The trick to finding really good deals on housing
August 1st, 2007 | by mbhunter |Free Money Finance is in the market for another house and has shared some of his comments about the hunt thus far.
He asked his readers if they knew any really great resources on foreclosures. He also made the observation that some of the houses in his neighborhood were selling for “unbelievably low prices” and postulated that the sellers were “trying to unload their houses for personal reasons (pending foreclosure, divorce, job relocation).”
If FMF’s looking for a deal, he’s already answered his own question. Not by asking about great sources for foreclosures — I don’t have any leads besides public records, tax sales, or auctions — but by the second observation.
The trick to finding really good deals on housing is to find motivated sellers and buy from them at a discount in exchange for solving their problem with the property. A motivated seller is exactly someone who is about to be foreclosed on, has to unload because of a divorce, or has to move out of the area because of a new job. If these people sold at unbelievably low prices, someone must’ve bought them at unbelievably low prices.
Why not go the foreclosure route? No reason really, but if a house is being foreclosed on, the cat is out of the bag, and the competition for the house, if it’s a good one, goes way up. A foreclosure sale is a public event, and enough investors with enough money know about these sales that the bidding is brisk.
The better deals come from pounding the pavement or developing leads on local properties where the owners are getting into some kind of trouble, but aren’t in default yet or being foreclosed on yet. This has a number of advantages:
- Competition for the property is lower. Not so with a foreclosure. Anyone with access to a newspaper can find out about those.
- You’re in a position to help the owner. Saving their credit rating from the blemish of a default or foreclosure is a big selling point.
- By talking with the owner, you get a better picture of the situation than if you were to bid on a foreclosure. You might see the property firsthand and up-close.
- You have the opportunity to finance the purchase on your terms. Foreclosure purchases are a lot stricter in their purchase terms.
It’s not without its challenges, though:
- It takes time to find a deal. Finding the deals yourself usually mean better deals, but they also require more digging.
- It takes even longer if you’re going to move in. The deals worth pursuing may be good ones but do you no good if they’re not houses you want to live in.
- It takes learning. There can be a lot involved in this process, and the deals can take many forms.
- It takes non-traditional sources of money. If you have the cash to purchase outright, that’s the easiest way, but if not, it’s almost a sure thing that a bank won’t fund the whole purchase price, regardless of how low. They’ll also want a lot of other expensive things — that you pay for, naturally, but do nothing to protect your purchase and do everything to protect the bank’s interest.
John Schaub
The main point though is to find the really good deals you have to go out and get them yourself and look in places that others aren’t.
7 Responses to “The trick to finding really good deals on housing”
By Minimum Wage on Aug 1, 2007 | Reply
Many of the seminar pitchmen talk about creating win-win deals. But there’s often a third party who loses.
Is there a way to create win-win-win deals?
By Lord on Aug 1, 2007 | Reply
Such ‘deals’ are harder to find than the naive think. This is because many of those in trouble are upsidedown for which someone must take a loss.
By FMF on Aug 2, 2007 | Reply
Lord’s right — these are hard to find. But thanks for the thoughts — I’ll take them to heart!
By mbhunter on Aug 2, 2007 | Reply
Lord is indeed right. What is happening, though, is that the lenders are starting to eat the loss. This is what happens in short sales. Under certain conditions, the lender will accept a payoff that is less than what is owed on the property because that is preferable to the potentially greater losses in foreclosure.
If the lender takes the loss, this tips the property toward being a deal because the owner is no longer upside down.
The lenders recently did not do short sales because the appreciation in the property gave them a cushion. But with falling prices, this cushion is going away, and lenders are warming up to short sales.
By Lord on Aug 2, 2007 | Reply
But that just goes to show you are better off waiting for foreclosure and getting it at a real discount. Short sales are hard because lenders don’t like to fall on their sword voluntarily and the people with the authority to do so can rarely be found.
Most of the real deals are really taking advantage of uninformed sellers with equity and avoiding those without, if you like being in that business and can rationalize your profiting from it.
By mbhunter on Aug 3, 2007 | Reply
Lord, thanks very much for your regular comments on the blog!
You’re right that some situations are better than others for doing this kind of deal (with larger equity in the house being better). And I see you suggesting that there are investors who take advantage of naive homeowners, which is also true.
I don’t think my friends would do what they do if they weren’t helping people in the process. They help people out of problem properties, and they help others get into the properties. They know what they’re doing, and they make sure the other parties know what’s going on as well.
Sellers that approach my friends about the property — yes, my friends are the ones that are approached, not the other way around — usually already know that foreclosure is on the horizon and are motivated to avoid it. The sellers may be uninformed or not, but in any case they want out of the property. It’s not a pleasant process for the seller, but without many other options available, it behooves the sellers to work with my friends if they want to avoid foreclosure.
Do they take advantage? Well, they’re in business to make a profit, but if they skin people word will get around and people won’t want to deal with them. They know what they’re doing and know how the systems work, so that works to their advantage, but they’re not predatory.
Knowing how the system works also lets them get to the right people to perform a short sale. (Actually, they outsource that part sometimes.) And yes, banks will do a short sale rather than go to foreclosure if they stand to lose less with the short sale. They just haven’t had to until recently, when the housing market has softened.
Anyway, long response, but there are real estate investors that are as legitimate and as over-the-table as your pastor, and I don’t find it hard at all to rationalize profiting from it as long as folks feel good about the transaction.