Flipper/Rehabber · Knoxville, TN · Member since 2017 · 130 posts · 72 votes
Hey everyone,
As one that has just begun to drive for dollars, I am a total rookie when it comes to direct marketing. Having said that, I keep on seeing a fairly common theme of making sure it's people with higher equity and those have owned it for a longer period of time. The latter point would seem to directly correlate with the former point, and I also get that typically if someone has only held the property for a year or two, more than likely that's not going to be a great motivated-seller pool in the big picture.
However, I'm still trying to understand how the higher equity piece specifically plays such a significant role in the overall success of this approach. Can anyone give me a tangible example of the actual math behind why the higher equity owners are targeted?
Investor · Los Angeles, CA · Member since 2016 · 577 posts · 240 votes
9y
T, I understand your question and I know that it can seem kind of confusing. The reason why we direct market to people with high equity in the property is is because it means that they have been there for a long time and they don't have to pay off a loan when they sell the property to us. For example if we go and direct market to somebody who has 10% equity in their home then The maximum discount you can get on The value of that property is 10% because the owner still has to pay down the loan which is 90% of the property value. If we were to take the same example and if a seller had 90% equity in their home the amount of loan that they would have to pay off is only 10% this allows us the investor to make a offer that is lower than the property value because the owner does not have some minimum offer that they can take. I know this may seem confusing. I hope it makes sense!
Oakland, NJ · Member since 2016 · 10 posts · 3 votes
9y
@Tae C.
The more equity a person has in the property the more they walk away with when the sale closes. You have two homes, each with mortgages of $100,000. Person A lived in their home 15 years and has $50k in equity, Person B lived in their home 5 years has $16k in equity. If the homes could sell for $150,000 and you offer them $120,000 Person A walks away with: $120,000 - $50,000 = $70,000 (50,000 being the remaining loan balance). Person B walks away with $120,000 - 84,000 = $36,000. Both would see a profit in that scenario but who do you think would most likely take the deal if they didn't "need" to sell but may consider it? Motivation to sell may in fact be more skewed to those in a home the longest (kids went off to college and there is no need for the house in the expensive suburbs anymore, the sellers are close to retirement and want to "cash out", divorce after the kids have gotten old enough where they can deal with it, what was once a solid job turned to garbage due to changing business market, etc).
Flipper/Rehabber · Knoxville, TN · Member since 2017 · 130 posts · 72 votes
9y
@Antoine Martel thanks for both of your responses, and for the specific examples with the numbers. I think I do understand, so I have a follow up question that may indicate that I do indeed understand or I'm still missing it.
So let's use Ryan's numbers, but maybe with a more specific scenario: ARV is $150,000, it needs say $35k rehab, and using the 70% approach just for the sake of example we need to be all in at $105,000 - meaning our maximum offer is $70,000 to the seller. I think where I get stuck in this is, why would the owner be willing to take such a low offer when they could sell it for higher without much effort given the assumed values in this example? Is this simply where the "motivated" aspect of "motivated seller" has to come into play - they are so motivated to sell that they don't think it's worth it to put just a little time/effort/resources to gain a potentially much greater profit? Again I know this is such a rudimentary question but the psyche of it all fascinates me.
Investor · Los Angeles, CA · Member since 2016 · 577 posts · 240 votes
9y
Motivation and distress is the key. If someone has a lot of equity in their home and they need to get rid of it tomorrow. It allowed them to take a low offer to close quickly. It happens.
Investor · San Jose, CA · Member since 2017 · 453 posts · 254 votes
9y
@Tae C. also if the property value is very low and they do not have a lot of equity then you are looking and doing a short sale with a bank which is a complication and more work compared to someone with a lot of equity they may be able to pay of the remainder of the loan and walk away with cash.