One thing I quickly realized while shopping for my first rental property was that it was hard to buy a house at a retail price and make the numbers work. Every time I ran my numbers, I would come up with a loss. I found at retail prices it was hard to be profitable especially if you have a mortgage payment. After talking with some other investors, I found out they rarely bought their rental properties off the MLS and never paid retail prices. They were buying off-market properties that few people are aware of like wholesale properties, foreclosures, tax sales, and other distressed properties. These types of properties usually sell for deeply discounted prices. While they often require additional investments in repairs and updates after closing, if purchased correctly they can be bought at a price leaving plenty of room for profit. How do you find these properties? This took me some time to figure out and many investors don’t like to share this information, because they don’t want to create any more competition for these deals. Here are some ways to find off-market deals:
Newspapers - Although not a popular as they once were, newspapers can be a great source for finding properties for sale. The classified section will usually have many For Sale By Owner or FSBO homes listed. This may be the only place these sellers have listed their home. When looking for the best deals, scan the ads carefully and look for ads having words or phrasing showing urgency to sell. Examples: Job transfer, Need to sell, Estate, Divorce, Best Offer, Bring Offers, Negotiable, Owner financing, handyman special, etc. In some newspapers, the classifieds will also contain a section for investment properties. These properties will usually be multi-family or occupied rentals.
In most areas, the law requires banks and mortgage companies to post a legal notice in the newspapers so many days prior to foreclosure. These can be found in the newspaper’s legal notices section. These notices usually have the name of the property owner, the address of the property and the date, time, and place of the foreclosure auction. This information can be very valuable. It enables you to do research on the property and the owner. Using this information you may be able to purchase a home pre-foreclosure helping the bank, and the homeowner, while saving yourself some money.
Internet - The internet is your one-stop shop for everything real estate. There are thousands of websites selling real estate online.
- MLS - MLS stands for Multiple Listing Service and is used by your local board of Realtors as a web-based database of all the homes offered for sale by their members. Realtors in each geographical area have a least one MLS. Some areas are so close together that they may overlap a bit. The Realtors pay fees to use these sites and to post listings, but here in my hometown our local MLS has a free public side to the website. This is where many other real estate sites get their data from so you might as well go to the source. While these are mostly retail listings, there are some deals to be found here. Some investors will sell through the MLS and occasionally you will find a fixer-upper deal. www.realtor.com
- Bank Sites - Sometimes banks and lenders will have a dedicated page on their websites where they list properties they have acquired through foreclosure. These are called REO (Real Estate Owned) properties. Some banks use real estate agents who specialize in REO and foreclosures to handle the sale of these properties. Many times these real estate agents have their own independent websites and use these sites to list properties before they place them on the MLS.
- HUD - The federal Housing and Urban Development (HUD) website will have properties that have been repossessed through foreclosure. These properties are subject to special HUD rules, one of which states, that HUD properties are only available to be purchased by investors after a priority waiting period has passed, which is usually at least 14 days on the market. This preferential treatment is intended to give priority to those bidders who are owner occupants over those who are merely investors. Unfortunately, this means if there is a really good deal that pops up, more often than not, it will probably go to an owner occupant. Rules like this can make it frustrating and is part of the reason why great deals are so elusive. But in order to be successful, you have to be patient and persistent and be ready to pounce when the right deal comes along. www.hud.gov
- Local Government - Your local governments often have their tax records available online for free. This is a great source for finding information about a property and the owner. In my area, as in many larger metro areas, we have what is called a GIS (Graphical Information System) website. This site allows you to find property maps, owner information, school districts, voting precincts, zoning, aerial photos, and has links to tax information.
- Paid Sites - There are sites that offer courthouse related services and other services for a fee. Even some offering foreclosure listings. I don’t see the need to pay for services that can be done for free. Besides most of the time, even if you paid for a list of foreclosures by the time you get it the list is out of date and the good deals are probably gone! www.crsdata.com
Drive neighborhoods - This is one of the best-kept secrets of finding deals. Identify and drive the neighborhoods where you would like to purchase homes. Look for “For Sale By Owner” signs. Look for vacant or abandoned properties. In the summer they are easy to find because usually, the yard is overgrown, other times look for no window coverings. Often these properties are sitting vacant because no one really wants them. Maybe they have been inherited, have out of state owners or are former rental properties that the owner has given up on. You just never know. Using the internet services I mentioned earlier you can find the owner’s name and address. With a little luck, you might be able to Google the owner’s name and get phone number, if not a letter will suffice. Contact them explain that you are an investor and you are interested in purchasing their property.
Foreclosures - While driving neighborhoods, another thing to look for is sheets of paper in the windows. Most foreclosures or REO’s will have one or two 8 ½" x 11" papers on the windows next to the front door with something like “This home has been winterized” or “No Trespassing” usually somewhere on the paper will be a phone number that can be used to get purchasing information on the property. Example “call this number 123-456-7890 if you see anyone vandalizing this property”. If you found a foreclosure ad in the newspaper you can attend the auction in person. They are often held on the courthouse steps or inside the courthouse.
Tax Sales - In most areas, municipalities and local county governments have annual tax sales. These are used to collect unpaid taxes on properties that are multiple years in the arrears. These properties are usually sold at auction. The stipulations will vary but most tax sales offer the previous owner a right of redemption period. This means the former owner could redeem the property if he can pay his back taxes and whatever you paid for the property will be refunded, plus interest and any “necessary” repair cost. This does include the cost of any remodeling.
Check with your local city or county clerk for a list of delinquent property tax sales. Sometimes this information can be found online. These sales are typically held at the courthouse and are an auction format. In my county, our local tax sale includes a redemption period of one year. This means the delinquent taxpayer has one year to reclaim his property. After the redemption period has passed the title will transfer to you. This makes it hard to finance with a bank or conventional lender. This means you need to be prepared to deal in cash at these sales.
Make sure you understand the rules and conditions of the sale before you bid on a property. I found in my community that if you do improvements during the redemption period and the delinquent taxpayer brings his account current he has the right to purchase the property back from you at exactly what was paid for it plus interest. Above and beyond that, he is only required to reimburse you for necessary repairs made to the property, not the improvements. Meaning if you fix the roof leak that’s fine but if you remodel the kitchen you could be left holding the bag. So buy with caution and wait until the redemption period is over before making major renovations.
“We Buy Houses” Signs - In most cities while driving around you will see “We Buy Houses” signs. The people who place these signs are usually wholesalers or flippers. I have on many occasions called the numbers on the signs and asked them if they had any properties to sell. If they are wholesalers and don’t have anything for sale, I give them my information and asked them to add me to their buyer's list. That way they can email me info when they acquire any new properties.
Real Estate Agents - There are real estate agents that specialize in investment and rental properties. Using one of these agents can be very helpful for new investors as they can answer any questions and walk you through the whole purchasing process.
Real Estate Investment Clubs/Groups - These can be another great choice for newbies. Clubs and groups can be a great way to build a network of wholesalers, potential partners, mentors, and other investors.