It doesn’t always mean paying too much. There are ways to win even without the highest price. We’re smarter than that; we’re investors.
In a seller’s market there are more buyers than there are sellers. Finding a single family investment in this type of market can be difficult. Most good homes sell in a few days for over asking price with multiple bids. It can be frustrating to watch property values go up every month while continuing to lose. Time really is money in these situations.
The common belief in a seller’s market is that more money always wins. This isn’t always true, though it does help. There are other ways to win. Let’s understand it from a seller’s perspective.
How to Invest in Real Estate While Working a Full-Time Job
Many investors think that they need to quit their job to get started in real estate. Not true! Many investors successfully build large portfolios over the years while enjoying the stability of their full-time job. If that’s something you are interested in, then this investor’s story of how he built a real estate business while keeping his 9-5 might be helpful.
The 3 Most Important Factors for Sellers
- Good return on their property.
- Sell on their own timeframe.
- Have a smooth, trouble-free transaction without surprises.
Let’s break down these pieces and learn how to appeal to sellers and win more bids.
Sellers Don’t Want to Lose Money
Sellers are paying for two realtors and closing costs. They are already spending a lot of money so don’t upset them with a low bid right away when your competition will pay more. Give them a fair bid if it’s already on the market.
Most of the “good deals” are going to be gone quickly. Another option is to only look at houses that have been on the market for a month or more. An overpriced house typically won’t get any bids, and sellers get frustrated. After a month they will be more willing to take less than it’s worth or a price that will cash flow for you. This is also about the time where they start thinking about dropping the price. You’ll want to get in before that happens.
Sellers Want to Sell on Their Timeframe
If the house is vacant, most sellers will choose the offer that is the most likely to close quickly. Mortgage brokers can close a deal in as little as 2-3 weeks, whereas banks will be more in the 4-6 weeks range. Most sellers are still paying a mortgage, which is costly when you’re also spending money to move and rent or buy another place. Let them know that you can get it done faster than everyone else by having your lender call them after putting in a bid, and tell them you can close fast.
If they are still living in the house, your realtor should ask when they want to move. That’s when the closing date should be. No one wants to be homeless for a few weeks. They want to conveniently move to their next destination. You can also offer to rent the house back to them for a few weeks to make their transition easier.
Write an escalation clause into the contract. This just says you will pay $X over the highest bid up to a max of $X if they show proof of the highest bid. This can be a double-edged sword because some realtors will reject your bid and counter it with your highest stated price. Use with caution.
Sellers Don’t Want Any Problems
Sellers don’t want to fix a hundred things and pay for them out of pocket after inspections. Real estate contracts have an inspection contingency that says the buyer can do inspections and back out of the deal for any reason during the inspection period and get their deposit (earnest money) back. You can opt out of this contingency and lose your earnest money if you back out. Sellers love this because it shows you are more serious, but make sure you add into the contract that if cumulative repairs are over a certain dollar amount, you get to still back out if they don’t do the repairs. You are giving them peace of mind in exchange for a lower price.
Don’t send them a preapproval letter — or worse, a prequalification letter with your bid. Send them an approval letter from your lender that has already gone through underwriting. When you put in a bid, have your mortgage broker call the sellers realtor and tell them you have already been approved and why that benefits them. Most banks won’t do this, so you will need to talk to a mortgage broker. A preapproval or prequalification just means you probably can get a loan. An approval means you have already been approved for a loan, and you only need an address to put on the loan.
Put more deposit (escrow money) down. This will make you look more serious because you have more to loose if you break the contract. If you don’t break the contract, you get it all back.
Pay all cash. Most sellers will forego the highest bidder and go with the all cash bid because they see cash buyers as more serious because they have more to lose. Cash buyers can also close a deal in two weeks, which makes them even more desirable. If you have a good mortgage broker and you are already approved for a loan, you too can close in two weeks.
Be more than a piece of paper with numbers on it. Write a letter to the sellers and attach it to your bid telling them how much you love their home. Tug at their heartstrings and make them feel good about you. Tell them how it will benefit you to live there if you’re going to live there. Everyone wants to feel like they’re helping someone else. If you’re only numbers on paper, then you have to be the biggest number to win.
Find homes before they hit the market. If you can find homes before they hit the market, you can save time and money. Here are a few ways to do that.
How to Find Homes Before They Hit the Market
Drive around neighborhoods you want to buy in and look for large remodels or construction on an existing house. Sometimes these homes will be in the process of being fixed up and resold. You might be able to buy it early and save money.
Have your realtor get you names and addresses of potential investment homes where the owners have lived in their homes between 7-10 years. Most homeowners sell after 7-10 years, so you could send them a card asking if they want to sell. This card should have the name of your lender on it so they can call and know that you are a real buyer. Sometimes your lender and realtor will get together and pay for it for you.
Ask your realtor to email people in their office and people who sell a lot in that neighborhood to see if they have anything coming up that you might be able to see before everyone else does. Most real estate offices have weekly meetings where they talk about homes coming up. Make sure your realtor goes to these meetings to help you out.
The most important thing you can do in any situation is have your realtor ask the sellers what they want. An open question is best. So few people do this and miss something important that will help the seller and increase your chances of winning. If you and your realtor were the only ones (you will be) who took the time to ask what they wanted and pointed out to them in a cover that you made those changes, you will have done your best. Besides, why wouldn’t you want to work with the person who cared what you wanted? A three minute conversation can save you thousands of dollars, and the sellers will be happy you asked.
Investors: What would you add? How do you snag deals in a seller’s market?
Leave your comments below!