If you can't be first, be last - Finding flip deals in hot market

[Rishit Shah]

In a Rush? Don't need TLDR I kept this one short ;). 

We're more than halfway past 2021(Can you believe it?) and the real estate market has been red hot. Houses are still being snagged up over asking price and bidding wars are becoming the new norm. While there are some news about the market softening a bit, the market doesn't show any signs of prices lowering any time soon. Guess which sector of real estate investing becomes the most lucrative, especially for early stage investors in such times? if you said flipping you were spot on. But doesn't a hot market make it equally difficult to secure deals because the inventory is so low? This was the question I kept getting from a lot of people when I started talking about flipping. So let's address this question today. How do you keep finding deals in a hot market? The answer is simple. Look where nobody else is. Here are 2 methods I use to find deals significantly under market value regardless of the existing market conditions.

1) Old listing on the MLS. 

There could be a variety of reasons a property just sits on the market without selling, but the most common ones that I see are either exceptionally high prices (even for a sellers market these prices make no sense), the property needs some work or a combination of both. What I look for is the last kind of properties. Why look at the overpriced AND distressed ones? Because they are the least likely to sell. These properties tend to sit on the market for the longest times until the sellers realize their prices are way too high and start considering being more reasonable with their pricing. The problem? they usually wait too long before reality hits them. Their realization often comes at a time when the ship has sailed and most people interested in the deal have either found another property or have removed it from their watch list. At this point, selling gets much more difficult due to an already low interest in the property. Moreover, most buyers assume there are definitely hidden issues with properties sitting on the market for really long time. After all, if there weren't any problems, why hasn't anyone bought it yet? This drives away most buyers. This is when I often make a lowball offer and if the seller is motivated enough, they take it. Now, this is no secret and many other investors use this technique. However, competition is significantly lower at this stage and sellers are much more willing to negotiate, creating the perfect conditions for an under market value purchase. However, given the current market conditions, these have become increasingly hard to find, but not impossible. I found my primary residence during the end of 2020 using this exact method. Bottom line, there are fewer of these at the time of writing this article but they still exist. If your timing is right, you may end up securing a great deal.  

2) Bank REOs

(Note: There are several pitfalls that must be considered when dealing with foreclosures so make sure you study the entire process thoroughly and speak with your lawyers before proceeding).
These are foreclosure properties that weren't sold at any stage of the foreclosure process. Foreclosure processes can be long depending on state laws and usually, the information about a property's foreclosure becomes available early on when the notice of lis pendens or notice of default is filed. This is when the first stage of investors rush to buy the property. These are cash buyers who have systematic direct to seller marketing systems. They flood the homeowners with direct mails and cold calls in the hope to work out a deal with the homeowner and lender to settle the mortgage and buy the house in cash before it goes completely through the foreclosure process. There are some stellar deals to be found in this phase but the competition is tough. The better your systems for outreach and follow up, the more homeowners you can reach and more deals you can close. 

If nothing works out in the lis pendens phase, the next step is foreclosure auctions. This is when the lender has taken possession of the property and is trying to sell it off by auctioning it to the highest bidder. The catch? you don't always get to see the inside of the property. So what you are left is your own judgement of the rehab required based on the property's age, location, previous condition/ownership status and many other factors (the list goes on). As a result, it is very easy to end up in a pickle if you don't know what you are doing, which is why I recommend getting some experience, preferably with someone who is already doing this before even considering going in this direction. 

If the property does not sell in the auctions, it is then added to the bank's REO list, which is basically bank owned properties that they would make a final attempt to sell through REO agents. For me, this the best phase to buy. Why? At this point the banks are much more flexible with prices because they have exhausted all their options to recover their money. But why would I buy something that nobody wants? there must be something significantly wrong with the property right? May be. But that is the least of my concerns. In most cases, a fix is always possible. The problem? the cost of the fix. If the rehab is too large and the cost of purchase + rehab is close to or exceeds market value of the property, the purchase would not make sense. This is where good REO agents come in. REO is similar to MLS sale in certain aspects. The most important one is you get to tour the property. Once you/your contractor figure out the estimated rehab costs of the property after touring it, REO agents will work with the bank to negotiate a price with the banks for you in a way that the deal is a win-win for both parties. Now, these agents are hard to find. Bank REO sales are a pure relationship game and the better the relationship of the broker with these institutions, the higher are the chances of negotiating a win-win deal. So if you want to buy properties in this phase, make sure you network, network and network until you find a rockstar agent!

There you go. These are the 2 ways I have been sourcing deals for flipping even in a red hot sellers market. Do you feel ready to dive in head first and flipping homes after this information? What other ways have you considered for finding deals? Let me know in the comments below.