Flipper/Rehabber · Jacksonville, FL · Member since 2015 · 105 posts · 26 votes
In many books and articles I'm reading that successful investors buy at a discount. However, these sources don't specify how they get that discount. I'm assuming some of the discounts could be:
1. Property needs sweat equity work, which could be counted as a discount disregarding your own time value.
2. Motivated sellers. You hear of the rare cases when someone wants out fast and is literally willing to knock 20% off the price.
What do you think people mean when they say "only buy at a discount of 20%" and things like that, and are there any ways I'm missing that you can get a discount?
@Arlan Potter, suppose you think someone is asking fair market value for a property, and it would cash flow even if you paid asking price. Would you start by just offering 80% of that? Is that considered "rude" or just good business?
Also, the books are likely speaking to discount relative to After repair value (ARV) in the neighborhood based on comps for fully renovated properties in the neighborhood. You're not necessarily asking for a discount, but sometimes a property is listed under market value because it is trashed or needs rehab in some manner. There are some folks who have trusted contractors or their own renovation teams that can perform renovations for x and sell for $20k profit or more on top of the cost of repairs to generate a profit. Its much more rare to find a fully move-in ready property and be able to negotiate a discount unless the neighborhood is not desirable or there are other extenuating factors. You pretty much have to be following the local market, be aware for new listings with daily alerts, and be ready to identify a property that is being sold at a discount to ARV (hint: you'll have to do your own research for each property on your radar) and if your calculated profit works for that property, you move forward with acquisition. It takes alot of practice, time, and realtor resources to help you quickly find and identify these properties so you can act quickly...
Don't forget, its easy to say "I want to buy a property at 70% of ARV" but finding one can always be difficult especially if you live in a more desirable market. So understand that 70% discounts in some markets can be highly improbable or difficult to find or get offers same day they are listed. Just don't want to get your hopes up that LA will present opportunities to actually buy at a discount, however I am not familiar with that market.
You'll find discussions on BP about the 70% rule (see below). Don't forget to read the BP real estate investing guide below as it has full chapters on why it is important to buy properties at discounted rates and what that means.
Here are typically the reasons why I've been able to get discounts 1) House Needs significant repairs. The worst the problem the better the discount. :-)
2) House has been sitting on the market. The longer they sit, the more they'll typicall drop the price and the lower your offer from the list price they'd be willing to accept.
ie.. If you offer 100k on a 150k listing in the first week, they'll probably tell you to go fish. If you offer 100k on a 150k listing thats been sitting for 8 months, you might get a counter. You might even get an acceptance.
3) Limited buying audience. Some houses are listed as cash only or cash/rehab loan only. When the buying audience is limited, the ability to get a discount is increased.
4) Estate sale. I just closed on a house that was initially listed at 130k. It sat for two months and they dropped it to 120k. I offered 80k. They countered at 90 and said that was the absolute lowest they would take and don't bother countering. I countered, nonetheless, and said 80k was my best and highest. Two weeks later the estate administrator accepted. That kind of discount is rare but estates can panic and if nobody else is biting, will discount it pretty good.
5) Time of year. This is probably more a northern part of the country thing because of winter. But here in Illinois, I've gotten some of my absolute best deals in the November thru feb timeframe. Banks and other sellers really like to dump stuff before the end of the year. I even got a 1k credit on a recent auction purchase for closing by the end of the year. Had to do it in 3 weeks but it was worth the rush for 1k..... :-)
6) Short sale/distressed seller. People that are going to lose their house and/or have some sort of divorce or tax problem fall into this category. Short sale sellers don't care what amount the house sells for. The key is whether you can get the bank to accept it.
I actually closed on one of my best deals ever a couple months ago that a BP'er found and wholesaled to me. It was a house that the owner's husband had passed and had a 60k child support lien on from the ex wife. The current wife/occupant stopped paying taxes because of the lien until this investor found out the tax sale buyer was going to get it and was able to work a deal out with both wives so that everybody got some money.
Crazy rush on that sale as the tax sale buyer could have redeemed it within a matter of 2.5 weeks from the time he passed it on to me.
Joe Henry what Jeff Bridges said. It is not about just offering 80% of asking price or just offering less than they are asking. There are a lot of ways to negotiate a deal, but just starting at a low number every time is not the best strategy.
If you just offer significantly less then they are asking every time you will be making tons of offers with nothing to show for it. You need to do as JEFF said and analyze every property.
An agent will happily do a CMA to get you its current market value. They may even tell you an ARV, but you should be coming up with this number yourself, as it is your money and your investment.
@Joe Henry Great post and @Mike H. is spot on! Every investor I've met has his or her own specific requirements for what they want, or prefer their numbers to be. What is worth $20K to one person, isn't worth the hassle to the next person, who wants to clear $100K. For example, wholesaler deals are not retail friendly, they go for pennies on the dollar and you do the fix up work. Some flippers like specific areas and only buy in those subdivisions, regardless of price, because they know it will sell, and just like the area. Some buyer and holds only do multi families to get their cash flow working harder across one address/multiple units.
To answer your question, "Are there ways I am missing a discount?", well, it depends! On my side of the retail spectrum, Realtors see 10% of list price for a starting point to make a serious offer on a retail deal. Short sales are harder, as the bank tries to get as close to full market value as possible, but they have far fewer bidders (hint, hint, fellow investors!). Searching the MLS using days on market and the key words "motivated seller" usually pulls up a list of sellers that will consider a larger discount and can save an investor time and hassle.