With real estate prices reaching ever-higher highs in large swaths of the country, the availability of deeply discounted properties is drying up. And that means it’s getting tougher for real estate investors and home flippers to find great deals worthy of their time and cash.
“There are fewer foreclosures to buy, but there’s more interest in buying foreclosures,” says Daren Blomquist, senior vice president at ATTOM Data Solutions, a real estate data firm. “Competition, even at the foreclosure auction, is pushing prices up.”
Bank-owned property sales, foreclosure auctions, and short sales still made up 16.9% of single-family home and condo sales in the first quarter of 2017, according to ATTOM. But that’s down from 20.3% of sales a year ago.
“Back in 2007, you were getting 20% off the actual value” on bank-owned property sales, Leland DiMeco, owner and principal broker at Boston Green Realty, told ATTOM’s Housing News Report. “Now you have them selling for 5% off, if that.”
So how can established and aspiring real estate investors and home flippers find a real deal?
Tip No. 1: Be proactive and look for off-market properties
Some landlords prefer to quietly shop around their properties to investors instead of listing them publicly. This way, the owners don’t upset any tenants currently living there.
“There is quite a bit of the pie that does get moved around, legitimately, but just off-market,” DiMeco told ATTOM.
So would-be investors shouldn’t wait for property owners to find them—they should find these folks themselves.
“If you like a neighborhood, you can go knock on doors,” Blomquist says. There might be “homeowners who may want to sell and don’t even know they want to sell yet.”
Tip No. 2: Act fast and pay with cash
There are still deals to be had—if you act quickly, says real estate investor Brandon Turner, author of “The Book on Investing in Real Estate With No (and Low) Money Down” and “The Book on Rental Property Investing.” He owns 52 rental units in 18 properties and has flipped about a dozen homes in Grays Harbor County in Washington.
“You have to work faster than everyone else,” he says. “I try to make an offer within 24 hours of a new listing coming on the market—the same day, if possible.”
Paying all cash can also sweeten the deal for sellers who might have multiple offers, he says.
Tip No. 3: Don’t ignore potential tear-downs
Real estate investors might not initially see the value of buying an overpriced, small, or run-down home within the city limits. But many of these homes in desirable locations can be sold to a developer to be torn down. Then a multifamily building or larger home can go up if the zoning permits it. And that can translate into some serious moolah.
It requires some vision and a bit of a leap of faith. With a potential tear-down, “it may not be a good deal to buy it as a single-family home. But if you can buy it for what it could be, it can be an excellent way to find value and deals,” Turner says. However, this approach is not without risks and obstacles.
“If you’re going to build a new house, it takes a good while to get all the permits,” he adds. “The danger is if the market begins to decline, you might be unable to sell it.”
Tip No. 4: Seek out nasty, smelly homes
Investors shouldn’t shy away from hardcore fixer-uppers and “nasty” homes, says Turner. That’s because there is not as much competition for these potential diamonds in the rough. Many lenders won’t issue loans on these properties if they’re in really bad shape.
“The stinkier the house, the better,” Turner says. “Smells are easy to fix. A good coating of oil-based primer, new carpet, and cleaning will take care of almost any smell.”
He typically looks for the “nastiest house in the nicest neighborhood,” he says. Even homes in need of serious TLC can be profitable if they’re in the right location.
“You can’t fix a neighborhood, but you can fix the house,” he says.
Tip No. 5: Look in another city or state
Many would-be property investors living in pricey parts of the country would love to become landlords—but can’t afford to do so in their own cities. So they can consider buying in lower-priced markets such as the Midwest.
“Look in other geographies that aren’t in your backyard,” Blomquist says. Focus on places that are growing “that still have a lot of lower-priced inventory available.”
But they should make sure to do their homework first to make sure they understand the neighborhood they’re buying in and who their potential tenants or buyers would be. This includes how much they can realistically charge.
Landlords might need to hire property management services if they can’t afford to get there quickly if something breaks. And that eats into profits.
Remember, becoming a real estate investor is still risky
Despite the stinky homes, investing in real estate might seem like a glamorous way to make a little extra cash—just look at all of those home flippers on HGTV! But in reality, it’s not risk-free.
Landlords sometimes have tenants who trash homes or don’t pay the rent on time. Flippers might encounter permitting problems or find costly structural issues in homes that cost quite a bit more than expected.
“We’re in a booming housing market. Everyone’s confident if they buy a piece of real estate it’s going to go up in value,” says Blomquist. “That’s true for the long term.
“This housing boom is on a lot more solid foundation than what we saw 10 years ago,” he says. “But you have to be very cautious because, in the short-term, we have seen … that prices sometimes do go down.”
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