About a week ago, I posted the blog How to Buy Undervalued Property with Direct Mail. This posting is about buying SFRs (Single Family Residential) really cheap.
It generated tons of questions about houses (which I answer in this one). That posting is about buying unwanted rural land.
The sellers are advertising their need to sell. Several people have asked me questions like these:
Hi Mr. Butala, I was reading on Bigger Pockets on the blog about your approach to making offers with a Purchase Agreement (PA) and sending it in the mail. I know you do that with land, and I’m sure it can be done when trying to buy houses. I couldn’t tell from the posts if you send out an actual PA (mine is 2 pages), or you send out a zipletter like Michael Quarles does. Can you please answer my question? Thank you, Patt.
Do you have a recommended home status that we should be looking at? I was thinking homes that are owned in estates or homes that are 60 to 90 days past due on mortgages or homes that are 2 quarters behind on tax payments.
It’s easy enough to find homes in escrow, but how are you determining that they are behind on taxes from your lists and do you know of a way to know if they are past due on their mortgages?
I appreciate all your help with this! Tammer
HERE’S THE SUMMARY process of buying undervalued SFRs:
1 Get a list of back tax properties from the county.
2 Get a tax roll list from Core Logic (First American Title) – We can tell you who to call. It’s the best data around.
3 Make a list of all the properties with back taxes in the county by running a duplicator.
4 Choose a Master Planned Community (MPC) and make a list of all of the properties in there with back taxes by finding the duplications.
Now you have perfect list of all the SFRs in the MPC that have back taxes associated.
5 Price the properties (they are all the same).
6 Send an Offer. (Not a cute colored letter or a post card).
7 Buy the best one and wholesale it to a person you already know as an established flipper or landlord (way easier than it sounds).
HERE’S THE DETAILS:
This is how we purchase homes really effectively all the time:
1 Get a good list of back tax properties from the county. Like this one from Maricopa County AZ (Phoenix).
Or check out the interactive map here (more for fun to see how much opportunity is out there than anything else).
2 Get the tax roll list from Core Logic (this is the list of every single property in the county). If you need data help, let me know.
If the county you are working in does not provide good tax defaulted data, please move on to the next county. When we first take a look at a map and begin the process of choosing which county to work in, we don’t really look at the real estate. We look at the quality of data. You won’t actually visit the properties you end up buying. The county can be in another state.
A long time ago, I said this sentence and my staff won’t let me forget it: “We are a data company who happens to buy real estate.” This is a very difficult concept to convey to new investors. It’s less about the house you are buying, and more about how you got yourself in the position to buy that house. There are millions of houses. If you can repeat the success process of how you got to review that great deal over and over you will do really well. Anyone can do one real estate deal. It takes a pro to repeat the process successfully.
3) Make a list of all the properties with back taxes in the county by running the duplicator.
You now have two lists. Run the both for duplicates. You will end up with one single list of all of the properties that have associated back taxes and coinciding fresh ownership data in the county. Now you know where to send the offers (not colored letters or post cards).
This process so far works for any type of real estate really well. Land, Strip Malls, Apartments etc. But let’s talk about houses (SFRs).
4) Choose a Master Planned Community (MPC) and make a list of all of the properties in there with back taxes by finding the duplications.
Find a master planned community (MPC) in which to mail offers to the home owners who are back on their taxes. It’s a subdivision where all the houses look the same and where built around the same time. Like this:
Please research what a master planned community is on google. It’s imperative to the success of the mailer. In Phoenix there are some huge ones. Anthem, Sun City, & Verrado. Some of the communities you will find were built in the 60s and 70s back east. You want the homes to be as similar to each other as possible because it’s really simple to place a value on them based a consistent floor plan, square footage & comparison values. Del Web has been credited with creating these subs. I personally believe it was going on way before he branded himself.
The homes should be about the same age, style, square footage and consequently close in price. They are usually way out in the suburbs. The houses in town were built before MPCs.
Please grasp concept: If an SFR has back taxes associated with it, there is a 99% chance there is no mortgage associated with the property. When there is a mortgage, the lender impounds the taxes and rolls them into the payment the owner makes every month because real estate taxes are in the First Lien Position (I explain this in other writings – Taxes get paid before the mortgage).
What you need to know is that “back taxes” are an advertisement to the world, that the property owner may be interested in selling or something is wrong, and that the price is negotiable or very very negotiable because there is no loan associated with it.
The owner does not have to check with the lender to sell the property to you.
We have completed the purchase and sale of more than 15,000 properties since 1999. And we buy properties weekly that are in this situation.
Q: Guess what the number one reason people fall behind on their property taxes?
A: They are dead.
This is a topic for another discussion.
Each property in a county has some version of an APN (Assessor’s Parcel Number). Ask them for an index map. It will look like this (I put a link here instead of an image because this map is interactive and it rocks. It explains everything):
Master Planned communities have APN (Assessor Parcel Number) schemes with a beginning number and an ending number. When a sub divider or developer goes through the entitlement process to get a subdivision approved the county assigns each parcel an APN.
Your job is to find the first APN and the Last APN for that sub so you can send all the back tax owners an offer.
First APN: 101-01-123
Thousands of APNs in between
Last APN 101-99-123
So now you have a master list of properties in that MPC and you have a master list of back tax properties from before. Run that duplicator again.
You are left with a list of the property owners who are begging to receive an offer from you.
5 Price the Properties
- Find out what SFRs are selling for in that MPC
- Multiply by .6 or so.
That is your offer price.
Here is an example:
- 200,000 x .6 = 120,000
“Why 60%, Steve?”
This is an example (a very realistic one):
You Buy: $120,000
Pay Taxes: $10,000
Your Cost: $130,000
Sell: $160,000 cash to your Flipper (no agents or fees)
Net: $30K and you never leave your desk or pick up a hammer or talk with a lender.
The Flipper does all the work and sells it to the end user (new family). In many cases you don’t have to come up with the $120,000. If you are working with an experienced flipper, they will pay you $30K for finding “sourcing” the deal. We have a group of flippers that we work with. They beg us for deals weekly.
6 Send an Offer (Not a cute colored letter or a post card)
The offer should say something like this (we have sent out millions of offers and this type really works):
Hello, Mrs. Wilson. I noticed you are a little behind on your taxes at 123 Elm Street in Anthem. We are here to help. We are interested in purchasing the house for $120,000 cash. We can close in less than two weeks or much more quickly than that if you need to. $120,000 is the amount of the check that you will receive. There’s no fees and no real estate agents involved and you don’t have to pay the taxes. We will handle those over for you and everything else associated with the house.
We have purchased thousands and thousands or houses like yours. My number is 602-xxx-xxxx.
Whatever your circumstance is, we are here to help.
The actual two page offer we use is available if you reach out to us.
We have helped people move. Loaned them money during escrow. We establish a “first name basis” relationship with our sellers. Give them the respect they deserve.
Please don’t send a colored letter or a post card. Trust me. It’s insulting to the seller and a waste of postage. I’ve tried everything and this is the way it works best. Those methods affectively tell owners to “give you a call so you can discuss the deal.” It’s a waste of your time. You want people to sign your offer and mail it back. Period.
The best deals I’ve done in my life involved three phone calls or less.
WHAT TO EXPECT after the mail goes out:
If you have done everything right you should complete about 1 transaction for every 100 mailers you send (if this is your first time).
“Well what the heck, Steve, you said 5-25% response? This is a 1%!”
For every 100 mailers you send, you will get between 5 -25 properties to review (probably way more). In the beginning of your career, you want to complete PERFECT deals ONLY. I can’t stress this enough.
We do about 5 deals from 100 mailers.
Tons and tons of new investors we work with get trigger happy when these calls come in. Find that perfect deal in all the options you have created for yourself and complete it (so you can send out another mailer).
Isn’t that a great sentence: “… in all the options you have created for yourself.” Where ever you are in your life, you can create an unbelievable option in real estate investment for yourself in less than 60 days and start down the path to being a private real estate investor full time.
Back to the point:
Some opportunities will involve:
Some will have holes in the walls, cracked foundations and deferred maintenance. Pass on the deal.
Title / Ownership Structure:
Some will be owned by Mrs. Wilson who wants to sell, but also owned with her brother, Johnny Wasted, jointly, who has been in a Mexican fishing village for 7 years with his now 19 year old wife (this happened to us) Pass.
Some will have so much back taxes accumulated that it doesn’t make financial sense to complete the deal for you. (I have a self-created deal calculator if you need one).
Some owners will call back and love the deal at $160,000. Pass.
I hope you get my point.
7 Buy the best one and wholesale it to a person you already know as an established flipper or landlord.
I have found that new investors are gun shy about this business because they don’t have any money.
If you are new, please retain this: “There is way more money out there than talent.”
If you have talent and can source great deals, you don’t need a dime and you will have a long profitable career. Money guys are lazy in nature. They are waiting for you to find them and present a great off-market opportunity that nobody else knows about.
The first few deals you do must be worry free. New investors can get really discouraged if the first deal they try to complete is complicated and takes 120 days. Same with working in a county with bad data.
Make it easy on yourself. Choose a good county and choose a good first acquisition. And choose a good mentor.
Here’s one last point about a direct mail offers: The owners keep these offers forever. We get calls from mail we sent out over ten years ago.
You are setting yourself up for life.
I’ll leave you with some math motivation:
If you do 10 deals a year like the one in the example (less than one per month):
You will make $300,000 that year.
No office, no job, no boss. No BS. Just you, your phone & computer.
You are Not Alone in Your Real Estate Ambition.