So where do deals come from? If your answer is “I dunno, I just figured they’d come from somewhere, and I’ll check the classifieds,” you’re on the wrong track. You might as well answer “the stork brings them!”
The fact is this: The deal is to the real estate investor what oxygen is to life. The real estate investor cannot profit without first having a deal to profit from.
As you already know, you can’t profit from just any deal. There has to be something in every deal you can exploit for profit. You will have to say “no” to the vast majority of the opportunities that cross your path – if you are smart, anyway – because the buyer isn’t sufficiently motivated, or because you cannot get favorable financing terms, or because the needed repairs and upgrades are beyond your expertise or they will not add enough value to justify their costs and the time involved.
To make an investing practice work, long-term, you need to create “deal flow.” You need a stream of deals to come your way, so you can execute one per quarter, or one per month, or whatever suits your time and resources available. Your job is to build a pipeline that will feed you qualified, potentially profitable properties to consider each month. The bigger you make that pipeline, the pickier you can be. You can focus on only the very best, most profitable deals, and make much better profits over the long run.
So how do you feed that pipeline? Where do deals come from? There are a variety of ways to open the spigot:
Canvassing and direct mail to targeted neighborhoods. Go talk to people! This is still the best way to build intelligence in a specific neighborhood you want to target. Supplement your face-to-face canvassing with a direct mail campaign in the same neighborhood. Hit it enough times, and everyone in the neighborhood will know who you are and that you buy houses – fast. You may kick over a good rock, or the deal may come to you by word-of-mouth. Either way works.
Foreclosure auctions. These aren’t as good as they used to be from the perspective of the property flipper. People write books about how to find foreclosure properties, and many markets are flooded with foreclosure buyers. That said, though, investors can, and still do, get quite lucky with foreclosure auctions on occasion. Generally, the foreclosure market – and the pre-foreclosure/short-sale market as well – yields the best results when real estate is most out of favor and when inexperienced investors are spending their time and money chasing stocks and day trading.
As markets get more efficient, however, the spread between the sale price of a foreclosure property and its ultimate resale price will tend to narrow. Foreclosures are certainly still well worth your time – but you will usually have no competitive advantage in foreclosures vs. other investors. Your best deals will come from your own grassroots marketing in your targeted neighborhoods, not from publicly announced foreclosure auctions!
Condemned properties. If you have a good deal of capital at hand, you may be able to find an occasional gem among condemned properties. Of course, these properties are condemned for a reason: Expect the needed repairs to be substantial, and potentially time-consuming. If they were easy, the existing owner would presumably take care of it himself!
For these deals to work, you need to have some good, experienced contractors in your pocket, and you need to negotiate a very steep discount on the purchase price. This is no time to feel sorry for the seller. Offer a fair price, but you need to count the costs of anticipated repairs very carefully – and err on the side of caution. Unless the reason for the condemnation is well defined and easily fixed, a bad bid on one of these can really cause you to lose your shirt!
Probate properties. This is a frequently overlooked market for real estate investors. When someone dies, all their assets are transferred to an “estate,” and then the courts oversee the dissolution of the estate. Creditors get a chance to file claims, as do heirs. The courts then take the available assets and liquidate them to pay off creditors. The heirs get what’s left, according to the terms of the will, or according to intestate laws if there is no will.
Unless the probate attorneys decide to transfer the house to a relative, they will usually try to sell the house or any other real estate properties to pay estate taxes, creditors, attorney’s fees, and the like. Occasionally, investors can find a very good property that needs a little TLC from a probate situation.
The attorneys in probate are not real estate experts and don’t want to be. Usually, neither are the heirs. Often they just want the issue behind them.
To reach this market, you can keep an eye on public probate filings in your newspaper. But that’s what everyone’s doing. You don’t create an advantage that way. The best you can do is create information parity – with people who have been at this game a lot longer than you have, and with a lot more money.
To create an advantage, start building a network of informants. Examples: Hang out with your friendly neighborhood antique dealer. Often they are the first people in the house after the ambulance crew and the life insurance agent leaves – putting together an estate liquidation. They are frequently in a position to get you to the right people at the right time to put in a reasonable offer on the house.
Also, build up your relationships with clergy, funeral directors, attorneys, and house cleaning professionals who frequently handle the homes of the deceased, etc.
If you do show up to bid on a house already in probate, at a formal hearing or auction proceeding, have a cashier’s check in hand for about 10 percent of your offer, at least.
You’re helping the families of the deceased by helping them clear the estate as fast as possible – and you’re helping yourself, too.
Tip: Get to know the local members of the American Society of Estate Liquidators.
Multiple Streams of Leads
Sometimes one system will really work well for you. Some experienced investors may specialize in just one or two systems – which they work to the hilt. For now, though, diversify across several systems and find what produces results. What works for the Guru of the Month may not work for you. Remember, your contacts, community, knowledge and favorite contractors are unique – just like everybody else’s. Keep an open mind, diversify, and build that pipeline with several different inputs to create a steady stream of properties for you to look at.
Jason Van Steenwyk is a veteran financial industry journalist who has been fighting to make the world safe for the retail investor since 1999. He lives at Ground Zero of the real estate bubble in Fort Lauderdale, Florida.