I like to think that each of the ways I’ve written about to make money with investment real estate is real, doable and ethical. I feel the same about this way, but its the one you’ll be least interested in talking about in polite company: buying at a discount.
In order to live up to my name, Mr. Cheap, I like to get a good deal. My friend joke that its my one failing (I suspect that the “one” part is the joke of the saying). If there’s a way to get something for less than full price, you’ll be hard pressed to get me to pay full price.
“Market price” occurs in real estate when there’s an equally motivated buyer and seller. In reality, one is usually more motivated then the other and this person gets the short end of the stick. As Violent Acres wrote, you’re in real trouble if a real estate agent can see that you’ve fallen in love with a property.
If, however, you can find a property that you’re willing to buy, but only at a killer price, desperate sellers become your best friend. Suprisingly there aren’t many people in this buying situation. Most people only want to put down big bucks for a property that they really like (how novel!). Surprisingly, for many people if they don’t like a house or condo, they wouldn’t live in it at any price (I find this a very bizarre attitude, but I’ve become convinced this is the perspective of the majority of buyers).
Desperate sellers can be desperate for many reasons: divorce, job relocation, old age (moving out of the house and in with kids), downsizing in retirement, financial problems, property in rough shape etc, etc. It doesn’t really matter. The sellers want money quickly, you want a good deal, and its a match made in heaven.
The “impolite” part of this approach is that some people will say you’re taking advantage of the seller. To my mind, if no one else is making an offer and they accept my offer (without me putting a gun to their head), how could it be considered taking advantage of them? They can always tell me to blow off, and wait for a buyer who’s willing to pay more (who may or may not ever arrive).
John T. Reed feels that the *only* way to make money in real estate is to buy at a discount (I keep wanting to read some of his books on the subject, but he insists they’re only applicable to the US market). I don’t agree with him that its the only way, but I do think its a very powerful way to make money on the day you buy the property. He feels that there are a number of properties available at any time that can be purchased for 20% under market.
I got a killer deal on my property for two reasons. 1) The seller had moved into a retirement home 7 months before and had had the condo sitting on the market (and paying condo fees) for 7 months without an offer & 2) it was in awful shape (he was a smoker and to “fix it up” for sale all he did was pull out all the carpetting so it had grungy bare floors, and damaged chipped walls in a really bad color).
Damaged properties can be great deals as buyers don’t want to have to fix other people’s messes (can you blame them?). Contractors can become troublesome and jobs can require more effort/money then originally estimated. The entire “flipping” idea is based of the premise that there’s value in being willing to fix up a property (i.e. the sum of a property and repairs are worth more then the parts).
One friend chastised me for “taking advantage of an old man”. That’s not how I see it. He was grateful for the offer and the opportunity to get rid of his property when it had been an anchor around his neck for 1/2 a year. He could have said no (in fact he did to my first offer), but in the end he decided it was better to cut his loses and get on with his life. Surprisingly none of the people who feel that these desperate sellers deserve more for their properties are willing to buy the properties themselves.
Had he been willing to put $8K into the property while it was sitting vacant, I’m sure he would have sold sooner and at a much higher price (he probably could have got $20K more for it). He didn’t though. Apparently he told his agent “there’s no way I’m putting money into a property that I’m trying to SELL!”.
That’s his choice and I benefitted from it.
August 8, 2007 at 9:55 am
Sorry for all the posts – it’s just that I find this topic rather interesting.
I would definitely NOT say you took advantage. That’s a pretty ridiculous statement actually. The truth is that most people are not willing to put a little money and effort into houses or condos, either when buying or selling. The house we’re working on now (and should be on the market very soon) sits across the street from a house that has been both for rent and for sale for a number of months. They are asking substantially less than we will but the place looks pretty horrendous. Of all the many evenings and weekends we’ve spent at our rental house, we have never once seen a person come or go across the street. I often wonder how this owner can justify not spending any money on fixing the place up but can justify sitting on losses every month. But as long as there are people like that out there, there is room to make a profit. RE is definitely less efficient (value wise) than stocks as humans exude a LOT more emotion in RE.
Anyway, my take is that you scored yourself a really good deal. Good for you I say!
August 8, 2007 at 11:44 am
telly: Please don’t apologise, I really appreciate all your comments!!! (especially correcting my misunderstanding of taxation!).
I agree with you (after I finished writing this I thought the tone was overly defensive, but in the end I posted it as it was).
I was actually planning a post on exactly that (inefficiency in RE market). Maybe you should put a low-ball offer in on the run-down property!
How much of the work do you do yourself and how much do you contract out? I had a very good experience hiring people to do work for me, but you hear so many horror stories that part of me worries that I really got lucky…
August 8, 2007 at 12:21 pm
“take advantage of an old man”?
Ridiculous, had you paid his inflated asking price you would have been allowing him to take advantage of you.
Property is worth what someone will pay for it.
Mike
August 8, 2007 at 12:56 pm
My husband is pretty handy so he has done a lot of the work but when you have a full time job it can get to be pretty tiresome (and can make you cranky!
) so contracting out can definitely be worth it.
My husband did the following:
installed a new front door, installed a new tub (with some tiling), sink and toilet, some electrical work, installed a couple fans, some new trim,…
I did a lot of the clean up and replacement of some electrical outlets, switches and face plates (a really cheap way to spruce up a place!)
We contracted out the following:
painting of the entire house, replacement of 5 windows, installing laminate flooring in kitchen (these were all done by a friend of the family so we got a really good deal), re-finishing hardwood floors (main).
That run-down property could be a good deal but I think because of all the above work, we’re kind of tired of rental RE. We burnt ourselves out a little. I guess all the more reason to hire a contractor!!!
August 8, 2007 at 4:10 pm
Great post, Mr. Cheap! I think it’s great that you are open to looking at properties in a different way to get a better deal. You got a great deal on your condo so kudos to you! Your post did not sound defensive to me, just well-deserved!
It amazes me when people don’t take the time and effort to present their property in the best light when selling. I am not talking about making upgrades just to sell it, but more doing minimum to necessary repairs. It always gets me when people are not willing to do any minimal repairs, but then insist, demand, and expect to get top dollar! Gimme a break!
August 9, 2007 at 8:56 am
[...] Financial Security Quest Money, Real Estate, Passive Income and Early Retirement « 5 Ways to Make (or lose) Money With Investment Properties – Part 5 – Buying at a Discount [...]
August 9, 2007 at 9:25 am
Quietrose, you sound like a realtor.
Like our contractor says, “it just needs a little lipstick”.
I love catching episodes of “Sell This House”. They manage to make the houses look MUCH better (and sellable) with only a few hundred bucks at most. One of my favourite episodes was when it took one homeowner to see video of people viewing their house being disgusted to finally get rid of the 6 ft. cat house / scratch post in the middle of the living room. No wonder the house had been on the market for months!!
August 9, 2007 at 11:18 am
As sad as it is, cheap repairs and staging are probably your best “bang for your buck” when selling. As a buyer I guess you have to make sure not to be influenced by the smell of freshly baked cookies when you walk in the house (and realize if you see that they’re done staging that you’re dealing with a savvy seller).
For someone who’s selling, you’d be a fool not to put a bit of time/energy/money into this…
October 23, 2008 at 7:09 pm
[...] post was originally made on my old site. Please see the original post for some interesting comments (then continue the conversation [...]