One of the keys to my strategy is buying properties at below market value. In order to do this you can’t buy any property you find on MLS at list price. It can take time, work and the ability to act quickly in order 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. Below I will go over some of the techniques I have used to purchase rental properties and some techniques I have not used.
Bank owned properties
REO stands for Real Estate Owned and is a bank term for properties they have gotten back through foreclosure. Some institutional owners like Fannie Mae repair the homes before they put them up for sale and other banks may not do a thing. Fannie Mae also offers a great program for investors who have more than four mortgages and are looking to finance more.
Foreclosures and REOs are getting harder and harder to find as the market improves across the country. There are still some great deals out there, but usually the great deals are on homes that need a lot of repairs. If you find a great deal on an REO you may 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. Highest and best gives everyone a chance to make their best 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.
Sometimes the 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.
HUD homes are properties that had FHA insured mortgages, were foreclosed on and went back to the government. HUD homes have a unique online bidding system located at HUDHOMESTORE.COM. All bids have to be made by a licensed agent and are sealed, meaning no other buyers can see what the other buyers are bidding. HUD homes can be frustrating for investors because HUD has a very strict owner occupied bid period that varies on different type 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 30 days, for uninsurable 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.
Short sales are another great source for investors. Short sale are owned by a private seller, but they owe 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 than they are owed and this can take some time. 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 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. Even if you get your offer accepted by the seller there is no guarantee the bank will approve the sale, so never count on a done deal until it closes.
Fair market sales
Fair market sales are homes owned by a private seller who have equity in the home and are making all the decisions. It is harder to find great deals on fair market sales because the seller is usually not in a huge rush to take 20% less than Fair market value. There are some cases where you can find a great deal. I have purchased properties from estates a few times that were great deals where the heirs just wanted to get rid of the home and get their money. I have also purchased homes that the seller had 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 has potential is an investor owned home. It may be perfect for a first time home buyer, but they property is rented for three more months and a first time homeowner can’t qualify for a home they aren’t occupying. The only choice for the investor is to sell the home to another investor for a discount.
Off market properties
Many investors buy properties that are never listed on MLS or marketed in any way. These are called off market properties, because no one knows they are for sale. It takes money and time to be able to purchase these types of investment properties. Usually investors will send out direct mail, postcards or advertise with signs that they buy houses. I am sure you have heard of We buy Ugly Houses. They use billboards, newspaper adds, and their giant trucks advertise to potential sellers.
Making an offer
When I make on offer on a property that is listed in MLS I will act 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 sometimes within 2 hours of the home being listed. This doesn’t always work, but it gives me a much better chance of locking up the deal before they received any more offers and ask for highest and best.