When looking to invest in real estate, it may be tempting to jump on what, on the surface, is seen as a steal of a deal on a property. Properties placed well below the current market value can provide a massive return on investment for savvy real estate investors.
Unlike stocks, which can be unpredictable and uncontrollable, real estate can be molded and managed as a physical asset. In the majority of cases, the more elbow grease, attention, and care you put into a property, the more you are likely to get out of it.
So, how does one go about finding these incredible deals, and how can one get the best return on their investment in the long run?
Too Good to be True
The old adage, “If it sounds too good to be true, it probably is” still holds true in real estate. If you find a property that is priced far below the market value for the type of property or the area where it is located, ensure you do your research before putting any cash down.
Start by analyzing the costs of rehabilitation, your fixed costs, and any operating costs that will be needed for the location. Ask locals in and around the neighborhood to see if there are issues. A great house in a bad neighborhood may still be a hard sell, even with renovations. After running the numbers, the “too good to be true” price may not be “too good” after all.
Time on the Market
Always check the total amount of time a property you are interested in buying has been sitting on the market. If it”™s been sitting for a while ”” say several months ”” with no interest, it may not be because it”™s a lemon of a property, it may simply come down to an ineffective realtor. This could be a positive for the investor, who could garner a good price out of a seller who is desperate to unload a property that has been sitting longer than they anticipated.
Special Sale Opportunities
Pay attention to tax sales, pre-foreclosures, and mortgage sales on prospective properties. These special real estate offerings can be a great way to get a below-market price on some great properties.
Getting to properties before they go on the market can ensure you get first dibs on great deals. Many of these special sales happen via online auctions which gives you an advantage as a buyer. Because these sales are happening virtually, you can purchase real estate anywhere in the country from anywhere in the country, and more options means more opportunities to save.
Another special sale option gaining popularity in this current real estate market is seller financing, whereby the seller finances the property purchase. In these deals, buyers will make a down payment and both parties hire professionals to draw up contracts and agreements, often making them quicker and less expensive than traditional financed property purchases.
The “Yellow Letter”
Sometimes, getting personal can work wonders. If you see a property you like, you can send a letter to the occupants, saying something along the lines of “My wife and I were looking for a property and came across yours, please call us”.
These are called “yellow letters,” and while they may seem presumptuous, they can prove to be remarkably effective. If you use a local number, there is a better chance you will get a return call. You may even be able to get your hands on targeted lists ”” such as homes that are listed as vacant or owe back taxes ”” and set your sites on those locations first.
Short Sales
During the real estate bubble burst of 2008, homeowners, buyers, sellers, and real estate investors alike all heard a wealth of tales about short sales. Now, in 2023 the short sale is making a return, which may lead to reduced prices for real estate investors.
A short sale means that the owner owes more than the property is worth. When purchasing a short-sale property, investors may be able to negotiate the price down with the bank that holds the mortgage and is often all too motivated to unload the home.
Savvy Investing for Great Returns
There are multiple factors that affect the pricing of real estate, and it helps to be aware of all of the ways below-market pricing can help ”” or harm ”” an investor. For instance, banks may price homes very low in order to entice buyers to an auction, where the price will then go sky-high once everyone starts to bid. On the other hand, some homes may be priced very low because they need far more repair than can be seen with the naked eye, and the current owner knows that those repairs will be costly.
However, if real estate investors do their due diligence and know what they”™re looking for, they could land on an investment that will pay them back and then some. While home prices hit record highs in 2021, the sellers’ market is starting to right itself. More and more homes are being sold below market and below asking price, leaving opportunities for smart investments and wealth building by real estate investors who know what they”™re looking for.
Dutch Mendenhall is founder and CEO of RAD Diversified REIT, a real estate investment trust focused on residential, multifamily, and farmland properties.
