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Pros and Cons of Buying From Motivated Sellers Instead of From Banks

by Danny Johnson on February 27, 2013 · 16 comments

  
Pros and cons of buying houses from motivated sellers

Should you focus your efforts on buying from motivated sellers (homeowners) or from banks?

Last week I went over the pros and cons of buying houses from banks.

Let’s take a look at the other side of the coin. The side I preferred when we got started and continue to do to this day. Even though I’m biased, I will still give an honest run down of the negatives so that you can make your own determination.

We Started By Marketing To Motivated Sellers

We are still doing so today. The main reason why we started and still focus on buying houses directly from motivated sellers is because we want to limit the amount of competition we have.

There is a common misperception that real estate investors that focus on finding motivated sellers are ambulance chasers. While I can see why this is the case, I don’t find it to be true at all. Contrary to popular belief, homeowners are usually beside themselves to have someone buy their house ‘as-is’ and close it very fast. Yes, they understand they are selling it below market, but there is always a reason. Unless you’ve been in a similar position it can be hard to understand why someone would do that. I’ve had rental properties that I would have been very happy with getting rid of for a song. Sometimes circumstances just create motivation that makes a quick sale very, very appealing.

Ok. So people are willing to sell their houses at great prices and are happy to do so. What are some of the other reasons I prefer to buy from motivated sellers and what are some negatives that I’ve recognized? Let’s take a look at them.

Pros of Buying Houses From Motivated Sellers

  • Much less competition
    There tends to be much less competition when dealing directly with motivated sellers. In my experience, they only typically contact about 3 people. This really shows you how important it is to answer your phone when someone calls. Some people will call investors and just deal with the first one that picks up their phone. These same people won’t leave messages and will likely not pick up or call you back if you call them later after missing their call. They’ve already found someone willing to look at their house.

    This isn’t to say that you won’t find yourself in situations where the seller has called 10 or more people. These usually are the ones that aren’t really motivated to begin with though.

  • Very little earnest money needed
    Motivated sellers don’t typically care what amount of money you are paying for earnest money. I typically pay $25 and used to only pay $10. I’ve only had a couple people ever ask for more and they were happy with a couple hundred dollars. The fact of the matter is that most of them are just happy to have you relieving them from their problem.

    Try to tell a bank that you are only going to pay $25 earnest money. See what happens. :)

  • No proof of funds needed
    In all of my years buying houses, I’ve never had a motivated seller ask to see proof of funds to buy their house. Never. In telling you this, I am in no way advocating going around telling people you are going to buy their house if you don’t have some way to pay for it (these ways could be your own money, hard money, private money, wholesale buyer, etc).

    If you are planning on making cash offers to banks, you’d better have proof that you have the cash to buy the house.

  • Can help other people
    One of the things I really like about working directly with homeowners is that you are actually helping them out of a bad situation. I don’t know how many times I’ve had people tell me and my wife, while wiping away their tears, that they can’t thank us enough for buying their house. If you don’t think that people can genuinely feel this way, go ahead and keep buying those bank-owned houses and leave me with less competition.
  • Much easier to wholesale
    When wholesaling houses, it is usually much easier when you are dealing with a homeowner. I’ve never had a homeowner get angry that I’ve assigned the contract. They are just happy that the deal went the way it was supposed to for them.

    Due to having less competition, you can typically get the houses for cheaper. This allows you to wholesale the deal quickly because you are leaving a lot of meat on the bone for your investor buyer. It also allows you to build in a larger wholesale fee.

  • Easier to control the deal
    Controlling the deal is much easier when you don’t have a bank dictating what, where, when, and how everything is going to happen. Homeowners don’t typically have a preference for a title company and so you control where the deal will be closed.

Cons of Buying Houses From Motivated Sellers

  • Real people are counting on you
    You will be dealing with people that are facing a tough situation. If you don’t close, someone is likely going to face some very difficult times.

    If you contract to buy a bank-owned property and don’t close, you’re likely to just lose your earnest money. I don’t think that will affect the bank too much.

  • You need to spend time and money on marketing
    You have to find motivated sellers, or have them find you. There’s not a website somewhere with a list of motivated sellers in your area. If there was, you’d likely have as much competition (or more) than dealing with bank-owned properties.

    It’s not really that hard to find motivated sellers. Just think of different situations that people can find themselves in that would give them a desire to sell their house quickly and/or as-is. Here’s a list of 47 situations that make homeowners motivated sellers.

  • You will have to schedule with sellers to see the house
    Motivated sellers won’t just slap a lockbox on their house when they decide they need to sell it and allow you to come by whenever it is convenient for you. You will need to schedule with them and have them show you the property.

    This is actually a good thing. You will be dealing with people that are making the decision to sell the house and to whom and for how much. This is your chance to build great rapport with the seller. Don’t squandor it. Really spend the time to talk to them and hear their story.

    Believe it or not, sellers have been known to sell to people that have offered less but that they like more than the competition. It’s not always just about the money.

  • People aren’t always honest
    If you buy from motivated sellers long enough, you will run into sellers whose word means absolutely nothing. They could agree to sell to you and end up signing a contract with another investor as you are on your way over to sign the contract with them. I’ve even had people try to sell me houses that they don’t even own.

    These situations are rare but they do happen.

  • Much more likely to get yelled at
    When marketing to motivated sellers you are much more likely to get an angry call from them. This is especially true if you are mailing to probate. These people have just lost a loved one and here you are asking them if the estate has a house that they want to sell. No matter how well you craft your letter, you will likely receive these angry calls. Just understand where they are coming from and take them off your list.

    Some investors have a real hard time mailing to probate and other motivated sellers because of these touchy situations. But, the fact remains that there are some out there that really need your services and are glad you contacted them.

  • You can’t decide on when sellers will call
    You’ve got to try to and be available for when sellers call. Some investors have answering services handle their calls. Usually, this is just a way to ‘set up their systems’. I think it stinks. You want to be the one to handle those calls. That’s when they get their first impression of you.

Now that you know some of the pros and cons of buying houses from motivated sellers, you can better decide whether it is right for you.

If you have so other pros and cons to add to the list, please do not hesitate to mention them in the comments.

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{ 16 comments… read them below or add one }

Seth February 27, 2013 at 12:06 pm

Nice overview Danny – this is a very accurate assessment based on what I’ve seen. Given these pros and cons, I still prefer working with motivated sellers over banks… but there can certainly be a price to pay for choosing this route.

Reply

Danny Johnson February 27, 2013 at 12:57 pm

Thanks, Seth. I agree. The price to pay is definitely worth it in my opinion. Just the fact that a homeowner doesn’t ever call me back to ask for highest and best is worth it in my opinion!

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Chris Bounds February 27, 2013 at 1:13 pm

Great article. Like Seth, I also prefer working directly with motivated sellers. In a strange way, I actually enjoy the chase. Sometimes the angry calls can get to you, but it is the sellers that are late or cancel meetings at the last minute that I find the worst part about it!

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Danny Johnson February 28, 2013 at 7:36 am

That is the worst. When sellers don’t show up and don’t bother to tell you they aren’t coming, it really boils my blood and grinds my gears. Last time that happened, I ended up just walking around the outside of the house and ended up stepping in a pile of dog stuff. Needless to say, I was blowing my top.

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Terry P February 27, 2013 at 5:20 pm

I have a motivated seller/realtor that is about ready to go into short sale, is there a way I can find out what the seller owes? Is it public record? The seller is not disclosing that info and the offer from a big rehab company that the bank turned down. I figure if I can find out what’s owed I got a place to start negotiating. This place is gutted and needs major renovations, so I don’t think the bank wants it back.

I’d think this bank would be my best place to negotiate at least construction financing, but the seller is holding that back too. I know the seller can’t disclose too much being a realtor by law. Other thing I learned is the city is criminally prosecuting the seller for not working on the place it’s been on the market a while untouched. Wow!
We are getting rehab bids together to look at cash flow.

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Danny Johnson February 28, 2013 at 7:41 am

I don’t think I’d waste my time with this one. The seller is being very uncooperative and doesn’t sound very interested in getting the house situation taken care of.

What is owed shouldn’t be of much concern. You can make your offer based on your due-diligence in finding out what it will sell for fixed-up and what it would cost to fix up.

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Chris Clothier February 28, 2013 at 10:25 am

Danny –

Nice article – really good info. I personally fall on the side of not buying from sellers right now, but buying from institutions. Mostly because they are available and my two markets are full of opportunities. But also because of the numbers based approach of the seller. There is no emotion involved (usually). We are able to be more efficient when the sales decision on the other end has no real attachment.

Good stuff – Chris

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Danny Johnson February 28, 2013 at 12:35 pm

Thanks, Chris.

Great point about the numbers based approach without emotion. That’s a pretty good reason to focus on the bank-owned.

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adam May 22, 2013 at 2:48 pm

We had a huge banked own inventory here, but it didn’t seem like the deals were that cheap at the time. How many offers are you putting in, to get a good discount?

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Danny Johnson May 23, 2013 at 6:49 am

With motivated sellers, I probably make about 5-10 offers before landing a deal. I do a good job of weeding out the non-motivated sellers and don’t waste my time.

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David February 28, 2013 at 11:02 am

Great stuff, Danny. How do you evaluate the obvious short-sale situations that you encounter, but where the house still looks like a good flip? Do you work with a good SS agent to get them listed and simultaneously put your offer in? Or do you just refer them to an agent and move on?

David

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Danny Johnson February 28, 2013 at 12:37 pm

I typically just refer them if it doesn’t look promising or if I don’t feel like getting involved (which is the case most of the time). I just don’t like messing with shorts sales anymore. The main reason is that I got tired of banks coming back right before the foreclosure auction and declining the short sale, which leaves the seller with likely no options (even though they are made of aware that that could happen from the start).

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David February 28, 2013 at 11:10 am

OK, Danny, I’ll hit you with one more question. Have you ever had any luck (or what is your view on) farming out aspects of the seller-contact to a commission-based person you’ve trained. Perhaps the need to quickly evaluate and estimate the repair costs makes it very difficult to find someone who has both sales/people skills, as well as solid rehab knowledge. After all, your reputation (and money) is at stake.

David

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Danny Johnson February 28, 2013 at 12:39 pm

You know that is one of those things that I feel is best handled by you. All of the other work you do to find deals leads up to that moment where you go and meet the seller. That is really the most important part. I want to be the one handling that at all times.

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Jason February 28, 2013 at 5:53 pm

Good info man. I think it is really worth emphasizing that what you are doing here is helping a person out. I would even go so far as to say that it is a skill not unlike other professions – dentist, bodyguard, chiropractor, you name it. Someone needs your help and they can’t do it themselves. I am looking forward to trying one, I just don’t feel I know enough about the process to pull it off. Any tips on where to look or whom to ask to coach me?

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Danny Johnson March 1, 2013 at 7:48 am

Hey Jason.

That’s a great way to look at it. There are so many people that see us as sharks but that is because they don’t know what it is like to be in the situations the sellers are in. They assume that the sellers are always in a tough spot with nowhere else to go. Not true. Most sellers have options and they choose the option that involves us buying their house.

Not sure what I can say to answer your other question due to the rules of the site. You can learn more from by blog if you haven’t visited it yet.

Reply

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