BiggerPockets

Bear with me; I'm just an Aussie trying to get a handle on some quirks of the US property market, which is much more complex than our property market in Australia, with many more techniques. Aussie investors tend to buy property and hold for either appreciation (the primary motive for buying in Australia, as our yields are much lower but capital growth stronger), or for cashflow in retirement (almost nothing cashflows on purchase here; but over time with rents increasing and mortgage interest being stable, it will). And of course some people develop property (new construction, splitting titles, condo conversion, etc), or rehab and flip. But by far the most common strategy is to buy and hold for the long term (ie into retirement).

Wraps aren't legal here. Lease options are done to a very, very limited extent. "Subject to" isn't possible within our financial regulations. Vendor finance (seller carryback) is done to a limited extent for commercial properties owned by institutions, but almost never for residential property. Foreclosure rates are very low, and for those properties that are foreclosed, they tend to sell at market value anyway. Wholesaling doesn't exist to any significant extent (I've not heard of it at all). We don't have "bird dogs". So our property investing environment is much simpler. ; )

I've read about people using "bandit signs" and "yellow letters", and people putting in great effort to implement these marketing techniques to find buyers, and I understand that the goal is to buy property for under market value. But I'm genuinely not understanding which market imperfection is allowing this to happen.

If somebody is in financial difficulty, why don't they just sell their home on the open market, which by definition will give them the market value? If so many investors are competing to buy pre-foreclosures, then why don't the current owners simply get all the people who send them these yellow letters to bid against each other? And in this case, doesn't the purchase price end up being pretty darn close to market anyway?

If a fellow biggerpockets member can tell me what piece of this puzzle that I'm missing, I'd really appreciate being enlightened. Thanks!

Jon,

What do you mean by "buying criteria"? Is that in relation to what parameters you are interested in buying property?

Thanks in advance,
Stan
Real Estate Broker
[EMAIL REMOVED]

Stan, This is usually a sheet they pass around asking what areas you want, what prices, how much below ARV, etc, along with contract info. These folks seem to be newbie wholesalers looking to add to their buyers list. People who've actually found a deal can stand up and tell the group about it. There are several who consistently have deals available.

Tracy,
I'm not sure I can explain why this happens or what's different between the US and Australia. I can tell you that when I moved to Denver in 1999 the market was rising and fairly hot. The house we ended up buying, though, had been on the market for quite a while, and we got it quite a bit lower than similar houses. Why? It was a mess. The woman who lived here had already been moved out by her kids. But, they had left behind a bunch of knick knacks and just junk. The carpets were a mess. One of the furnaces had failed, and there were smoke trails leading out of the vents. The basement was painted lime green and had indoor/outdoor glue down carpet. Even in a fairly hot market, most people took one look and moved on. So, this property took a major discount, far more than it would have cost them to fix the place up for a better price.

In a slow market like now, its far worse. A dumpy house priced at retail value less the cost of fixup will just not sell at all. To get it to move, it has to get a huge discount. So, in your example, an investor might pay $60K, knowing they might make $10K profit. Many owner occupants wouldn't pay $60K, let alone $80K. May such buyers are struggling to make the down payment, and don't have the $10K needed to fix it up. Further, they want to move in quickly, and don't want to spend months fixing it up before they can move in.

At least around here, there's absolutely no de facto arrangement between investors. Quite the opposite. Its very competitive. Houses are being bid too high to be profitable. Too many fixed up houses are coming on the market, and driving down retail prices. We're rapidly reaching the point where there are no deals.

Thanks, Jon and Jason, it's so interesting. It sounds to me like this "split market" that you have, which we don't, is a consequence primarily of the following two factors:

1) Americans obviously have a greater reluctance to rehab than we have in Australia.

"Renovator's delights" (as agents optimistically call them) generally are only discounted by the cost of necessary repairs, or slightly more. So in the example I gave, the property would usually sell for at least $85K; most would see it as an opportunity to spec the property to their taste, and wouldn't be put off. Or an opportunity to DIY and save a bundle. Renovating is practically a national pastime here. :D The main way "flippers" make any profit in Australia is that they get $10K off, where $10K is the cost for contractors to do the work, then do the work themselves for $2K in materials plus some of their time, and sell for $100K. (Which means they're not profiting from the investment; they're being paid $8K to work as an unlicenced contractor. :roll:) No wonder "flipping" is so much more popular in the USA, when you can get such hefty discounts because people don't want to do any rehab work. :cool:

2) The credit environment.

I think that it's much harder for lenders to foreclose here in Australia, due to our stronger consumer protection laws. (ie less lender-friendly) So homeowners aren't as terrified that they have to sell "now"; they know there are lots of chances, warnings, and time before they'll lose the home. It can take well over a year from the first missed payment to the house being sold, and if you catch up payments during that time, it can drag things out even longer. We also don't have a credit score system; we simply have credit reports, which only list significant credit issues such as defaults and judgements, and who's approved you for credit. But bounced checks and missed payments aren't "significant enough" to make it onto the report. Because the consequences of skipping a payment are pretty negligible (except for your reputation with that particular institution, who'll be the only ones who know about it), there's not as much fear of the potential impact of missing some payments. Nobody feels that overwhelming need to sell in a hurry for financial reasons.

Thanks for your help thinking this through... I appreciate your willingness to share your thoughts and experiences.