows the seller to drop the price a bit and give us something of a "bulk" discount on the purchase.
It allows my buyer to negotiate cheaper prices with their contractor. If we're re-wiring 2 houses right next door to each other, we get a much better price per house than if we are re-wiring just 1 house. We can buy materials in larger quantities. We have our construction workers treating two houses as one job site, saving massive TIME during our rehab. We leverage the proximity of the homes to save time and lower our holding costs. Over the past few years, my clients have had 3 sets of houses directly next door to each other to rehab at the same time.
Two renovations projects directly next door to each other
Lastly, on the leverage front, I especially like houses where the seller has not leveraged the property. When a home is owned free and clear and there's no mortgage to settle, they are far more likely to take an offer that leaves room for rehab and profit. I always look at the recorded mortgage notes prior to making any offers to see what is owed on the house. Especially on a vacant home, it's all about money in the sellers pocket.
So, my big point in all this, is that the deals are out there. Forget what the list price on the MLS says. Analyze the deal. What's the price you can buy it at? Where is the hidden value in the home? Can the seller afford to sell? Do they have a reason to sell it quickly? Is it possible they are just tired of having the home sit there unsold? If you're an agent working with investors you should be asking these questions. And if you're an investor, you should be working with an agent who asks these questions.
Say these words to yourself over and over: