How Many Years on the Market? – Part 2

Thank you for coming to Part 2 of this article to discover a specific example of why it is entitled “How Many Years on the Market?”.

 I was working with a Student who was trying to get a good price on a deal that was a listed REO.  By all indications of closed comparable sales in the area, it could be worth $150,000 to $170,000.  He had made a “correct” offer at $100,000 with the intent of wholesaling it for $125,000+.  The list price was $149,000 and the lender countered his offer at $125,000.  Yes, REOs do sell below list price if you know how and when to make your offers.

 He had seen the property and it needed some work.  In fact he had used my “Deal or No Deal” software to estimate “Do It Yourself” repairs of $10,000 and a contract bid of $25,000.  Let’s assume the after repaired value was $150,000, than a rehabber purchasing the property for $125,000 and putting $25,000 into repairs would have a property costing him $150,000+ that was worth $150,000 - $160,000.  Frankly, this isn’t enough profit for the work and money in the deal.  So we knew that $125,000 wouldn’t work as a wholesale price.

 In addition, the comparable closed sales we very far apart and the higher comps were located in neighborhoods that didn’t quite have similar properties or where the homes were newer.  I asked him how long it had been on the market and he said he hadn’t looked.  When we looked we saw it was on the market for over 300 days.  We could have checked further at how many price reductions it had but it didn’t really matter. 

 The lender had gotten a Broker’s Price Opinion (“BPO”) to estimate the property’s Fair Market Value (“FMV”) and was stuck on their price.  The property was vacant,  had been vandalized and was slowing going into disrepair.  Despite all this the Asset Manager for the lender was holding out for too high a price.  Because of recent changes in the Federal statutes, this toxic asset on the bank’s books is no longer a critical issue.

 On further examination of the few homes for sale in the area that were listed on the MLS?, the DOM ranged from 300 to over 800 days.  If a seller asks a prospective listing agent “How long will it take to sell my home?” what is the local agent to say – “Maybe a year or two.” should be his answer.  More likely he will talk about a couple of months and get the listing and the seller will wait and wait and wait and finally start reducing the price until it sells.

 If you intend to wholesale in areas where the DOM are relatively high (greater than 200 days) you need to get great purchase prices, use creative financing to control the property, get long inspection periods, have a very strong buyers list and learn to “Super-Style” your marketing..  If you have the cash to buy the property, I suggest you don’t because your money will be tied up for potentially years.  Better to do 10 deals in two years than one that doesn’t get you much more of a profit.

 The listing agents are the stumbling block in making creative offers because their only concern is “How am I going to get paid and at closing?”  Before you start making creative offers make sure the listing agent first understands how he will get paid (no financing of his commissions) and that what you are proposing is legal in his mind.  Agents seldom understand creative financing techniques and often believe what investors do is illegal.  If necessary, have your closing agent or preferably your closing attorney explain your offer to give it credibility.

 In summary, you should be trying to make creative offers on properties that are over-priced and where sellers won’t budge on their prices.  Your final cost has to make sense for being able to get a cash flow out of the property even if you have no money in the deal.  If there is a negative cash flow with a tenant in the property, your investing career isn’t going to last. 

 Make low cash offers and lots of them, put them under contract with long as possible inspection periods, try selling wholesale and if that doesn’t work go back (your partner does this) and make an offer for creative financing – “subject to”, seller second, lease option, straight option or seller financing.  You also always have one last card to play and that is borrowing private money at current market (5% or 6%) for a three to five year period.  Just make sure your property cash flows or is at a price to wholesale it or don’t do the deal!

 To your limitless success,

Dave Dinkel