The Investor's Guide to Finding Profitable Deals on the MLS

When I first started in real estate back in 2005, the common wisdom was there were no deals to be found worth buying on the MLS. This was partially because I started in Eugene, Oregon, and the coasts are particularly expensive. Indeed, buy and hold is harder in high-priced cities, and it usually is harder to find any sort of good deals on the MLS in such places. It was also during the middle of a boom, which made it all the more difficult.

However, when I moved to Kansas City just after the crash, the MLS was a gold mine.

Cash flow markets in the Midwest and South present a lot more options than the more expensive markets. Although that doesn’t mean it’s impossible in higher-priced areas, it just requires more work to sort out the diamonds from the coal.

The first step is to decide whether to become an agent or not. It does take some time and money to become an agent, and there are a few continuing costs and hassles. But being an agent will 1) allow you access to the MLS and 2) save you half of the commission on purchases. I would highly recommend either finding a great investment-minded real estate agent or becoming one yourself.

The key with buying investment properties on the MLS is speed and volume. For this reason, you must either have access to the MLS or work closely with an agent. If you do not have access, your agent should set you up to automatically be sent all the new listings in your target market as they are listed.

One important note for wholesalers and flippers planning on selling without doing a rehab: You need to be aware of any deed restrictions or earnest money problems that may exist. For example, Fannie Mae and Freddie Mac require 10 percent down for cash purchases. This puts you at a lot of risk because you are not going to get your earnest money back if you back out after the inspection period. Furthermore, Fannie and Freddie also have a deed restriction that means you can only sell or finance a property for 20 percent more than you bought it for during the first 90 days.

Speed

The early bird gets the worm — and the early bidder gets the property. It is not uncommon for properties to be mis-listed, sometimes ridiculously mis-listed. This is especially true for REOs from HUD, Fannie Mae, Freddie Mac and occasionally some of the big banks.

HUD, Fannie Mae and Freddie Mac unfortunately have investor restrictions and only allow owner occupants to offer for the first 20 to 30 days. Still, you want to make offers on any mis-listed property as soon as it comes on or is available to investors. I recently heard a podcast where the person being interviewed said the last three great deals he had bought were on the MLS and came up near the end of the day on Friday. Everyone else apparently thought they would just look at the property on Monday, but he made sure to get the offer in that day.

Regardless of how quick you are, unfortunately these properties will often get multiple offers and go “highest and best.” It’s just part of the business, so be prepared to deal with it.

Highest and Best

One time, we went $24,000 over asking and got a property that had at least $40,000 of equity in it. Another time, we went $33,000 over asking on a duplex and missed it. It was listed for $32,000, we offered $65,000 and it sold for $93,000! And you know what? It was still a great deal at $93,000. That’s how badly some properties are mis-listed.

On a quick aside, the “highest and best” does serve as a reminder of why it’s better to find a deal off-market than on the MLS or even through a wholesaler. Had that deal come directly from a distressed seller and I was the only one around, I could have gotten it for $32,000 and had $100,000 or so in equity from day one. That being said, the MLS is a numbers game, so dealing with highest and best situations is something to get used to. It’s just part of the life of a real estate investor, so it’s best to make peace with them and simply figure out how to deal with them.

The first step is to simply know where you’re at, financially speaking, and what your appetite is. Do you have a lot of money or private lender funds to place? If so, it would be good to be a bit more aggressive. But if you’re a little tight right now or don’t have a private lender lined up or perhaps you are a flipper who is in the middle of a project and not hugely keen on starting another one, don’t push on the deal.

Furthermore, just because a property has gone highest and best doesn’t mean the other offer is strong. Sometimes it’s an offer that had been made on the property a long time ago that amounts to little more than a low ball. The seller uses that as leverage to get you to raise your price. And sometimes, even if you’re the highest, they will counter you again because they don’t think you’ve gone high enough.

Other than that, the key thing to ask is, “At what price will this be a really good deal?” When you first analyze a property, you should come up with a strike price that is the highest you will possibly go under any circumstance. Remember that “highest and best” situations can be a bit like auctions, where you get caught up with “winning.” But you only win if you get a good deal, so make sure to stick with your strike price no matter what.

Thus, when and if a property goes highest and best, you can just come in at your strike price (or perhaps less if your appetite has shrunk). You will usually lose out, but not always.

Volume

On the MLS, it’s all about volume. Back in 2012, we made 341 offers and bought 32 properties. And I looked at many more properties that were in such bad shape or so overpriced I didn’t even bother offering. It’s a numbers game, folks.

What I do is go on “property tours” and look at something like 15 properties in my target areas. These areas I know well, so I can quickly estimate the repairs and ARV and then aim to be all in at about 75 percent of the ARV and have a rent/cost ratio of about 1.5 percent or so depending on the area. Based off of these criteria, I set an offer price and a strike price. Then we make all the offers and see where the chips fall.

Sometimes you don’t get anything. Sometimes you get more than you want and have to drop a few. It’s a bit messy, but it certainly can be done. We just had two properties we bought off the MLS appraised for refinances; one we’re all into for $53,000, the other for $56,000. They appraised for $75,000 and $85,000 respectively. So don’t let anyone tell you that you can’t find great deals on the MLS. You just have to be fast, careful and make a lot of offers.

Investors: How do YOU find great deals on the MLS? What tips would you add to those listed above?

Be sure to leave a comment below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.