Ethics when buying off market properties

22 Replies

I have a homeowner who owes $50,000 on her house. She and her husband can no longer make their payments. I talked through everything with her and will be going out to see their house early next week (6/5/18).

My deliema is that they were shocked that they would be able to get any money at all for the house. My as-is retail estimate is $140k and my ARV is $170k. I am guessing it will need some work but the house is only 11 years old. From talking with her I think the budget will be somewhere between $10-15k. I don't want to take advantage of these folks but I also need to make money off the deal.

Where do you draw the line?

Have you ever negotiated against yourself to make sure the homeowners are being taken care of?

What % of ARV should I not cross so that I can still look at myself in the mirror?

I just down want to progress the bad opinion of us real estate guys as used car salesmen. I have never had someone not know at all what their house may be worth.

@Bjorn Ahlblad I agree 100%

That is where the questions at the bottom come in. What would you do?

Do you have a % of profit compared to ARV that you will not pass when buying directly from a homeowner who doesn't know better?

@Ryan Blake the fact that you are asking the question means you want to do things the right way. but what that means in terms of an offer price is a personal decision only you  can make.  Also, keep in mind that until you actually see the house you don't really know what you are in for.

"Have you ever negotiated against yourself to make sure the homeowners are being taken care of?"

Never...always me first.

If you are concerned tell them to get some advice (at risk of losing the deal) otherwise if they are reasonably intelligent adults they can look out for themselves. Give them your low number and see what they do.

@Thomas S. Thank you for your reply! It seems like most adults should know what they are doing. This couple is in their late 50's so they should have quite a bit of life experience.

They have a problem (can’t make payments.) You have a solution (absolve them of debt, prevent deeper delinquency and damage to their credit.)

If both parties agree on terms that benefit each other, is that operating ethically?

Market value matters a lot less when a seller has other priorities. Solve their problem and use your skills to bring more value to the table.

When you meet them take a look at their teeth. If they each seem to have a reasonable number of teeth they may be competent enough to make a informed decision on their own. On the other hand at their age not being able to make payments is a indication of something missing.

Collectively less that 10 teeth and they are likely well below average intelligence. You may want to review your ethics quotient (or not).

@Ryan Blake just be honest with them. Tell them that after looking at the property, this is what I can offer you, all cash and I can close quickly and you can put this behind you and move on. On a side note, I'm not sure what your plans are on this, but with an ARV of $170k and $15k in repairs. You will lose money offering $140k. Break even is probably somewhere in the 128-130 range. If you're wholesaling this, as an investor I'm buying this from you at a max of $105k and that's if your rehab is accurate.

@Jason D. Who said I was offering $140k??? I said the retail value is $140k. I don't pay retail for homes. I am probably going to go into this offering around $80-90k.

I don't wholesale either. I keep my own leads unless they are way out of town and I just birddog it.

well couple things comes to mind..

1. you have the ethics  and moral compass  your can let that guide you

2. the natural greed in all of us will cause your moral compass to sway towards you I know it would with most.

3. if you low ball too much they may call someone else and you lose the deal all together how did the lead come to you if it was direct mail or bandit sign you can be almost 1000% sure they will or have talked to others..

4. and this is what I personally do when confronted with this situation.. NOw I am not a buy and hold guy so everything I touch gets sold to someone else.. I would do a JV with them. with putting only enough money up to solve their credit issue and move them then sell and give them a nice check.. makes me feel good.. they do better and you do well on a very leveraged deal.. I beat MANY wholesalers out this way.. they all have one way of thinking about things and frankly its greed plain and simple..

5. if your plan is to refi and keep as rental  then go back to what you think is fair and again what you can morally live with.

As long as they aren't mentally disabled, etc, my conscience is clear :] 

You have to understand most owners of distressed properties are in damage control mode. They made a series of mistakes to get to where they are with that property. You're essentially offering them a 'get out of jail' card. They have 2 other options: 1. find a better offer 2. Lose the property, get $0 and ruined credit.

Originally posted by @Pratik P. :

As long as they aren't mentally disabled, etc, my conscience is clear :] 

You have to understand most owners of distressed properties are in damage control mode. They made a series of mistakes to get to where they are with that property. You're essentially offering them a 'get out of jail' card. They have 2 other options: 1. find a better offer 2. Lose the property, get $0 and ruined credit.

not really list it with a good broker sell it in 3 days for 100k or better.. no rationalizing how you guys cream peoples equity.. it is what it is we all do it.. myself included.. just depends.. on how you got the deal.. if its MLS or agent brings it to me.. then I pay whatever.

I mean I have bought properties that agents listed and they had no clue as to the timber value.. I paid full price right on MLS and made 500k or more in cash in 90 days just on the timber.. but who was I to educate them on timber values.. that's why they hired an agent.

but when your dealing direct  well that's a different matter.. and we can all say they are big boys etc etc.. folks here in the US are tend to be much softer than foreign investors just culturally..  

The bottom line is your sellers are uninformed. If they knew the property was worth $140k, why on Earth would they sell it to you for $80k? Homes are flying off the shelves in pretty much all markets across the country. How is it that these people are unaware of this?

Who in their right minds are shocked their home is worth any money at all?

Some people think sharks are great and wonderful creatures, while others hunt them down and kill them. Who is right? 

You will attract as friends those who are like yourself.

"...Meet my friend Ryan, he is super good at finding people who are ignorant and vulnerable and capitalizing. He is so great. He drives this super neat car and lives in a really big house. We're besties..." That's something you won't find me saying ever, but I like to think I am not a troll, and conversely, who is to say trolls are not creatures of God too?

Be nice. Give respect. Reject stupidity. The world is a better place when we employ these. Then again, dung beetles have their place too - lol.

I am up front with numbers, to the degree that it is not stupid to do so. A couple thousand my way is fine with me. A couple tens of thousands, when the person getting the short end is just a regular little minnow, is not. That's me. Did you come on here asking for a number to go with? The 70/30 strategy is not a new one. Lets give you an extra five to satisfy your greed and keep your conscious clear. $170k - $15k x .65 = $100k.

@Jay Hinrichs Yeah my first other option included getting it listed. 

I'm not going to deny that when we find a "good deal", whatever that may be, it's because we were better at negotiating or had more knowledge. The reason we've spent so much time and effort studying real estate is so we have an advantage in the market. If I can gain that advantage just by using google/books, so can the seller or buyer of a property. It's a level playing field in my eyes. 

@Merritt S.

I know it's hard to believe but there are many reasons why someone would sell their property for less while knowing they can get more. Price isn't always the determining factor. For example, a family sold me a property while having a much stronger offer on the table simply because I helped them with a lot of things that other's wouldn't. I helped them sort through decades of sentimental items, boxed them up, help them load a u-haul, took care of junk vehicles on the property, etc. I made their lives easier in an emotionally stressful situation which meant a lot to them (and me). While handing me the keys they said "I hope you make a boat load of money on this".

Our primary motive being in RE is....ROI/$$$. But for distressed property owners, it's more than that, sometimes much more.