The Science of Finding Deals - Even on the MLS!

In a Biggerpockets Meetup Group in Chicago where I was invited as a guest speaker, I’ve been asked the question: “How do you find these good deals, Wendell?”

My answer: you got to boil down finding deals into a science.

Donald Trump wrote the book “The Art of the Deal” and even though it’s a good read, I like science more. Science produces repeatable, predictable, and consistent results. Art does not.

There are so many BP members who complain everyday how it’s so difficult to find deals in their market, that I’ve decided to share with you “The Science of Finding Deals”. I have a real estate business that has bought 20 houses last year even in this HOT market so I think I know a thing or two about how to find good deals. I have done over 100 deals since 2004. "The Science of Finding Deals" is a multi-part forum and blog posts that I am providing to BP Nation to help as many investors as possible how to find good deals.

I described in Part 1  the concept and importance of having LEAD PIPELINES. By establishing lead pipelines, leads come in consistently with minimal effort on your part. When you have lead pipelines, you don’t seek out deals. They come to you.

In Part 2 , I described the importance of knowing and having MULTIPLE ENTRY AND EXIT STRATEGIES. If you k now just one or two entry (how to buy houses) and exit (how to profit from houses) strategies, you are limiting the number of leads you can convert into deals. You set yourself apart from other investors if you can buy properties that other investors pass on. In my podcast (http://Biggerpockets.com/show65) I described how I bought a property for 93% of market value and yet I made over $30,000 profit on it (house is worth $170K, I paid $160K for it). Listen to my podcast to know the exact entry and exit strategy I used in that deal.

Today in Part 3 (which will be in blog format), I will describe how to find GOOD deals even on the MLS…even in today’s HOT market. Most of my deals (70-80%) do NOT come from the MLS. But a substantial part of my leads (about 20%) still come from the MLS. So before I jump and share how to find good deals on the MLS…

First…

Why You Need The MLS But 2 Reasons Why It’s So Hard To Find Good Deals There

Banks list their REOs (real estate owned or banked-foreclosed properties) and shortsales on the MLS. The government (through HUD, Homepath and other programs) is the biggest motivated seller of distressed properties and they list their properties on the MLS. So good deals exist even on the MLS. But how come finding good deals is so hard?

The first reason are the AMATEURS. Blame it on the flipping shows. They make rehabbing sound so easy everyone wants to do it. You got amateurs and the wannabee real estate investors who are making crazy offers on houses because they don’t know their numbers. They offer higher than what makes sense for a professional investor. Amateurs speculate and they drive up prices but eventually, the amateurs lose money.

The second reason are the HEDGE FUNDS. They have very little cost of money and they can securitize rents allowing them to get even more capital to buy houses with. They can buy at 90% of market value and still make money. The hedge funds have specialized entry and exit strategies that allow them to profit on deals that the ordinary investor won’t make money from. Hedge funds create markets and they make a lot of money doing so.

Both these extremes (amateurs and the big players like hedge funds) make finding good deals on the MLS difficult to do in this market. So how do you compete against these 2 extremes?

Competitive Advantage #1: Look For Unwanted Properties That Have Value-Add Opportunities

A contrarian investor goes the opposite of what the herd (or majority) of investors do. The real estate gurus on TV and in the seminar circuit teach the beginning investor to look for a 3 bedroom/ 2 bath house in need of repairs whose ARV (After Repair Value) is in the median price range. The reasoning goes like this: buy and fix houses that are most in demand by most people to maximize your chances of success.

It sounds good and it works. The hedge funds buy as many median-priced 3 bedroom homes they can find.

The problem is – if everyone’s doing it, everyone (specially the hedge funds) will compete for the same inventory. So here’s what you can do to get deals from the MLS – focus on properties that the amateurs and even the hedge funds don’t want.

For instance, why not focus on 2 bedroom homes with only 1 bath? Before you say that sounds like a terrible idea, hear me out first. Of course you don’t buy an undesirable property simply so that you can buy something. You have to buy it with the idea of creating more value so you can sell it at a higher price and make money. For instance, you should buy a 2 bedroom/ 1 bath home if you can…

•  Do 2nd floor additions. If you add a second floor, you may be able to add an additional bedroom and bathroom converting it to a more desirable 3 bed/ 2 bath home. Of course the numbers have to make sense for it to work. Below is a video that shows how to do 2nd floor addition in just 1 day (of course not all 2nd floor addition takes only one day - but it's a lot faster than what most people think).
  
  Depending on your market, it might work for you. I know some investors in the Chicago area where their specialty is buying 2 bed ranch homes and converting them to 3-4 bed 2-story homes. They make $50K to $100K per house on properties that most investors do NOT want.
• Add a bedroom and bath if the house has enough square footage. Let’s say the house has 2 bed/ 1 bath with 1500 square feet. Depending on its lay out – it can be converted to a 3 bed/2 bath home. You may need to add walls, re-route some plumbing, etc – but explore if it can be done. Again, the numbers (repairs + your acquisition price) has to work before you do this.
• Demolish it (if it sits on a double lot) and build two 3-bedroom homes.Obviously, this is very specific but if you can find a situation like this and have experience in building houses, buy that undesirable 2 bedroom home.

The whole point is to buy an unwanted property and create value. You can create value by adding square footage, adding a bedroom, adding a bathroom, etc. For example, we recently bought a house in Ravenswood Manor neighborhood of Chicago. The property has 3 bed/ 1 bath with 1600 sqft. We will convert it to 5 bed/ 3.5 bath with over 3300 sqft by spending $200,000 in renovation. The property will be worth $1.1M and we acquired the property for $490,000.

Another way to add value is by converting a property into its highest and best use. For example, is an area in your town gentrifying? Maybe you can buy dilapidated small multifamily and deconvert them into luxury homes? What’s the profit margin for a single family home vs. a duplex in your market? Maybe there’s an opportunity there to buy unwanted duplexes and convert them to more desirable single family homes.

Competitive Advantage #2: Buy Properties with Deed Restrictions and Sell On Rent to Own

Prior to 2008, buying and wholesaling shortsales is easy. After the crash however and the banks became smarter, they started imposing DEED RESTRICTIONS on shortsales. For example, they prohibit shortsales from being re-sold within 6 months. This deed restriction made wholesaling shortsales difficult.

The government followed suit. They launched Homepath and Homepath properties are even more difficult than shortsales. A Homepath property can NOT be resold within 12 months. This deed restriction made fix-n-flip difficult (not just wholesaling it) for Homepath properties.

SO how do you use these difficult properties to wholesale and fix-n-flip as a source of competitive advantage? If you’re a flipper, you got to be open to RENT TO OWN as an exit strategy, specially for Homepath properties. In Part 2 of The Science of Finding Deals, I gave a comparison between a typical house that can be rehabbed and rent to own. I show there why rehabbers make only HALF of what a rent-to-own investor makes. And yes, you will hold the house for a year but what if you can refinance out of a hard money loan (into a conventional loan) and get your money out in 6 months anyway? Now, you can do another rehab project while waiting for your bigger payday 6 months later? Flippers (wholesalers and rehabbers) don’t like Homepath. In fact, most of them don’t want to bid on these because Homepath requires a 10% earnest money deposit. However, landlords (rent to own and straight rentals) should look into Homepath as a competitive way to get deals. 

Competitive Advantage #3: Develop a Lean Mean MLS Offer-Making Machine

Most investors do not treat their real estate investing as a business – they treat it as a hobby. Everything depends on them doing the work. And when one is converting a lead into a deal, then there’s no lead coming in. Once the property is sold then the amateur investor will work hard to find the next deal. On the other hand, professional investors create an MLS Offer-Making Machine. They develop systems for…

• Finding deals (they set up MLS alerts to find houses that were contingent that just come back on the market, houses that have steep price reductions, etc.)
• Calculating what to offer on every property. Every property has different entry and exit strategies. We have spreadsheets in our office for rehab projects, rent to own leads, development leads (e.g., land deals) and rental properties. My staff has been trained on how to use these spreadsheets so they can know what to offer even without me.
• Making offers -we have a full time Virtual Assistant from India and his sole, full time job is making offers everyday of the week on MLS listed properties. We literally make 1,000 offers every single week on the MLS. Other investors can’t keep up and can’t compete– we have a system in place to doing this – and the result? Every week we get an offer or two accepted. It’s an automated lead pipeline.
• Raising Capital – if you can put down $20,000 earnest money on a deal while your competition can afford only $500-$1,000 EMD, whose offer will get accepted? Yours. You need to line up your capital sources. One good way for beginners to get capital is business lines of credit. Contact me for more information on how you can get access to up to $150,000 business line of credit (even if you have no real estate experience).

So there you have it: I’ve discussed just 3 ways for you to competitively get deals on the MLS. In our office I teach more than these 3 ways to get deals from MLS listed properties. Some of these ways are obviously proprietary and I cannot divulge them here.

In summary, there could be overlooked opportunities even on the MLS. You can buy unwanted properties and see if you can create value. Don’t dismiss an MLS lead source if it has deed restrictions. It could be an opportunity for you specially if you change your exit strategy from fix-n-flip to fix-n-rent to own. Lastly, you need to develop systems that will out-work your competition so you can get deals before they do. 

Even though finding good deals on the MLS is like finding a needle in a haystack, the MLS remains a treasure trove of good deals. You just have to dig through the dirt to find the gold.

So get started digging!