Personal Finance

5 Ways To Make (Or Lose) Money With Investment Properties – Part 5 – Buying at a Discount

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.