If you’re having difficulties with finding on-market deals at the price points that meet your investment goals, you aren’t alone. In today’s competitive market, relying on available listings as your sole source of new deals is not viable or effective, as an investment strategy.
As of September 2017, the median list price of homes is up 10% year-over-year, while the number of days on market and inventory are down 10% and 9%, respectively, according to research by Realtor.com. In hot markets, these numbers soar far higher. Fewer deals are available, and they are selling faster and at higher prices than just a short year ago. It’s a trend that shows no signs of waning soon. In fact, CNBC recently reported that 2017 will likely turn out to be the fastest housing market on record.
The inability to find on-market deals is a frequent concern of my clients and the listeners of my podcast, Best Real Estate Investing Advice Ever. It was also the number one challenge identified at the annual real estate conference I host, the Best Ever Conference, where I survey each attendee to find out the most difficult investment challenge they’re facing and aim to solve specific investment challenges.
Finding deals in a hot market is a challenge I have faced and overcome, and now I’m able to help others do the same. Here’s my secret:
For every on-market deal an investor comes across, they should reach out to the owner of the surrounding properties and attempt to purchase two properties: the on-market property and an off-market property. More specifically, they should pursue off-market properties that naturally complement the on-market deal.
I was sent an on-market opportunity in a Dallas sub-market: an apartment building with more than 300 primarily one-bedroom units. The property’s characteristics fit perfectly into our business plan. However, due to its high publicity and it being marketed by a broker, the building price inched higher and higher. We were not confident in our ability to manage the project in a way that would achieve our investor’s goals.
We found that there was another complex directly across the street from this on-market deal: a 200-plus unit building of primarily two-and-three bedroom apartments. Our broker contacted the owner of this off-market building, and after a brief negotiation, we secured a contract to purchase the property at a significantly discounted sale price. We were concurrently in negotiations to purchase the on-market deal and felt secure in offering a higher bid than we otherwise would have if it weren’t for the complementary off-market property across the street. As a result, we were awarded the on-market deal.
Aside from finding a deal in a hot market, here are three more advantages of this strategy:
- Economies of scale: One major advantage to this approach is the cost savings that result from economies of scale. For example, a major apartment building’s expense is the cost of a lead maintenance supervisor. Therefore, rather than paying an on-site maintenance function to manage one property for $50,000 a year, we can split that cost across both properties. Additionally, these economies of scale can apply to many other fixed and variable expenses, including advertising and marketing, salaries and commissions for leasing office personnel, property management teams, etc.
- Referral source: Another advantage — and the reason why I advise you to pursue complementary properties — is having a natural referral source. This applied to my particular case because the on-market property is primarily comprised of one-bedroom units and the off-market property of two-and-three bedroom units. If a potential resident is interested in a one-bedroom unit, we are covered. If they decide instead that they want more bedrooms, rather than turning them away, we send them to our property across the street.
- Flexible underwriting: Finally, the most obvious advantage I see is the ability to be flexible with the underwriting to create a competitive offer. Essentially, you are able to tap into the discount you are receiving on the off-market property — in combination with the previous two advantages — to offset the premium paid for the on-market opportunity.
So, the advice I offer to those who are having difficulties with finding deals that are compatible with their financial goals is to create your own opportunities. Don’t just look at the on-market listings. Instead, search for properties in immediate areas surrounding the on-market deal, reach out to the owners and work toward packaging two deals into one.
Ultimately, because of our willingness to create our own opportunities in this competitive market, we were able to add two cash flowing assets to our portfolio. By following this approach on the next on-market deal you come across, you can too.
What is your secret to finding deals in today’s competitive real estate market?
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Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.