In today’s seller’s market, it can be hard to find a good price on a residential home — but it’s especially tough to find a deal on a real estate investment property. That’s not to say good deals aren’t out there, but competition is tough and the likelihood of one just landing in your lap is slim.
In a time when there are more buyers looking for homes than are available, here are a few tips for finding your next investment property.
Make Offers — Lots of Them
Even in a buyer’s market, real estate investors are used to making a lot of offers. This is especially important in a seller’s market. For every 100 houses you look at, you may make 10 offers. And from those 10 offers, you may have only one accepted. The important part of this equation is that, in the end, you’ve come out on top with an income-generating investment property.
It’s also essential to know your market and adjust your offers accordingly. You may have more luck in metros where inventory is higher and there are fewer buyers, rather than a red hot seller’s market.
Nothing can slow down a home sale quite like contingencies. Those looking to purchase a property as their personal residence may ask the seller for financing contingencies — for example, they must sell their home for the deal to go through, the lender has to approve them for the amount, etc. Or, they may ask for an inspection contingency — they have the option to back out after a professional inspection if a defect is found and the seller doesn’t fix it.
Investors can improve their offer in the eyes of a seller by waiving these contingencies. A seller is usually hoping for a quick closing, and knowing you won’t back out of the deal can put your offer ahead of others — even if it is for a lower price.
Similarly to waiving contingencies, paying for the property in cash can be a huge positive to a seller. A May 2020 survey by the National Association of Realtors (NAR) found that 9% of contracts were terminated between March and May 2020 — 21% of those because of issues related to financing.
If you’re in the lucky position to be able to pay fully in cash (don’t forget about closing costs!), this certainly sweetens the deal and might be enough to give you an edge over other offers. The seller knows they won’t be waiting on a lender to close and the deal is likely to go through.
Offer More Earnest Money
Earnest money is somewhat common in the real estate industry, but don’t confuse it with a down payment. Earnest money is simply an amount you pay upfront when you make an offer to show a seller you’re serious. A higher earnest money deposit can reassure the seller they will at least make a decent amount for their time if the deal falls through on the buyer’s end at the last minute.
Buyers and sellers can negotiate the amount of the earnest money deposit, but a usual range is 1% to 2% of your offer price. In a seller’s market, offering 5% to 10% in earnest money can sway the seller in your favor.
Craft the Right Offer
When you’re trying to convince a seller to choose your offer, it can help if you have all your ducks in a row. There are a few other things you can do to sway the seller in your favor in addition to all the tactics mentioned above.
If you are using financing, make sure you have your pre-approval letter from a local broker or lender. Know that in a seller’s market, you may not get the kind of deal price-wise that you would in a buyer’s market.
If you are looking for a steal on price, be willing to give a little in other areas — maybe by not asking for much in the way of repairs.
Non-Traditional House Hunting
Virtually every buyer uses some combination of a real estate agent, a local multiple listing service (MLS), or online site such as Zillow to find houses on the market. Investors can get creative (and get lower prices) by finding off-market deals through direct mail, social media ads, and “driving for dollars” — driving around neighborhoods and looking for distressed properties.
You don’t necessarily have to offer the most money to have the most attractive offer to a seller. Other factors — like those mentioned above — can carry a lot of weight, reassure the seller that you are a serious buyer, and make for a quick closing.