| | How to Find MLS deals
Q: I would like to find some distressed single family homes that I can buy at an under-market price, fix up, and sell for a profit. But when I look at properties that are listed for sale in the local Multiple Listing Service, I find that by the time I pay the asking price, put in the necessary repair costs, and then pay holding and sale costs, there’s absolutely no profit left! Surely there are some good deals in the MLS; what’s the secret to finding them? –Bob from Dallas
A: Bob, your observations are exactly correct. Most properties in the MLS are listed at a price where no investor could make a profit renovating and reselling them. And yet, lots of investors use the MLS to buy bargain properties every day. The “secret” that you’re looking for is simple: what the seller of a particular property is ASKING for his house and what he will ACCEPT are often 2 different things.
As a licensed agent, I can attest to the fact that there’s an interesting psychology involved in setting the asking price for a property. In sitting down with a seller to write up a listing agreement, an agent usually recommends a price at which the home will sell reasonably quickly. This price takes into account the recent sale prices of similar homes in the area; the condition and desirability of the particular property involved; the current market conditions; and the needs of the seller himself to pay off any underlying financing.
However, the seller often has other ideas about the value of his home. He may have heard from neighbors that another property in the area sold for a very high price–and even if this can’t be verified by looking at official property transfer records (people have a way of inflating the price they got for their home when bragging to their buddies), the seller is not ready to let go of the idea that his could command a similar price.
In addition, many sellers don’t have a real grasp on how much work their property needs to bring it into good condition. One of the toughest jobs an agent has is gently explaining to a home owner that, although he’s been perfectly happy with the 40-year-old kitchen and the 30-year-old orange shag carpet and the 70-year-old coal-conversion furnace, most buyers are going to see them as things that need to be replaced.
And finally, there’s the temptation to list the property at a higher price because “The buyer will want to negotiate.” The fear of the seller is that if he places his home on the market at the price he really wants, he’ll only get offers of 95% or less of that price–and in a sense, that’s true. But the conversation with the seller often goes like this: “I’d be happy with $120,000, but let’s list it at $124,500, so that I have room to negotiate. Better yet, let’s put it at $129,900, becuase then the buyer will probably offer $124,000. Or how about $134,000? But if I get an offer of $129,000, I’ll take it.” A good agent will reign this tendancy in with a reality check–a property that is listed for WAY too much will get no offers at all–but will usually start by trying out a price somewhat above what the property will reasonably sell for.
So, given that the asking price in the MLS may or may not bear any relationship to what the seller will take for his property, how do you sort through the thousands of listed properties to decide which ones are worth taking a look at? First, scan the MLS listing for other signs that the seller might be motivated. Look for comments like “sold as-is”, “handyman’s special,” “no FHA/VA,” “sold to settle estate,” “out-of-town seller,” “must sell,” “vacant,” and “lender owned.” Eliminate properties that are drastically over priced–in other words, properties that are listed at retail price despite the fact that they need $20,000 in repairs. Then take a look at the properties that are left, run your numbers, and make your best offer regardless of the asking price. Don’t worry about “insulting” the seller–think of it as doing him a favor by giving him a reality check. And don’t get discouraged when your offers are rejected. Under the best of circumstances, 19 out of 20 will be.
And once you’ve made an offer on a particular property, follow up regularly with the listing agent.
It’s often the case that a seller of a distressed property will receive many offers in the same range as yours, and will realize over time that the market is telling him what his property is really worth. At some point, he might well decide that it’s time to give up on the fantasy that he’s going to get a fortune for his ugly house and just take one of these offers. If you’re the one who keeps coming back over and over with interest in the property, there’s a good chance that the offer he takes will be yours.
Reprinted from the Real Deal, a monthly newsletter for Real Life Real Estate Investors with permission of Vena Jones-Cox. Get a free 3-month trial subscription by logging onto regoddess.com