I’m often asked how I buy homes for pennies on the dollar. A lot of people assume that I have to take advantage of people in distressed situations or use tricks to find such deals, but that is far from the truth.
I am very straightforward with sellers about my buying process and the fact that I can’t pay them top dollar for their homes. I usually even tell my sellers how much more money they’ll likely get for their home if they list it for sale on the open market. I’m honest because the last thing I want to do is spend a bunch of my time and resources analyzing the numbers and raising capital for a deal that might fall apart at the last minute after the seller learns the truth.
The key to finding good deals is not deceit and trickery. Those tactics will only result in wasted time and effort. The real goal is finding the right seller and providing certainty and convenience. There is a lot of work and risk involved in selling a home on the open market. A seller never knows for sure how long it will take to get a contract or even what the home will ultimately sell for. How many groups of people will parade through their home before the right buyer makes an offer? When they do find a buyer there are still home inspections, appraisals, financing contingencies and a litany of other hurdles and hassles to overcome before they actually close the deal.
The more of these hurdles you remove up front the better potential deal you can get on the home. But sometimes just being a ready and willing buyer in front of the right seller at the right time is enough to get a big discount on a home. Finding an amazing deal really just boils down to finding the right seller. The secret, therefore, is marketing.
Before you commit to this endeavor you should be aware that finding a great deal is all about the numbers. You can’t be picky about the home. Your number one, two and three top-buying criteria have to be that the home is a smoking great deal and you’ll have instant equity on day one. You just might have to live with a certain number of bedrooms or a home on an odd lot. The more selective your buying criteria the less likely you’ll be successful in your efforts to buy like a flipper. If you know you have to have a certain type of home or specific things in the home then trying to buy like a flipper will probably just be a waste of your time and effort. If, on the other hand, you know you’re only going to be in the home a short time and your only absolute requirements is a roof, four walls and a bunch of equity then read on.
There are about a half-dozen standard techniques used by flippers to find the right seller. Almost all good flippers send out flyers, put up signs, run ads in print and online, set up websites and network with Realtors and bird dogs — people who identify deals for investors for a fee. Many also drive neighborhoods and knock on doors.
You’re not going to put together a campaign like that of a full-time flipper, but you could use a hybrid system that costs you little in time and resources and has a fair chance of paying off.
You have a distinct advantage over a flipper. We flippers have a lot of costs associated with investment capital requirements, and we have to budget in the costs of buying and selling the home in the same year. I must get a home at a minimum of 25 percent under market value. A nonflipper could buy the same home at 15 percent under market and have an equally good deal. Imagine that: If you were competing with a flipper for a home, you could pay 10 percent more than they could and still be just as well off.
Here are some ideas to help you build your own hybrid home flipper marketing system:
- Define your market. Zero in on the area where you would like to live. Define that area as best you can so that you can describe it to other people easily. Older neighborhoods are usually better hunting grounds.
- Create a mailing campaign. Use a list-buying service to identify homeowners within your search area who have high amounts of equity or who have lived at the address for a long time. Another great potential source of deals are absentee owners, people who do not live in the home any longer. Put together a simple letter or postcard. Make sure you explain in the mailer that you are looking for a home for your family in their neighborhood. Mail postcards every four to six weeks for at least six months. Don’t send out just one round; the first one almost never works.
- Put up signs. These stupid “We Buy Home” signs you see everywhere work. But you can’t put them out on state roads in Virginia, or you’ll get a ticket. Find out the local rules, or get permission from people to put them in their yard.
- Drive around your target area. Take note of any homes that look empty and or uncared for. Make a special list of these homes. It may be useful to contact the owners to see if they want to sell. You just might make someone’s day. At the very least, make a special mailing list.
- Advertise — let people know that you’re in the market. Take advantage of free online advertising. It doesn’t cost you anything to run ads on the many free online classified ads websites. It might even be worth paying to run some ads, depending on your location and the cost. In my opinion, the D.C. area is not the best place to pay for print ads, but it has worked out great for me in some other markets.
- Network and put out the word. You might try attending some of the many real estate investor meetings we have around here. It may be possible to make contact with Realtors and real estate bird dogs or wholesalers. These people make it their business to find deals for investors. They may do a lot of the work for you. Just beware that there are no real licensing requirements for bird dogs and wholesalers. Ensure that you verify everything they tell you.
- Check out the For Sale by Owner websites, and call on any yard sign you see in your neighborhood that will put you in direct contact with a homeowner. You can find a great deal here. However, most people who sell their own homes do not know how to value them, and in my experience they’re more likely to overvalue their home than undervalue it.
If you’re not experienced in real estate, then I highly recommend you work with a real estate agent. If you find a deal, you’re going to need someone who can help you evaluate the numbers. Just because you find a seller who’s willing to sell to you outside the open market doesn’t mean that you’ve found a good deal. And you can’t rely on the appraisal. Most appraisers appraise the home for the contract amount, whatever that amount happens to be, as long as it’s justifiable. Residential appraisals usually tell you only when you’ve overpaid. They rarely tell you that you got a good deal.
I recommend you get a good Realtor to do market analysis and assist you with the contract and closing process. A Realtor can also help you create mailing lists. Many Realtors send out postcards. Ask the agent if they’ll mail special postcards to your target area. This might help the agent’s response rate. They can say on the postcard that they have a buyer specifically looking for homes in their area. The agent may find another client out of the effort.
Make sure you don’t overpay for a fixer-upper. Ensure you have at least 10 percent equity in the home after you do all of the fix-up. Too many sellers think that if a home needs $50,000 in fix up, then they just need to reduce the price by that amount. Well, if that’s the case, then I highly recommend you buy a home that needs no fix-up. I guarantee you that home will end up costing you more than you think in repairs, and even if your numbers are right, you need equity to compensate you for your risk and effort. Otherwise, save yourself the trouble and buy a home that’s move-in ready.
And finally, don’t talk yourself out of a great deal. I always hear people ask with suspicion: Why would they sell for so cheap? They assume there must be some hidden defect. Do your due diligence. If everything checks out, then don’t be afraid to take a great deal.
There’s no doubt this is a lot of work and hassle, but this is how we find the good deals. There is no secret to the process, and anyone can use these techniques or versions of them to find the deal of a lifetime.
Justin Pierce is a real estate investor and real estate agent who regularly writes about his experiences buying, renovating and selling houses in the Washington area.