How to Find Good Real Estate Deals
SUMMARY
One of the highest value uses of your time as a real estate investor is developing your system for finding good real estate leads. There are a number of different ways to do this, which I have highlighted below.
Networking with Wholesalers
Networking with Brokers
The Multiple Listing Service (“MLS”)Here is my 4 Pronged Strategy
To be successful, each individual real estate investor should think about their particular skill set, network and other resources that are available, and build a plan that utilizes those strengths.
A quick note on preparation – I have spoken to so many people who want to invest in real estate but just “can’t find any good deals”. Most of them actually don’t even know what a “good deal” looks like because they have not done the prep work. I cannot stress this enough, you MUST do the preparation work to be ready to pounce when you find a good deal. Don’t go through all the effort to generate a good lead, only to fumble it away and harm your reputation. You want to be known as the person who closes good leads when they are presented, not the person who was given a good lead only to fumble it away.
Okay, with that out of the way, here is my playbook on how to find solid real estate investment leads.
Networking with Wholesalers
Wholesalers are people who use marketing campaigns to find real estate leads. They use various marketing methods, like sending mailer campaigns to lists of property owners, putting “We Buy Houses” signs on the side of the road, cold calling property owners, knocking on doors of properties, etc. Typically wholesalers will find a good lead and then enter into a contract to purchase the property, making it clear that the contract is “assignable”. Assignability means that the wholesaler is permitted to buy the property herself, or she is permitted to “assign” the rights to purchase the property to another buyer. Wholesalers will usually assign these contracts to real estate investors and charge an “assignment fee” for the service of connecting the buyer and the seller. These fees are highly negotiable and can range wildly – I have seen $5,00 fees up to $85,000 fees and I have heard of even higher fees.
A word of caution: in my experience, 90% of “wholesalers” are not very good at what they do and many are playing a get-rich-quick game that involves making money on the backs of property owners and real estate investors. If you are going to work with wholesalers, you must find the few really good ones in your market who solve problems for sellers and work with real estate investors.
Networking with Brokers
My favorite way to generate real estate leads is to build relationships with the best real estate agents in your market. Every market has a lot of bad real estate agents, and a few select very good real estate agents. One of the most valuable things you can do as a real estate investor is to identify these amazing agents and then build a relationship with them.
To identify which agents are the best, spend some time looking at real estate listings in your market. Is there a name that keeps popping up as the listing agent for these deals? Once you see that, you know there is a strong likelihood that this person is one of the good agents – many sellers are sending them leads, likely because they have a good reputation and solid network.
Real estate agents are so valuable because they get a high volume of leads, and not just leads that will make it to the open market. A lot of times agents will have sellers who want to sell, but don’t want to list on the open market for some reason. If you have a good relationship with the broker, you can be the only buyer to get these leads – obviously this is extremely important.
Again, you want to be prepared prior to getting a deal from one of these brokers. If they spend time getting to know you, and then send you a deal and you don’t have your ducks in a row, you will likely never get another chance. If they send you a deal and it doesn’t work for you, you need to tell the broker exactly why it doesn’t work, for example, you could say, “thanks for sending 123 Main St, I love the property, but the roof repair and the bad furnace make the return below my criteria of 15% return”.
The Multiple Listing Service (“MLS”)
This is one of my favorite topics because most seasoned real estate investors have a terrible opinion about buying deals from the MLS, and with good reason. If you are trying to buy a deal on the MLS, it is likely that an investor who has a good relationship with the listing agent has already seen the deal and passed on it for some reason. And everyone else looking for deals is now at the table negotiating with you, which could create an auction-type situation which is never good for a buyer.
BUT – I believe there is a strategy that can be effective to buy good deals off of the MLS if you are willing to make strong offers and if you can deal with losing out on deals over and over again before you finally close on one. Also, generally it is easier to find good deals on the MLS during a “buyer’s market” than a “seller’s market” because there is less competition during these times.
The key to winning deals from the MLS is to have an edge. If you don’t have an edge you will lose every single time unless you are overpaying for the property (the cardinal sin of successful investing!!!). So how do you get an edge to win good deals off the MLS?
Here is my 4 Pronged Strategy
Edge Number One – Write the strongest offer. To get a good deal on the MLS you need to write an offer that has very limited contingencies. When I offer on the MLS my offers are structured as follows: (1) all cash offer when possible, (2) no inspection contingency (because I have already walked the property with my contractor and I know the condition before making my offer), (3) no appraisal contingency, (4) close quickly, (5) “as-is” offer, and (6) strong earnest money deposit (varies depending on deal size but your goal is to make the seller think you are dead serious about closing).
Edge Number Two – Your reputation. To win a competitive deal on the MLS you absolutely MUST be able to demonstrate to the Seller that you are a closer. So many “buyers” are wanna-be’s who put properties in contract and either can’t or won’t actually close the deal. This happens all the time and it drives sellers crazy. When you make an offer the seller must believe that you can and will close the deal. The best way to do this is to tell the seller right up front that you are a buyer who closes deals, and you make it easy for sellers. You are not going to nickel and dime the seller because there were small items found during the inspection (for example ungrounded outlets, tuckpointing needed, flashing repair). No, you are going to close easily and quickly. You want to drive this point home with the seller and tell them repeatedly that you are a closer. Ideally you will be able to describe your track record as well, describing your current portfolio and tell them about a few recent acquisitions you have completed to show you actually to purchase real estate. If you don’t have the track record, this is where you need to lean on the reputation of your real estate agent, borrowing their reputation to help demonstrate to the seller that you will close.
Edge Number Three – Use Your Real Estate Agent. Not all real estate agents are created equal. If you want to win a deal on the MLS you need a Ferrari, not a golf cart. The difference between a really good agent and a regular agent is absolutely huge and cannot be overstated. Good agents add tons of value to their clients, helping them find and win deals and they can sometimes provide guidance on obtaining financing and finding contractors as well. See my write up about real estate agents here.
Edge Number Four – Let the Sellers Agent Double-End the Commission. Another edge you can create for yourself involves playing on human nature. Seller’s agents are trying to make a living just like everyone else. If you are not working with a real estate agent on a transaction, you can call the listing agent and tell them that you are interested in a property and you are not working with an agent. You can then let them know that you would like them to prepare the offer and purchase contract for you and you are perfectly fine if they would like to represent both sides of the transaction. Some real estate agents will not do this because they believe it is not in the best interest of their clients, who end up paying a larger commission because the agent represents both the buyer and the seller. Other agents will salivate at the idea of earning an extra commission on a sale and will automatically move your offer up to the top of the list or perhaps indirectly assist you in getting the deal done. If your offer is close to other offers, you have an Edge because the listing agent is financially incentivized to want you to win.
Direct Marketing – Another way to generate good real estate leads is to create your own direct marketing campaign. You can purchase lists from companies that compile data of different groups of property owners, such as non-owner occupied duplexes, or properties with tax liens on them. From their you can either send letters directly to these property owners or cold call them in the hopes that they are looking to sell their property and you can start a negotiation. This method is quite time intensive and you have to be willing to be rejected 99% of the time. Most of your letters and calls will result in no leads. But, if you are willing to put in the time and deal with the rejection, the small percentage of effort that generates leads usually puts you in the position of being the only buyer at the table, and the seller often is in a situation where they would like to sell the property quickly and they do not want to go through the hassle or take the time to list the property on the open market. Usually there is a problem with the property that needs to be solved, and you have to have the skill to be able to solve it. If you can handle all of these things, a direct marketing campaign can be a great way to find really good deals where you are the only buyer looking at the property.
