James, one of our subscribers, recently posted the following question on our website: “Would it be better to purchase homes from distressed sellers, or to buy foreclosures?” As always, an excellent and insightful question, which is why I chose to answer it as a part of this month’s “ASK the P.I.G.” series.
This is definitely an easy question in my book, because I think it is undoubtedly far and away better to purchase from motivated sellers, and NOT homes that have been foreclosed on. The biggest and most compelling reason is because purchasing from motivated sellers gives you so many more options in regards to both purchase and exit strategies.
When you find homes with distressed sellers BEFORE they have gone to foreclosure (a.k.a. PRE-foreclosures), you have a litany of options that you could pursue. If it’s overleveraged, you could do a short sale, which allows you to have influence on the appraisal and gives you a 4-6 month time frame to try and find another buyer. If the seller is only a few months behind on payments, another option could be taking it subject to the existing mortgage, making up the back payments, and either renovating for resale or renting it out for cash flow. If there is equity in the property, you have the option of wholesaling for an assignment fee, or negotiating partial or full owner financing, a lease option, and the list goes on and on.
However, when you purchase an REO property from the bank (typically listed by a Realtor), you basically have one option, and that’s to buy it or not buy it. They will perform a BPO and/or appraisal, and will set the price at the current market value, which leaves little to no equity for most buyers. You also typically need to have cash, because you are oftentimes competing with other cash buyers, and the Realtor will require a proof of funds letter AND an earnest money deposit. That’s not exactly what you call creative real estate investing.
Another key benefit to dealing with motivated sellers is the lack of competition. Even the neophyte entrepreneur understands the basics of supply and demand, and so if you have hundreds or thousands of buyers looking at a small supply of good deals on the MLS, the competition will inevitable drive up the price. However, if your marketing has generated a motivated seller lead that no one else knows about and isn’t on a public MLS website, it gives you a great deal of control to structure the deal in a way that is most advantageous to you and your investing business.
To check out my full response to James, watch the video above…and then leave your thoughts or comments below.