on Jan 6th, 2008Motivated Sellers
If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!
One of the best things about current market conditions for real estate investors is the abundance of motivated sellers.
A motivated seller is someone who is desperate to part with their property. They may be over-extended on their mortgage, they may need to move due to a job or family situation, maybe they invested in a property themselves and they’ve decided it just isn’t for them.
In a “seller’s market” it can be hard to find the motivated sellers. To the newly minted real estate investor it might seem that all of the sellers are firm in their price and terms, and that the properties might not be in the best of shape. The fact is, that even in a seller’s market - you can still find motivated sellers. You just have to look a little harder because they are a smaller percentage of the overall market. But it appears that in most places 2008 will look a lot like 2007 - as far as real estate is concerned - so let’s talk about motivated sellers in a buyer’s market.
A motivated seller is someone who has a problem and he’ll sell to you at the price and the terms you ask for - as long as you solve his problems. So your job as the investor is not to find out about his price and terms - your job is to find out the problems he is trying to solve by selling the property.
See, that’s the real deal here. No one wakes up one day and says “I think I’ll sell my house today”. They’re selling for a number of reasons: they need cash, they have to move, they can’t make the payments, the tenants are too much trouble, the property needs too much work, there may be problems with the neighbors, etc.
The sooner you find out their motivation - the faster you can structure a deal.
Finding motivated sellers in today’s market is easy. You, or someone on your team (a real estate agent perhaps), should be on the lookout for properties that come on the market priced way below the market. This is usually an indication that the seller not only understands the current market conditions - but that he’s also in such a hurry that he’s not afraid of leaving money on the table. For obvious reasons these deals get snatched up quick, which is why it is important to have all of your parts in place and ready to go (financing, inspections, etc.) - even before you make an offer. The quicker you can make the offer - and the quicker you can make settlement happen - the better for your seller.
Another indication of a motivated seller could be the person that owns a property that has been on the market for a long long time.
At first it might not seem like this person is motivated - because if they were, they would have lowered the price and sold their house already. But that isn’t always the case. Sometimes a house can just get lost on the market and it goes stale. It comes on the market - there is a flurry of activity (advertising, open houses, showings, etc.) - and then it just dies down. The real estate agent could be new or timid or both, and they’re unwilling or unable to talk to the seller about the reality of their price or the condition of their home. You might even find that the sellers have already vacated the premises and are carrying two house payments while they “wait the market out”.
Often times - if you approach these sellers, you’ll find that they are far more willing to accept a lower price on their house than they previously might have.
Two summers ago, when the market was just starting to turn a client of mine made an offer on a house. He offered them their full listing price, but he wanted them to throw in 3% closing on their end. So they’d end up pocketing about 90% or so of the asking price after they paid the buyer’s closing costs, their closing costs and the real estate agent’s commission.
But the sellers had spent the better part of the last year watching all of their neighbors cash-out big time. They had seen their friend getting offers 5% to 10% over the asking price. And their friends didn’t have to pay any closing costs. So they ended up counter-offering back with a full list price and no closing costs.
My client - who was rather savvy about the market - politely declined. He remarked to me privately how they were the most expensive house on the market in that neighborhood and how they weren’t the biggest or best. He told me he knew the most recent sale in the neighborhood was just at their asking price and that was a house that was considerably larger.
We ended up finding him another deal, and he came out just fine.
But the sellers on the other hand - from what I heard they eventually signed on for a deal below their asking price - only to have that one fall through at the last minute. By then the market conditions in our area had steepened their decline and their property went stale. A year later I checked the MLS to find out what ever happened to that property. The ended up reducing the price (from $650K to $590K) and it sold for $585K.
As time goes on - sellers get more motivated.
Another way to look for motivated sellers is by prospecting for expired listings. An expired listing is a house where the listing contract with the real estate agent has expired. Most listing agreements state a time frame to sell the house (30 days, 90 days, 120 days - whatever). If the house isn’t sold at the end of the listing agreement - then the listing expires. Most multiple listing services in the U.S. mark these listings as “expired” (as opposed to inactive or something).
An expired listing is just like the property that has gone stale - only its taking it one step further.
And if you find an expired listing that is also vacant - then you know you have considerable leverage to make the deal work.
One word of caution though. Don’t let the seller’s problems become your problems. These are problems that mostly go with the property: bad tenants, property in disrepair, zoning or occupancy issues, trouble with neighbors, crime etc.
Unless you KNOW you can solve these problems (meaning you’ve solved them before) - you’re better off walking away and finding another deal.
Especially in today’s market.
