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Welcome to the Grow Real Estate Investing Podcast. I’m Joe White and in this podcast I am going to go over the methods on how you can buy discounted investment properties.
First Why Discounted Properties?
Why? Because most successful real estate investing strategies are reliant on buying property at a discount. Meaning, most investors need to buy property for less than the property is worth, to make their investment approach work. It doesn’t matter if you are looking to flip property, buy and hold rental property, or wholesale it to others to buy it. It will likely be important to you to get the property for less than its market value.
What we are talking about is equity. Equity is the amount the property is worth, minus what is owed on it.
I most often champion the strategy of forcing appreciation with rental properties. This is also commonly called Value Add or the BRRRR Method. What makes this strategy so attractive is that you are recycling the same money again and again. Reusing it to buy rental property after rental property, instead of saving an entire whole new amount. All while collecting cash flow along the way.
This strategy relies upon you having the equity to take back out of the property. In fact it relies upon you having at least 25% equity if you don’t want to add more money to that initial investment.
It needs to be said that it is okay to leave money in the deal if you don’t reach that equity threshold; but the more equity you have, the more advantaged you will be. With this strategy, you will be forcing the property to appreciate, forcing it to be worth more than you owe on it, and you do this to create equity. And you will be trying to do this in two ways:
- With improvements, like strategic renovations.
- By starting out with as much equity as you can when you leave the settlement table.
It's common to hear in the property investment world that “You make your money going into a deal when you buy it”. Because it is important to have equity the moment you buy a property and it becomes yours.
This is for several reasons:
- A Safety Buffer. Probably the most important reason to get discounted properties is for safety reasons. Buying property at a discount, and having instant equity at the moment it becomes yours, is your safety net. If a house is worth $100,000 and you buy it for $90,000, you have a $10,000 safety net if something goes wrong.
If the market goes down by 10%, or if a low appraisal comes in when you try to sell it, or refinance it, or if an unexpected expense comes up, like a surprise bad foundation; you will have an extra $10,000 to buffer these problems. The more of a discount you get, the more of a buffer you will have. Equity is always your best exit strategy. Many times equity is your only exit strategy. If you need to, you can sell the property or refinance it; but you need equity to do it, unless you are willing to take a loss. - Refinance Lender Minimums. I’m a big fan of rental properties and if you are relying on doing a Cash Out Refi to get your equity back out so you can reinvest it, or pay off your lenders, you will typically only be allowed to take out a percentage of the equity you have in the property by the lender. Most common is a lender will loan you 75% of what the property is worth, requiring you to leave 25% equity in the property to cover their risk. This is called loan to value, or LTV. For this reason alone you will likely need a discount; because the improvements you do to the property, like renovations will probably need a lot of help to get you there.
- Cash Flow. Cash flow is the money the property makes each month in profit. Equity makes you wealthy, cash flow keeps you safe and makes sure you can pay the bills, including if costly problems arrive. You want the property to be worth more than you owe because a property worth more, should also rent for more. And the lower the debt you owe, the higher the cash flow will be. We hope the rent we collect will give us cash flow and buying at a discount certainly helps that.
So you need to buy property at a discount and this is where many investors get stuck. They have the money, they have the knowledge, they don’t have the discounted property leads.
And that’s the meat of this podcast. How to find discounted property. But 1st you will need to hold on a bit longer, as there are some important considerations.
- Every real estate market is different and every point in the economic cycle is different. What isn’t working great in one city might work incredibly in yours. And as the real estate market changes, going up and down, so will the results of the different lead marketing techniques.
But also, your competition will have an impact on your marketing for leads. It's common to have a competitor saturate the lead source, drying up your leads or the competitor stops altogether and the leads start pouring in.
I recommend you use the Red Light, Green Light approach. Diversify your sources of leads. Certainly have more than one way to get leads. If a lead source is producing, you “Green Light It” and begin funding it to increase the leads. If it’s not producing more than it's costing you in money and time, you Red Light it and barely invest in it.
But know, lead sources can change at anytime. - For a seller to sell you their property at a discount, they will likely also need equity to do it. If a seller owes a mortgage of $40,000, they would have difficulty selling you that property for $30,000. Because they still have to pay that lender, the $40,000. In order to sell you that property, for less money than they will need to pay back, they would need to take money out of their pocket to do it. They would have to show up to the settlement table, with their own money and sell the property at a loss. There are short sales, where the seller does just that, or the lender agrees to accept less; but seeking a seller where you have to convince them to lose money wouldn’t be a great source of leads. Unless they are already seeking a short sale. I have a separate podcast on just that so check that out if you are interested.
How do you know if a seller, or your source of possible property leads have equity or not? You might not always know; but you look for those groups that are likely to have equity. I will explain more on that in a bit. - Willing sellers verse reluctant sellers. Sellers that come to you, require far less effort than sellers that you approach. Remember, your time equals money. If a property is listed on the MLS, where real estate agents post properties for sale, that is a willing seller who is waiting and is asking for an offer. Calling a landlord, or someone with a distressed property, or someone with a property that has city violations on it, or approaching someone who hasn’t indicated an interest in selling at all, will typically require far more effort. They will be apt to be far more difficult to deal with and they will be far less likely to sell.
Now the reason you may want to approach owners of properties that are not currently for sale, is that you lose most of the competition for these properties and your chances of getting a deal can go way up. There are property owners that are so averse to inconvenience that they put off selling their property, even though they really want to sell it. There are sellers who will simply take the path of least resistance and money is sometimes less valuable to them, than avoiding any discomfort, embarrassment or effort.
When deciding what sources of discounted property leads to go after, you will need to balance the cost, versus your time cost of money, all while considering the discount.
How much time do you have? How much does that time cost you? How much money are you willing to invest to get property leads? And how much hassle are you willing to tolerate?
There are lead sources with less far competition, lead sources with willing sellers, lead sources that require far less time and lead sources that require a lot more effort. There are also lead sources that are near free and lead sources that are extremely expensive.
Let's break down different lead sources of discounted properties, looking at their pros verse their cons and how best to go about them. But 1st, you need to understand that you will need to analyze each lead yourself. You can not rely upon the lead source to do it for you. Obviously the person selling you something will tend to tell you how incredibly valuable it is. This includes real estate agents, wholesalers and sellers. I have a podcast on evaluating property. Check that out.
Sources of Leads:
- Wholesalers:
A wholesaler has a contract to buy a property that they are interested in selling to you. A professional wholesaler works to find properties, hopefully at a discount. The idea is that the seller will get the agreed upon amount, the wholesaler will get their fee and the investor will get a property at a discount.
Wholesalers typically maintain a list that they blast properties to. Getting on these lists is very easy as the wholesaler wants to find buyers that will buy these properties. To find these wholesalers and to get on their lists, you should search the internet for them and contact them directly. They often have websites, they are on real estate investing forums and social media. A lot of these places you can post that you are looking for wholesalers and they will find you. For example, comment here on this podcast what you are looking for, lending, loaning, partners, to mentor someone or that you are looking for discounted properties or wholesalers and let that comment go to work for you.
Wholesalers are people and as such some are better than others with their knowledge and their estimates. Pay attention, because wholesalers will often blast the property to other wholesalers, who will in turn add their own fee on top of the cost. It's not uncommon to see the same property listed with several wholesalers and the original one who actually has the contract to buy the property has it discounted, without the extra middleman fee. - Word of Mouth:
People don’t tune in to this podcast to hear common sense stuff they think they already know; but since many of you will still not see word of mouth as the valuable source of leads that it is, here we are. You need to hear this.
Friends, family, neighbors, co-workers, basically everyone you meet is a potential source of discounted property. Far more than you think. Anyone half considering selling their property is a potential discounted property for you to buy.
Selling to you means they can just be done with it. No interviewing agents, no endless showings. They can avoid all the hassle plus they can sell to you for 6% less than if they list it with a real estate agent; since they avoid that commission. A 6% lower deal, also means they avoid paying transfer tax on that additional 6%,essentially putting even more money in the seller’s pocket.
It's important for you to let everyone you meet know you buy property off market. Take a moment to create your “elevator speech”. You don’t have to sell anyone anything. You merely state what you do, and what you are looking for and people will bring you deals. The more people you tell, the more deals you will get.
This podcast provides me with property leads, partnership leads, mentors, clients, friends, and people willing to invest with me through private lending. This podcast means a lot of different things to me; but one of those is that it's my announcement to the world: who I am, what I want and what I am capable of providing. And people who have wants and needs that can be satisfied by my wants and needs, see that here and they come to me.
Word of mouth is a free source of property leads,and typically from willing, easy to deal with property sellers. - The Multiple Listing Service (The MLS):
The MLS is one of my favorite places to find discounted property. I understand that surprises many of you. The MLS is extremely low cost. It's extremely efficient and requires very little of my time. These two factors make the investment into finding leads on the MLS to be very little. The sellers are more willing. They are actually selling their property after all.
The MLS has discounted properties on it. You just need to know how to find them, or how to “scrape it”. I have a podcast on finding deals on the MLS. I highly recommend you watch it. In fact, I have podcasts on each of these methods on finding property leads; that you can watch; but the MLS one might convince you. See Podcast on MLS Scraping Here. - Direct Mail:
Direct mail is a higher cost, lower effort source of property leads. Though it can be higher effort than using a wholesaler, word of mouth or the MLS.
You are creating a mail piece, or having it created, mailing it and responding to the response. Designers aren’t typically expensive, or you can use a preset template. And you need a list to mail to. You can canvas a neighborhood or use a more concentrated list of more likely candidates. I mentioned earlier, that a seller will likely need equity to be able to sell to you at a discount. So you can target those people directly. You can get lists of property owners that are over a certain age threshold, lists of people or people involved in the probate process. Both of these have higher likeliness to have the equity to be able to sell their properties at a discount.
You can also get lists of those with violations against their property and landlord and absentee owners.
These lists aren’t overly expensive and can be found on services or through a skip tracer, who is someone whose job it is to compile these lists.
To be effective, direct mail typically requires multiple pieces sent to the same individual.
It can take seven mail pieces to begin giving you a return. But the more pieces you send that greater the return tends to be.
Plus direct mail really does lend itself to the Green light, Red Light approach. If you are mailing to 1000 people and it's paying off, you can greenlight it by double, triple, quadrupling the number of people you are sending. Plus, you can refine it once you begin seeing a demographic of who is interested.
The plus side of direct mail is that it doesn’t take a lot of effort to send out a mail piece if you are using a service. The downsides are that it can be costly, especially since you will likely need to fund several pieces before you get a return. Also, expect angry responses. And by angry, I mean threaten to kill you angry. Something about direct mail, cold calling, door knocking and bandit signs trigger an intense side you might not be mentally ready for. - Driving for Dollars:
Is basically driving and looking for properties you think might be candidates. You then seek out their addresses through a skip tracer, tax records or a service. This can be a hard way to find properties; but it's effective and it can be free.
Or you can jump into Door Knocking:
Stop your car and knock. It's not for the meek; and that’s why I suggest everyone try it. You want a fast sales education? Try doing it face to face, with angry doors getting slammed in your face. Face to face, you are going to get questions and comments you won’t have answers to. But you will have those answers when you leave. And when you come across an easy seller, it will be a walk in the park. - Cold Calling:
The phone is an inexpensive way to build your property portfolio. In fact it can be as free as long as you have a phone. But you might want to use a dialing service as they typically will organize your leads. It's common to hear, “call me in 6 month” and you will need a system. Cold calling isn’t for the meek either; but it will sales train you fast and you will find property deals. Cold calling and hour a day, five days a week can make you passively wealthy. You can find leads to call by calling landlords you find on Craigslist and Zillow, you can use a service to provide you the contacts or a skip tracer.
Landlords are a very good source of potential leads. Very few rental property owners educate themselves. and their management of their investment suffers. When rental property management suffers, so does the property owner. Great deals can be found from landlords who are just overwhelmed.
- Bandit Signs, Voicemail Blasts:
There are bandit signs, where you post your signs around a neighborhood or marketing using a Voicemail Blasting Service. These types of marketing will certainly increase the hostile phone calls that you get, especially bandit signs. And by hostile, I mean, expect calls that make you feel someone will come hurt you. And they are not legal everywhere, so be careful with that. Also, it's hard to establish trust with a seller, if you already started out in a manner that feels less than honorable to them. And that will be no small hurdle. My deals come from people trusting me. They have a problem that I can solve. Win - win. - Websites, SEO And PPC:
I greatly recommend that you have a website. A website can act as your lead funnel, where all leads might be sent into where you can better manage them. It might be from it from direct mail, a bandit sign, or just a business card.
A website can further your sales message, it can have a FAQ section that can save you time answering questions. You can also easily change what is on the site, at anypoint.
The next level would be to attempt to have the site itself bring you property leads. For that you would need to have the site come up when people search for ways to sell their homes.
Your site would need to have very good seo, where work goes into the site to make it come up naturally, or organically; or you would do PPC, where you pay search engines to show your site, when people search certain terms.
Both options can be productive; but they both tend to be very expensive, costing thousands of dollars, depending on your market. I once read a FAQ Google has that answered the question “How can my competitors pay so much for a lead?”. Google’s response was that many of your competitors have no idea their spending is a loss for them.
At that, I’m going to wrap this up. I have several podcasts that dive deep into many of these lead strategies specifically and I will be adding more. It's important that you comment on this podcast, and add value here with your own thoughts. It helps create a dialog and fills in the gaps on anything I missed or things you might know better than I.
On that, I’m Joe White. This is the Grow Property Management Podcast.
Happy investing!
