Tuesday, July 1, 2008

How do you find "good" deals without any competition?

I've been curious and questioned other investors that consistently found juicy deals, how they found a particular deal. The answers have usually been that they learned about the property word-of-mouth from someone who knew the owners, or through some acquaintance. Basically referrals.

That seems obvious for seasoned investors who've staked a claim in particular farm. However what about when we don't have a presence in the farm yet? How can we find good deals before we've established a good referral business?

I've discovered that direct marketing is THE answer (dream tool) for not only finding juicy prospects, but getting the prospects to call ME directly, and...best of all... getting the prospects to call me without (or before) calling any of my potential competitors.

OK, so direct marketing works. But one asks, how we choose a good farm area. And what criteria do we use to chisel the list of prospects down to the MOST profitable mailing list.

The answer is easy. First make up your mind about what type of financing you are capable of. Are you a cash buyer? Are you a Lease/Optionor type buyer with a some cash? Are you a wholesaler with solid financial backing or personal funds? Or maybe a rehabber with a line of credit? These all make difference on what types of houses, and equity situations you target.

Then make a decision on the price range of houses you want to invest in, the size home, again the equity values, the age of the properties, and finally the length of ownership. Did you know that most owners get in trouble on their home loans within the first 24 months of ownership? These are usually good sub2 type prospects. These are what I target.

Yep. And these types of prospects usually have very little equity. And this makes a big difference for those of us who specialize in taking over loans on houses that I call "equity lite". These are properties bought with 10% down a couple years previous, but don't reflect enough equity now to pay a real estate agent to sell.

Of these prospects that get in trouble --- these are the same prospects that tried to keep up with the Jones after buying their new home. They moved in and immediately loaded their credit cards up with furniture and toy purchases. Dad of course had to match the "Bubba" truck that the neighbor owned, in order to pull the new trailer filled with "desert toys". And then mom soon after refused to drive the kids to school in that old 1995 Aerostar. So she came home in the new Honda SUV to show off to the other mothers.

Well, after all these purchases of cars, furniture and toys, they're now over extended. Whoops! Figuring out how to downsize the bills, they discover the only thing they can sell is the house! Everything else is upside down.

Meanwhile, I'm scouring for upside down moms and dads in new houses. So Mom and Dad Seller get a card from me, informing them about how they can sell their house in 24 hours (or less!). Mom calls to ask how this is possible.
I invite myself over to evaluate their situation and explain what (if anything) I can do for them.

So, in comes me! The hero,
  • to take over their loan
  • protect their credit
  • and resell the house for an obscene profit to a credit challenged buyer whom has roughly 10% down.
  • This all happens in four weeks flat.

The house was worth about $300,000. I took over a $260,000 loan. I resold the house for $330,000. I asked for $30,000 down. So, $30,000 profit up front in down payment money, and another $40,000 in potential equity profit equals $70,000!

Not bad just for protecting someone's credit, and bailing them out of a loan they could no longer afford.

That's why DM'ing becomes profitable --- sifting out all the prospects except those that are likely to be headed to foreclosure because of pride. And notice, nobody else was competing with me for this juicy deal. I am the only one talking to these sellers. And I didn't have to create a name for myself in the community to get the referral. I just went directly into the pool of "don't-wanters" as Bob Allen used to say.

Next post, I'll explain the cheapest place to get a mailing list.


MattJohnson said...

Excellent post; great way to make some quick cash, and I like that it doesn't require any cash/credit on the part of the investor.

One question: what exactly do you do to find those homebuyers who can't qualify for a normal loan? What type/amount of marketing do you do to build up your buyer's list?

Javipa said...

That’s a great question, and there are several answers depending on the pressure and frequency one plans to maintain in buying and selling sub2. That is, is this a full-time effort, or not?

If this is a “one-time” proposition, it might take several weeks to locate a buyer, if we haven’t already begun a marketing campaign for buyers.

If we’ve advertised for buyers ahead of time, using our “phantom” house as bait, we’ll might already have six to ten (or more) potential buyer’s lined up, and it'll be just a few days before we can resell.

Of course we have cattle call showings, so that we can create a scarcity mentality among our buyers. This isn’t always possible, but we aim for this.

That all said, we need to make sure we know very intimately what the velocity of sales is in the farm area, and the average days on market --- and comps.

This will be a legitimate gauge as to what we can expect if we are marketing our homes anywhere near retail.

We’ve found that it costs us about 1% of the value of the house to market it for sale. So a $250,000 will costs roughly $2,500 in total marketing costs (gas, ads, flyers, newspaper ads, etc.)

We keep a leader ad running in every venue we can including “real estate” wanted in the biggest circulation paper, craigslist.com, kijiji.com, backpage.com, penny-saver, etc.

Also our ads emphasize the features of the house that attract that certain type of buyer that our house will mostly appeal to. For instance, we don't market a 2/2/1 condo as a family home. We would market it to a young married couple with 1 kid, or no kids.

As far as finding credit-challenged buyers we advertise precisely for these folks. Our headlines always read something close to this..

$20,000 down, NO QUAL.
Orange Crest 3 bed, 2 bath has it all.
2400 sqft tile roof spa RV parking
$1900/mo Call Jay Today (866)237-3847

or similarly to this...

No Credit Check! Small Down! Seller Finance! $1900/mo 3 bed, 2 baths, fenced yard, RV parking, tile roof, 2400 sqft. Call Jay Today (866) 237-3847

Those with credit problems are the ones that will first notice and respond to these ads. Also, we advertise the PI only, and not the PITI.

There’s a lot more to say here of course, but marketing for buyers will be a 24/7 effort from the moment we start looking for houses to flip, until the minute we sell the last property.

Anonymous said...

How would you go about handling a sub2 on upside down properties, or properties in arrear/or in foreclosure? I would like to target some of these owners, and hire a proven/efficient loan modification firm to handle the loan mod. So for instance, a home in foreclosure has a loan of 200k with CMV (current market value) of 90K. I would take it under sub2, and have the load mod to something close to or under the CMV; then do a lease option or seller finance above the 90k. what do you think about this strategy?

Anonymous said...
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Jay Palmquist said...

I'm not an expert on that strategy. However, I talk frequenlty with an investor friend of mine who secures options on upside down houses; gives the sellers a couple of thousand dollars as option consideration; rents out the house; applies for a loan modification; and finally takes title when/if the loan mod is successful. Meantime, my friend keeps all the rents, so he wins even if he loses the deal.

It's wise to get the deed from the seller in the meantime. The option part is just to relieve the seller of any liability for receiving rent during a default (rent skimming). And the option consideration is not taxable until the option is abandoned or exercised.

I would put the title into a Land Trust and then you can do whatever you like in selling it via a lease/option, land contract, or whatever. I just would not transfer title until your buyer pays off the loan.

Of course the loan modification may have a stipulation that the owner must live in the house for a period of time... This could be a problem for you. Also, loan mods rarely reduce the principal.

So, unless this loan modification is a principal reduction and not just an artificially low interest rate... It might not be sellable after all is said and done; depends on the payment amount...

Anonymous said...

Thank you for the response. Yes, I would use a land trust to execute this. Even though I know how to conduct a successful loan mod, and have done it since 2007, I have never attempted a principle reduction. This is where I believe a good, reputatable and establised law firm might be valuable. I intent to research this possibility with potential firms. However, even if the principle isn't reduced, if the payment is lowered significantly where I can achieve positive cash flow from renting, that would also work for me.

In the instance where the loan mod stipulates that the owner lives in the house for certain length of time, if I am eager to sell, I suspect I could seller finance for the duration of the stipulation.

Now, in the case of your friend, at what price does he contract his option (current market value, current loan amount or modified amount)? Also, how doe he protect himself from liability for collecting rent of a default property (rent skimming)? His option protects the seller. But what about him?

Thank you. Your willingness to share your knowledge and educate is invaluable.

Jay Palmquist said...

My friend only has an option to sub2 the deal, not actually taking title, until he is successful with the loan mod. or short sale negotiation... That's how he limits himself from 'rent skimming,' and the seller is not receiving anything, but the option consideration. So, no title holder is receiving 'rent.'

He options the loan balance at the time of short sale, or loan modification. If he doesn't get the short sale or the loan mod. he abandons the option. Also, the bank could go ahead and foreclose...and in that event the option would be extinguished by default. He hasn't told me if he's had this problem yet. He's just had a problem with a seller wanting out of the deal after a year...and he gave up his position, but not after netting about $1,000/mo on the deal. So, it was still good, and worth the risk, etc.