I don't get the whole bandit sign/yellow letter concept...

[Tracey B.]

Bear with me; I'm just an Aussie trying to get a handle on some quirks of the US property market, which is much more complex than our property market in Australia, with many more techniques. Aussie investors tend to buy property and hold for either appreciation (the primary motive for buying in Australia, as our yields are much lower but capital growth stronger), or for cashflow in retirement (almost nothing cashflows on purchase here; but over time with rents increasing and mortgage interest being stable, it will). And of course some people develop property (new construction, splitting titles, condo conversion, etc), or rehab and flip. But by far the most common strategy is to buy and hold for the long term (ie into retirement).

Wraps aren't legal here. Lease options are done to a very, very limited extent. "Subject to" isn't possible within our financial regulations. Vendor finance (seller carryback) is done to a limited extent for commercial properties owned by institutions, but almost never for residential property. Foreclosure rates are very low, and for those properties that are foreclosed, they tend to sell at market value anyway. Wholesaling doesn't exist to any significant extent (I've not heard of it at all). We don't have "bird dogs". So our property investing environment is much simpler. ; )

I've read about people using "bandit signs" and "yellow letters", and people putting in great effort to implement these marketing techniques to find buyers, and I understand that the goal is to buy property for under market value. But I'm genuinely not understanding which market imperfection is allowing this to happen.

If somebody is in financial difficulty, why don't they just sell their home on the open market, which by definition will give them the market value? If so many investors are competing to buy pre-foreclosures, then why don't the current owners simply get all the people who send them these yellow letters to bid against each other? And in this case, doesn't the purchase price end up being pretty darn close to market anyway?

If a fellow biggerpockets member can tell me what piece of this puzzle that I'm missing, I'd really appreciate being enlightened. Thanks!