Recently I attended a foreclosure sale where I observed a young man, about 30 years old, buy a four-bedroom fixer-upper house in a good neighborhood for just $5,050 cash. The house is worth perhaps $250,000 in its run-down condition. He bought “subject to” an existing first mortgage of $227,000, including arrearages. In other words, he earned an “instant profit” of about $17,950 ($250,000 minus $227,000 minus $5,050).
If this young man spends about $15,000 fixing up that house, he can increase its market value to $300,000, perhaps more. Whether he keeps that house to live in or for an investment, or “flips” it for a quick resale profit, he earned his first profit when buying for the right price.
But you don’t have to buy at foreclosure sales to earn profits when buying a home below its market value. That’s just one method. There are many other profit opportunities at the time of home purchase.
– Ask why the seller is selling. As a buyer of rental houses for many years, I’ve heard virtually every reason for selling a home. They include: divorce, unemployment, job transfer, drug or alcohol problems, moving up, moving down, retirement and foreclosure. Often, the seller hasn’t told the listing agent the truth.
But it helps to know the seller’s motivation if you want to make a bargain, below-market-value purchase. Try to tailor your purchase offer to meet the seller’s needs. For example, if the seller is retiring, a seller carryback mortgage will give the seller retirement income while giving you easy financing. The terms you offer can create an outstanding bargain below-market interest rate.
– Don’t be in a hurry to buy a home. Just because a home’s asking price seems like a bargain, try to figure out why. Although the house might be in excellent condition, for example, if it’s in a bad school district the rotten schools will hold down market value appreciation.
This time of year, between Thanksgiving and New Year’s Day, or even until Super Bowl Sunday, is the best time to buy a home. Only serious home sellers have their homes listed for sale during the holidays. It’s a big advantage to have little competition from other home buyers.
Study locations carefully. What looks like a good neighborhood might be considered undesirable by the “locals.” Ask lots of questions if you really want to profit at the time of home purchase.
Before making a purchase offer on a house you want to own, ask your realty agent to prepare a written CMA (comparative market analysis). This form compares the subject home with similar nearby residences that recently sold, asking prices of comparable neighborhood homes currently on the market, and listings that recently expired. An experienced realty agent can help you make a low purchase offer, which the seller either will accept or counteroffer.
– Never fall in love with a home. Single-family detached houses are usually the most profitable purchases. Condominiums, mobile homes and vacation or second homes are often the least profitable because of limited resale demand.
However, if the seller won’t accept your low purchase offer, or something close to it, be prepared to walk away. If you or your spouse lets the realty agent know you love a particular residence and absolutely must buy it, that information will be quickly conveyed to the seller who will then hold out for top dollar. It’s hard, but be prepared to walk away if you can’t make your first profit at the time of purchase.
– Include contingencies for additional protection. Just in case you offer too much for a home and the seller accepts, be sure your offer contains at least two contingency clauses.
Even if you are preapproved for a mortgage, as you should be, make certain your offer is contingent on both the residence and you qualifying for the exact mortgage you need. If the house appraises lower than your purchase offer, then you can cancel the sale and get your good faith deposit refunded.
The second contingency clause to include is for a professional inspection. It will cost you around $300, but it’s worth every dollar to have the home professionally inspected. Be sure to accompany the inspector to discuss any defects he finds that the seller didn’t previously disclose to you. If the seller refuses to repair such defects, or give you a credit, then you can disapprove the inspection report and get your earnest money deposit refunded.
– Conclusion. With a bit of planning, it’s possible to make your first profit on a home purchase by acquiring it below market value. Not every home can be bought this way. But all you need is one.
