How to buy a house under market value

How to buy a house under market value

by Reed Sawyer.

The real estate market has changed.  In the past, you could buy a house, at full list price, and know that the value would go up rapidly.  That doesn't happen now.  If you want to make money in real estate now, the only way to guarantee that you will make a profit is by buying it right, by buying it under market value.

How do you buy a house under market value? By finding motivated sellers.  How do you find motivated sellers?  They don't put a sign around their neck saying, "Steal my house!"  They don't put signs in front of their house saying, "I will walk away without taking a profit."  Instead, you must ask questions, OR, make enough offers to find someone that is motivated AND has the ability to accept your offer.  

Here are the steps:

1)  You must know what you want.  Be very specific as to exactly what you want in a house.

a) How many bedrooms?

b) How many bathrooms?

c) How big?  (How many square feet?)

d) How old?

Once you know exactly what you want, you can then start looking.  If you say that you are going to "see what's available", you are wasting your time.

2)  If you want to be very efficient in your search, use a realtor.  Don't use just ANY realtor, use a realtor that knows what they are doing, and is willing to work with you.  A multi-million dollar producer is who you are looking for.  If they are multi-million dollar producers, they will know how to negotiate and close deals.  If they work part time as a realtor, and have a full time job...they are not going to be as valuable to you.  You might even prefer to work with a realtor that specializes in REO (bank owned) properties.  They have a massive amount of listings, and do a massive amount of sales.  They have systems that allow them to streamline the process, and they don't care about the sales price, they only care about the sale.

3)  Have your money lined up.  If you are paying cash, be prepared to close within a week.  If you are getting a mortgage, get pre-qualified, have your credit pulled, have your income verified, and have everything ready, except for the address of the property.  When you can close within 14 to 17 days of acceptance of the contract, you can offer a unique advantage to the seller.  (The seller might not NEED to close within 14 days, but by offering to close within 14 days, you have an advantage over everyone else.) If you are buying a property FROM a bank, you can get significant advantages over someone that needs 45 to 60 days to close.

4)  Make offers on properties before you see them.  I will sign a contract, (The FARBAR contract is 7 pages long.  The only thing that changes on a contract from property to property is the 1st page and the addendum page).  I will have the realtor send me a list of properties that meet my criteria, PLUS pictures.  I will then find out the value, (Property valuation sites such as http://www.zillow.com or http://www.eppraisal.com give you a very quick property valuation).  This gives you a very quick estimate of what the property is worth.  Make an offer 40% below market value.  Fill out the first page of the contract, sign it, and scan and email or fax it to your realtor.  

IF THEY ACCEPT, then go out and look at the property.  (Why would you waste your time on looking at a property if the sellers aren't interested in your offer?)  How do you protect yourself?

5)  Each offer must have an esculpatory clause.  That means that you can escape the contract, another word is "weasel clause".  My favorite weasel clauses are:

a) "This offer is subject to approval by financial advisor within 48 hours of acceptance by seller."

b) "This offer is subject to approval by licensed property inspector, at buyers expense, within 7 days of acceptance of this offer."

The first clause gives you an immediate out.  The property inspection clause gives you an out if, after a home inspection is completed, there is significant property defects that must be addressed.  

6)  If you understand that only about 5% of the property owners will have the necessary combination of being motivated AND being in a position to accept your offer, you can make offers that meet your needs.  If someone says "no", that's ok.  You are not looking to buy every house that is out there.  You are looking for a deal.  If it's not a deal, you can make an offer, and you don't have to look at the house unless they say "yes".  If you and your realtor can streamline the process, it shouldn't be a strain on either party.

7)  Justification:  If you are buying a property for your own personal use, explain that you have a policy of only buying a property if you can do it in such a way that you could possibly walk away without losing money in the future.  If you are buying a property for investment, explain that you have a policy of only buying properties that you can make a profit on.  It doesn't matter.  If they accept your offer, they don't care what your motive was for the lowball offer.

8)  Remove all of the negatives.  If you can close early, close early, but make sure that you articulate that advantage to your sellers? If you can do anything to sweeten the offer, do so, as long as it doesn't cost you any more money, time, or effort.

9)  Repairs:  A property should be purchased for 40% below market price in good condition.  If repairs are needed, that is when your property inspection report will quantify the cost of the repairs. 

In summary:

1)  Get your money together.

2)  Get a system.

3) Make offers before you look at a property.  Only look at a property AFTER they have accepted.  Don't have your realtor show you properties until the sellers have accepted. Sign all of the pages of the realtors contract, and only fill out the first page for each new property.

4)  Have esculpatory clauses.

5)  ALWAYS get a property inspection.

6)  40% below market price in good condition, repairs are deducted as needed. Itemize everything.