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FINDING OPPORTUNITIES THAT OTHERS MISS

Now that you know the price range and size of the house you want to buy, you can begin looking for opportunities. This can be overwhelming because there are often many properties for sale. Focusing on certain neighborhoods and specific types of properties in those neighborhoods will help you to identify the houses you want to research and then to make an offer.

SOURCES OF OPPORTUNITIES

A great thing about buying houses for investments is that there is an unlimited supply of opportunity. Every day new houses come on the market. Every day people’s lives change unexpectedly, and they decide to sell their house. Every day brings new opportunities.

One of my teachers, Warren Harding, encouraged me to look for good deals close to where I lived and worked. He advised me to never drive down the same street twice. Instead, drive down different streets in different neighborhoods and you will constantly see new opportunities. Real estate opportunities are everywhere, yet some investors drive for hours or even go to other states trying to find greener grass. They drive past or fly over thousands of opportunities near where they live.

Out-of-town management can be an expensive adventure. I know first-hand: I’ve owned investment properties in ten states. Today I only own property in the town where I live. Owning property close to you allows you to stay on top of the management or to manage it yourself. Even more important, you know your market and can buy when there are buying opportunities and sell when the market is hot.

Most buyers look at properties listed for sale. The best opportunities are not on the market for sale. They are not listed, and there is no sign in the front yard.

When you can identify a house that an owner wants to sell and that is not listed, you have no competition from other buyers. Here are my top sources of opportunities for investment homes:

1.   Empty houses. Not all empty houses are opportunities, but most opportunities are empty houses. An empty house is costing somebody money every day. In addition, it is a source of worry and work for someone. Look for empty houses, and contact the owners. If the house is empty, knock on the neighbor’s door and ask if he knows where the owner has moved. If that fails, look up the neighbor’s phone number and call him. Neighbors typically don’t like an empty house next door, especially if it is not being maintained. Neighbors can be a valuable source of information. The owner may be a lender who has foreclosed or an heir who has inherited the property.

2.   Houses that need work—especially in nicer neighborhoods. Houses in disrepair stand out, especially on a good street. Some people are just poor housekeepers, but more often they are short of money to repair the house. Occasionally, the house is rented to a tenant who is not maintaining it. All these situations signal potential profit.

3.   Out-of-town owners. While you cannot see this from the street, you often can find an owner’s name and address in the public records. When you spot an empty house or one in disrepair, look up the owner. This can often be done on the Internet. If not, go to your county courthouse and ask for help in looking up a property’s owner. While you are there, ask how to find out if there are any mortgages or liens against the property, and read those. You can learn what the current owner paid and what he or she owes.

4.   Landlords who are not maintaining their property. When you see an occupied house in disrepair, knock on the door and ask if it is for sale. If it is rented, the tenant typically will tell you and may even give you the landlord’s name and phone number. If the landlord is out of town, he may be more than willing to sell. You can tell the tenants that if you buy it, you would be willing to fix it up and maybe rent to them. Sometimes the tenant is the problem, and sometimes the problem is the owner.

Some houses are occupied but not rented. Either the tenants have quit paying rent and the landlord has done nothing to correct the problem, or sometimes a relative or friend has moved int-o a house to “house sit” or take care of it until it sells.

If the tenant or “house sitter” is not a good house and yard keeper, it detracts from the house and makes it harder to sell.

5.   For sale by owners (FISBOs). Many owners try to sell their property without the help of a broker. Some of these owners do not have enough equity to pay a broker, and you can buy their house simply by taking over their payments. Other sellers may own their property free and clear and be willing to finance the purchase. Still others have had bad experiences with brokers and may be anxious to get rid of a house that is a problem to them. Their problem may be your opportunity. Before you go to see their house, research what they paid for it and what they might owe in the public records. Ask them the questions listed on pages 37 through 39. Don’t waste your time and energy going to see a house until you are sure that it is an opportunity that you want to buy.

6.   Real estate agents. Although some of my best buys have been from agents, they are a seasonal source of deals. When the market is hot, they don’t need buyers, so you won’t get many calls. When the market cools off, they have more sellers than buyers, and they will call you. Ask a lot of questions when they call to qualify the house. They will try to sell you anything they have listed. Don’t waste your time unless you smell opportunity.

7.   Lenders. Like agents, lenders are a seasonal source of good buys. When the economy softens and lenders foreclose on many loans, they need buyers and will be cooperative in selling you properties at wholesale prices. When the market is hot, they have few foreclosures and don’t need buyers.

8.   Letters to owners who may need to sell. Sending out letters and postcards to sellers who may have a financial problem can be very productive. However, this process costs money and requires a good system so that you follow up on leads aggressively. I have walked into a house of a seller in foreclosure and seen a pile of letters from buyers who have written trying to buy the house. I bought the house because I knocked on the owner’s door and talked with her. If you could send out 1,000 letters at a cost of $1 each and get one good lead and buy one good deal, would the letter be a good investment? Of course, but it takes effort to write a good letter and send it to the owners in trouble to the right addresses. You don’t buy houses with letters, you generate leads.

9.   Foreclosures. Many good buys are made because the seller has a financial problem, so a house in foreclosure seems like an obvious opportunity for an investor. However, only a few houses in foreclosure are in the price range and neighborhoods where you want to buy. A high percentage of foreclosures have loans far greater than their value. Look for foreclosure opportunities in the neighborhoods where you want to buy and follow up by knocking on the door. The best deals will not have a sign in the front yard or an ad in the newspaper. The way you will find them is to walk through neighborhoods and knock on doors.

ASKING QUESTIONS TO KNOW WHAT THE OTHER PARTY WANTS

If you are calling on an ad in the paper or someone has called you, before you hop in your car to go see the house, ask the person a few questions. The answers to these questions will help you to decide which houses are potential deals and which sellers you want to meet.

If you are walking through a neighborhood and find a house that looks like an opportunity, you want to ask the owner these same questions.

In a normal market, 90 percent of the houses for sale are not opportunities. You are trying to identify that one seller in ten who might have a reason to make you a good deal. After you find the right seller, you want to determine whether this house has the potential of making you money. Not all houses are opportunities.

Asking the right questions gives you clues about how anxious the seller is to sell the house, and then the information will help you to make an offer that the seller can accept. It will increase your chance of buying a house at a good price.

Ask these questions to determine a seller’s motivation to make you a good deal. The first questions will be easy for the seller to answer. As you ask the harder questions, you are both gathering information and testing the seller’s eagerness to sell. If the seller keeps answering questions, eventually the information you receive is not really in the seller’s best interest to share with a potential buyer. Keep in mind that the seller is answering the questions to keep you interested in the house because he or she really wants to sell it.

As you ask these normal questions, take notes, because you will learn a lot. Number a sheet of paper (or take notes on your computer) and record the answers to the following questions:

1.   Are you the owner?

Many times a neighbor or relative will answer the phone for an out-of-town owner. If so, ask for the owner’s cell phone number and call him or her directly.

2.   Where is the house?

Only pursue houses in neighborhoods where you want to own property. Write down the address and phone number.

3.   How large is the house?

Look for houses large enough to accommodate a family.

4.   How old is the house?

Older houses may be in great neighborhoods, but beware of fragile and high-maintenance houses.

5.   How large is the lot?

Look for lots of normal size and regular shape with adequate front and back yards.

6.   Does the house need any work?

All houses need some work. Look for an honest answer.

7.   What school districts is the house in?

Know which schools are the best and worst in your town. Buy in the best districts that you can afford.

8.   What are the neighbors like?

Are there more tenants or owners on the street?

9.   How long have you owned the house?

Long-term owners often have larger profits and are easier to negotiate with.

10.   Have you made any additions or remodeled?

Not all additions or remodeling projects add value to a house, but new plumbing, electrical service, roofs, kitchens, and bathrooms are big pluses.

11.   Is the house listed with a Realtor?

If so, when does the listing expire?

12.   Do you have a current appraisal?

If yes, ask how much it appraised for.

These are warm-up questions. They let the seller know that you are interested and give you some basic information. If at this point you are interested in the house, move on to the following, more probing questions.

The questions that follow are ones that you should give the owner plenty of time to answer:

1.   It sounds like a great house, so why are you selling?

Listen!

2.   Can your existing loan be assumed?

The owner may not know, but most loans can be assumed with the lender’s permission.

3.   What is the balance on your loan now?

This will tell you how much equity the owner has.

4.   Are your payments current?

Surprising enough, most owners will tell you.

5.   What will you do if you don’t sell?

Is the owner moving anyway? When? The day before they move, most owners are really ready to make a deal.

6.   How long has your house been on the market?

This time! Most people answer two weeks, but it’s the third time they have tried to sell.

7.   How much did you pay for the house?

If the owner balks at this question, tell him or her that you want to buy in a neighborhood that is appreciating. Ask if the house has appreciated since he or she bought it. In addition, you can point out that you can learn this information in the public records and would appreciate his or her time-saving assistance.

8.   If you don’t sell the house, would you consider renting it?

If the owner answers yes to this question, you may be able to buy it from him or her with a small down payment. The owner won’t get much down when he or she rents it.

With hundreds of possible sellers to buy from, you need to learn how to use your time wisely, and asking questions over the phone is an efficient use of your time. You will be surprised by how much sellers will tell you.

After you talk to a seller, rank both his or her motivation and the potential profitability of the house on a scale of 1 to 10. A partial list of motivations appears on page 40. You will hear many other answers and can fit them into this list.

Use these scales to compare two or more houses directly and decide which one to pursue first.

Once you find a seller with a high motivation who owns a house that is desirable, stop looking and go buy the house!

LOOK FOR A SELLER WHO IS TRYING HARD TO SELL YOU HIS HOUSE

Every seller and every situation are different. You want to buy from a seller who needs to sell and who is trying hard to sell you his house as opposed to someone who is playing hard to get. If you find yourself trying to convince the person to sell to you, the seller is not as motivated as you are. Look for a cooperative attitude in a seller. A seller who avoids answering questions and won’t make concessions is not ready to make you a good deal.

Another test that you can give a seller is to ask her to come to you. Before I go see a house in my town, I ask the seller to come to my office for a meeting. If she won’t come, she is showing me that she is not motivated enough for me to make her an offer. If she doesn’t show up, at least I know I have not wasted a lot of time.

Sellers will try to get you to come see them. As a test, you should offer to meet the seller. If you do not have an office, offer to meet in a safe place, perhaps a bank lobby (convenient to you) or a coffee shop. If the seller does come, you will have won the first negotiation and learned something about his motivation.

One seller of an empty house called me from his new location, a three-hour drive away. He knew I bought houses and said that he wanted to sell me his house. I looked at the house and told him I was not interested in buying it because it would not make a good long-term investment. He said he wanted to sell it to me anyway and would drive over to meet me. He drove three hours and made me an offer I could not refuse. When sellers are ready to sell, they will send signals like driving three hours to sell their empty house.

There is no set formula for making offers. There is no rule that you make an offer after a certain number of hours or questions. Every seller is different. Always test the seller to see if he is ready to sell you the property.

The way to test is to ask questions and see how the seller responds. You can ask very direct questions, such as, “Are you ready to sell your house today?” or “Can you be out by this weekend?” These questions will also raise the seller’s level of expectation—she will think that you are interested in buying and buying now!

You are, of course—but only if you can make a good deal.

If you ask those two questions, and the seller answers yes to both, then the seller is ready for you to make an offer.

Before you sit down with a seller to make an offer, write down your strategy. Use the worksheet shown in Figure 4.1 to gather current market information and to think through what you want to offer. Write down the most you are willing to pay for the house, the price you hope to buy it for, and the best price you can imagine buying it for. Write down the amount and terms of the financing you need to make the house a viable investment.

FIGURE 4.1    Buying Strategy Worksheet

It’s important to write down these figures. When you are making the offer, the seller may be a better negotiator than you are and will try to talk you into paying more for the property. You need a well-thought-out plan before you actually begin the exciting process of negotiation.

Successful buyers prepare and have a game plan before they make an offer. They anticipate the seller’s response and plan a counteroffer. Like a chess player, a good negotiator thinks a move or two ahead. Like chess, your opponent sometimes surprises you, and when that happens, you need to step back and rethink your plan.