If you want to find a primary home, look on the Multiple Listing Service (MLS). If you’re going to find great investment deals, you need to look for off-market properties. This reality leads many new investors to ask me how to find motivated sellers in real estate.
A variety of strategies exist to find motivated home sellers. But, all of them revolve around identifying sellers with two common traits. First, they need to have equity in their homes that can be turned into cash. Second, they need to have a problem that only a real estate investor can solve—in other words, motivation to sell.
So let’s talk about how off-market deals work and why you should care. I’ll also give you my favorite eight ways to find these gem properties without using the MLS. Let’s dive in.
WHY INVESTORS LOOK FOR OFF-MARKET DEALS
Most new real estate investors understand the MLS. If you’re looking to buy an investment property, you’ve probably already purchased a primary home. And, when you bought your home, there’s a good chance you worked with a real estate agent. This agent probably took your general search parameters (e.g., price, area, size, etc.) and gave you tailored access to the MLS, where you could scroll through every listed property meeting your search criteria.
While this system works great for finding a primary home, finding investment properties on the MLS rarely works. More precisely, due to the following three reasons, investors will struggle to find good deals on the MLS:
- Competition: In theory, if you work with a real estate agent (or are a real estate agent), you can access MLS data from anywhere. Accordingly, when investors try to find potential deals on the MLS, they’re competing against three different parties: 1) primary home buyers, 2) other local investors, and 3) out-of-market investors. This situation significantly drives up the competition for MLS properties.
- Property Condition: While you can buy investment properties on the MLS, you’re unlikely to find a distressed property that will qualify for a fix & fix deal. People primarily list properties on the MLS for primary home buyers, meaning that these homes need to be eligible for traditional financing. In other words, they are not distressed properties in need of repair. Instead, most MLS properties are in good enough condition to meet the standards required by traditional lenders.
- Price: Related directly to property condition, MLS properties generally have prices that don’t support a fix & flip budget. Instead, these homes list at retail price. This means that, even if an investor does find a property to rehab, there’s a good chance that its price will not support a deal budget.
THE BENEFITS OF OFF-MARKET DEALS
Instead of dealing with the challenges associated with MLS properties, successful investors understand the value of finding off-market deals. In other words, they look for properties that
- A) fit their investment criteria but
- B) haven’t been listed for sale.
Searching for deals in off-market properties presents two primary advantages. First, as these properties aren’t listed on the MLS, they inherently have less competition. When you approach a potential seller, you’ll be the only investor making an offer in most situations. This lack of competition leads directly to the second significant advantage: price. Off-market properties fitting an investor’s criteria will typically have major repair needs. Between these needed repairs and the lack of competition, sellers do not have the leverage to command retail prices.
The bottom line, successful investors understand the importance of crafting a strategy to find off-market homes. But, as I’ll explain in the next section, finding these homes is only one part of the problem.
HOW TO FIND MOTIVATED SELLERS IN REAL ESTATE
Once you find a target deal and connect with a potential seller, you still need to convince them to sell. This involves two parts. First, motivated sellers must have equity in their homes. Equity provides an incentive to sell, which can be converted to cash at sale. Without equity in a property, owners have little overarching financial incentive to sell a home.
Second, you need to undertake some problem-solving. Typically, motivated sellers have a need that they must meet. Frequently, they need cash for something or other but can’t sell their house due to its current condition. It may be significantly distressed or require a major repair that the owner cannot afford.
As a result, these owners can only sell to all-cash or hard money loan investors. Enter you as the problem solver. You can purchase this property and provide the owner with the cash they need. But, I always want to emphasize to new investors: don’t pretend you’re doing this out of the goodness of your heart. This is disingenuous, as you’re doing it to profit – not for charity. Instead, you’re looking for a win-win situation. By purchasing the home, you solve the owner’s cash-need problem. But, you also gain a good deal in the process. Win-win.
Here’s the major takeaway: when looking for properties, remember that you’re a problem solver. But, to solve problems, you must first understand the seller’s needs. If you take the time and effort to do this – which requires a little empathy and communication – you’ll find motivated sellers and great deals. And, you’ll help people out in the process.
So how do I find motivated sellers? Here are eight of my favorite fail-proof methods.
STRATEGY 1: HIRE A BIRD DOGGER
I like this strategy because it serves as a time multiplier. It gets other people to find deals for me, which frees up time to focus on current projects.
Here’s how bird-dogging it works. Many real estate investors make money through wholesaling, which I’ll discuss next. But, in a nutshell, wholesaling requires investors to find deals to bring to other investors. While the wholesalers themselves can undoubtedly do this searching legwork, they often pay other people – bird doggers – to do it for them.
Bird doggers spend their time looking for a particular sort of deal. They want to find distressed properties that won’t qualify for traditional financing. In other words, conventional mortgage lenders want to make sure a house is habitable. Bird doggers look for properties that don’t meet this standard. Next, the owners of these properties need to have A) some equity in the property and B) some reason for wanting to sell – often to turn that equity into cash.
As bird doggers find leads in situations like this, they pass them along to wholesalers for a fee. They may receive a fee for every lead, or it could be a contingent payment based on the lead converting. It ultimately depends on the relationship you have with a particular wholesaler.
But, regardless of payment structure, hiring a bird dogger provides you an outstanding opportunity to find great deals.
STRATEGY 2: WORK WITH WHOLESALERS
This strategy aligns closely with the hiring of bird doggers. Specifically, wholesaling properties is an investment strategy that lets investors make money without purchasing properties. Instead, wholesalers find off-market properties, and they enter contracts to buy these properties.
Rather than close on the purchases, they assign the contracts to a third party, typically a fix & flip investor. And they give these contracts for a fee. As such, wholesalers find deals, connect the sellers with investors, and collect a fee – all without dealing with the headaches of doing any rehab work themselves.
When you wholesale, you quickly learn how to spot good deals for fix & flip investors. If you don’t find good deals, you won’t be able to assign contracts to these people. Simply put, you learn what to look for in a property.
Additionally, you have to work closely with house flippers because, without solid relationships with flippers, wholesalers cannot offload their contracts to other investors. From a house flipper’s perspective, this reality creates an outstanding way to find motivated sellers – work closely with your local wholesalers!
I like to tell wholesalers exactly what deals I want to find (e.g., price, location, property condition, etc.). Then, whenever a wholesaler finds one of those deals, they call me, and I’ve just been directly connected with a motivated seller – great system!
STRATEGY 3: DRIVING FOR DOLLARS
I love a strategy I call “driving for dollars.” You hop in your car, drive around some neighborhoods, and identify homes that look like potential deals. You may find a distressed property or one that seems abandoned. Regardless of what type of property you’re seeking, driving around for a couple of hours every week will help you find plenty of opportunities.
STRATEGY 4: FINDING VACANT HOMES
This strategy relates directly to the above one. While driving for dollars, yes, you should look for distressed properties. But, vacant homes represent another great source of motivated sellers. In particular, when homeowners abandon a property, they typically do so for one of two reasons:
- Major maintenance issues: Sometimes, a home can have such significant maintenance requirements (e.g., leaking roofs, broken HVAC systems, collapsed flooring, etc.) that fixing those items requires too much money. Instead, homeowners simply abandon the property, letting it continue to fall into greater disrepair.
- Financial issues: According to the above, homeowners in financial trouble may just up and leave a property. Rather than continuing to pay their mortgage and other property-related expenses, they just go. Eventually, a lender will foreclose upon and try to resell the property. But, for a period of time, it will inevitably remain vacant.
Regardless of which of the above situations occurred, vacant properties create massive costs. Municipal fines add up for landscaping, paint, and utility-related citations. Pipes can freeze and burst. Animals can get into the home and do a tremendous amount of damage. And, if a significant issue existed before abandonment, there’s a good chance it will become even worse during the vacancy period.
Traditional lenders will not approve loans with this sort of distressed property condition. In other words, people looking to purchase a primary home will not be able to qualify for a conventional mortgage (e.g., your standard 30-year mortgage). Distressed properties definitely won’t be eligible for FHA and other government-backed loans. Appraisers will flag all major maintenance and repair issues, and the loan will fail to meet underwriting criteria.
The owners of these vacant homes now have a significant problem. They own a property that they either can’t or won’t pay to repair while unable to sell it to people looking to purchase a primary residence with traditional financing. The bottom line, these homeowners likely need some cash, they want to get rid of their vacant property, but they cannot sell their homes to most buyers.
Enter real estate investors as problem solvers. As illustrated above, most owners of vacant properties are motivated sellers, even if they haven’t tried listing their abandoned homes. Using cash or hard money loans, investors can purchase these homes to fix & flip or rehab and convert into rental properties. With hard money loans, lenders base approval on the hard asset itself, the property. These lenders base their loans on the after-rehab value (ARV) – what the property will be worth following a renovation. Consequently, the fact that a vacant home is distressed doesn’t matter.
This creates a win-win situation:
- Win 1: real estate investors can purchase these properties at significant discounts due to their A) current condition and B) the lack of competition from primary home buyers.
- Win 2: the owners of the vacant properties can sell the abandoned homes, put some cash in their pockets, and get rid of a major headache and financial burden.
STRATEGY 5: CODE VIOLATION HEARINGS
A code violation citation can be a massive headache for a property owner. But, violations can also create opportunities for investors to connect with motivated sellers.
When a local municipality cites properties for code violations, the homeowners generally need to appear before an administrative court. Where and how frequently administrative courts meet to hear housing code violation cases differs in every jurisdiction, so it’s beyond the scope of this article to go into that level of detail. But, with a bit of research and asking around at local government offices, real estate investors can confirm:
- Where administrative court sessions are held.
- When these courts hear housing code violation cases.
- What requirements – if any – exist for investors to sit in on these court sessions.
Ideally, the first-time homeowners need to go before an administrative court to answer for unremedied housing code violations is also the last time. Most people simply don’t want to deal with the hassle and stress of these procedures.
And many owners realize very quickly that the necessary steps imposed by the judge to remedy a violation don’t make financial sense for them. For example, being ordered to do $15,000 of lead pipe replacements in a property likely doesn’t make sense or is out of the question budget-wise for an owner. Recognizing this reality, savvy real estate investors can attend these hearings and provide property owners an opportunity to unload their violation-related headaches by selling their properties.
While not every property owner at an administrative hearing will want to sell, a little persistence will provide real estate investors access to deals before they hit the market. By putting together some informational flyers and rehearsing a 15-second “elevator pitch,” investors can make dozens of offers at these hearings.
And, because you’re making an offer on a property that’s not up to code, you’ll be able to make significantly below-market offers, as the property owner would not be able to sell in a typical transaction with an inspection contingency. So, this strategy finds a way to connect with potentially motivated sellers and get a great deal.
STRATEGY 6: PRE-FORECLOSURE HOMES
Pre-foreclosures offer another excellent opportunity for connecting with motivated sellers. A pre-foreclosure property has not been taken back by the bank yet, but the bank plans on doing so. When mortgage borrowers stop paying loans, lenders send them a series of late notices. Eventually, and the time period varies by lender, the borrower will receive a notice of default.
This notice constitutes the first formal step in the foreclosure process, and it must be publicly recorded – usually at the local courthouse.
Investors see these as potential win-win situations. Any property that has had a notice of default filed against it – but hasn’t been foreclosed upon – qualifies as a pre-foreclosure property. And due to the public disclosure requirement, many investors find these potential deals by inspecting publicly available information.
First, the investor has an opportunity to sign a contract for a home at a discount, as many homeowners will sell at a cut-rate price just to avoid a foreclosure. Second, many of these homeowners have some equity in their properties, but they cannot sell to buyers using traditional financing due to needed repairs. This makes working with an investor an excellent opportunity for the seller.
STRATEGY 7: CONTACT HARD MONEY LENDERS
Like pre-foreclosure situations, hard money lenders sometimes have properties they want to unload, making them motivated sellers.
Generally speaking, hard money lenders aren’t in the business of holding properties. Instead, they generate revenue by lending funds for investors to purchase properties that don’t qualify for traditional financing. Despite the best due diligence, these deals sometimes go south, and the borrower defaults. When this happens, hard money lenders need to foreclose on the properties and resell them to recoup the outstanding loan balance.
When hard money lenders are forced to take this path, they usually want to sell the properties as quickly as possible to get back to lending and avoid unnecessary holding costs associated with the property. Recognizing this, it’s a good idea as an investor to establish relationships with hard money lenders in your target markets (and not just for lending purposes). If you tell them that you’re always looking for motivated sellers, these lenders will keep you in mind when they have some properties to unload.
STRATEGY 8: BE THE PROBATE EXPERT
Real estate investors realize this eventually – most home sellers are not experts in the home selling/buying process. This provides investors a way to connect with motivated sellers, particularly in estate-related home sales (e.g., a parent dies and leaves a home in a will).
It’s a sad fact of life, but most don’t want to plan for a loved one’s passing. People typically enter probate (the period when a will is confirmed) after a death without understanding how that process works. In addition, these family members have more pressing concerns than working with lawyers – grieving, organizing funeral arrangements, etc.
Real estate investors can act as the estate expert in these situations, solving the seller’s problems while also purchasing an investment property. Real estate investors can bring an estate attorney into the deal. Rather than the seller needing to find and pay for an attorney to work out all the estate-related details of a property left in a will, the investor offers to pay for those services as part of a sales contract – for an associated reduction in sales price.
I’ve done this in the past by building relationships with respectable and competent estate attorneys in my area. By establishing these relationships, I’ve worked out deals where I pay their fees following the home purchase. I simply work this attorney fee into my total budget calculation for the flip.
Win-win: the homeowners don’t have to navigate the estate process independently, and the investor gets a great deal on a property from a motivated seller.
No single strategy exists for finding motivated sellers. Instead, investors need to discover the best approaches for their unique needs and local market. I recommend that new investors try out a few of the above strategies to gain experience and help determine which ones are the most effective. With this exposure under your belt, you can develop your marketing strategy, something in which you become an absolute expert.
But, regardless of what strategy you settle on, all of them revolve around identifying sellers with two common traits. First, they need to have equity in their homes that can be turned into cash. Second, they need to have a problem that only a real estate investor can solve.
Find out how all this works by attending our next webinar.