Alternatives to Auctions for Buying Below Market Value Properties
Below Market Properties (BMVs)
Below market value properties, or BMVs, often have a distressed seller, which means they are about to be foreclosed on, are behind on taxes, or have recently had a financial hardship, or can’t afford necessary structural work to maintain the property. It may also be the case that an heir to a property just wants to sell the property quickly, or the owner has been transferred overseas and prefers a fast sale to a higher price.
Many of these properties end up at auctions, but there are other places to find them as well. For more information about real estate auctions see this article: How Does a Real Estate Auction Work
Since purchasing distressed properties at an auction may come more risk, especially if you’re not allowed inside the property, you may want to consider some of these other alternative places to shop listed below.
Banks offer another option for bidding on real estate through their listings of REO (Real Estate Owned) property databases. If a bank goes through a foreclosure auction and is not sold it will be listed on the bank’s list of REO properties.
You can search by the bank name and “REO” for more information about banks in your area. Generally each bank has and department for managing their REO inventory, as well as dealing with evictions and negotiating with the IRS for the removal of tax liens.
Because with REOs you can go take a look inside the property and negotiate with the bank, this method of purchasing foreclosures allows you more control of the situation and less unknowns. You can also usually get the property inspected so you know what issues you will be facing, even though the bank may not be willing to make any repairs before closing the way a conventional real estate seller might be expected to do.
Depending on the state of the real estate market this method of purchasing foreclosures can be highly competitive, especially because more people can afford to purchase a property with a loan than can afford to purchase one at an auction with cash. However, if the home is in poor condition, it may be difficult to find a lender who will give you a loan on it, and if you do find one, you may have a much larger down payment requirement.
Additionally, if you are purchasing the property as an investor instead of as your primary residence, lenders may consider you a higher risk and so you may have a higher rate on your loan. There are some loans available that also include funding for repairs. Typically these are for home buyers but there are some commercial lines of credit available for investors that cover renovation costs, but may require higher credit scores and have more strict criteria.
If a property has been on the market for over sixty days, the bank is likely to negotiate more. This may be an opportunity also to ask the bank to pay closing costs if their policy does not typically include closing costs.
National or Local MLS Listings:
MLS stands for “Multiple Listing Service,” which is a database of properties provided by real estate brokers. There are numerous national and regional databases that feature these listings that are submitted by real estate brokers. Often REO’s are listed in these MLS databases.
You can usually spot a foreclosure among the listings because it will be sold “as-is” and may specifically state that it’s bank owned. If you have trouble finding them yourself, you can contact a real estate broker to help you with your search.
Online Databases Specifically Designed for Investors:
These may or may not require a fee or subscription for access, and may just include a list of foreclosures you can find in the MLS listings, or may also include off-market listings such as those under contract by wholesalers.
HUD.gov also lists foreclosures for sale. These are often priced well below market since HUD is not in the business of making money and wants to sell the property quickly.
If you are buying a foreclosure through the U.S. Department of Housing and Urban Development (HUD), keep in mind that HUD’s goal is to promote home ownership through federal programs. Because of this, a lower bid by someone who plans to live in the home may win out over a higher bid by an investor.
Wholesalers seek out distressed properties and try to match them with investors. You may be able to find good deals on off-market properties by networking with some wholesalers and asking them to add you to their mailing list. Be aware that wholesaling is not legal in all states, however, and not all wholesalers where it is legal are ethical. It’s best to work with only reputable wholesalers if this practice is allowed in your area.
Databases of “For Sale By Owner” (FSBO) Properties:
Many commonly used national websites such as Zillow allow you to set up a search filter for email alerts about FSBO properties that meet your criteria. Purchasing a property that is being sold by the owner and not through a real estate broker may come with additional challenges given the likelihood they are an inexperienced seller.
Real Estate Investment Clubs:
These clubs, such as local REIAs, vary greatly in quality, but can be a good place to network and find deals. However, be careful not to fall for scams or overpriced resources since most people you meet will be trying to sell you something, and not all of them will have the experience they claim to have. If you seek out these clubs to make friends with other investors, builders, contractors, property managers, and other professionals working in the industry, you may hear about good deals before they are on the market.
You can search public records online for foreclosures and liens, or scan through county courthouse records for upcoming auctions. County courthouses also typically have foreclosure sales information available to the public if you visit them in person.
Many investors mail postcards, or email or call/text homeowners in their target area in hopes that someone who receives their postcard will want to sell their home at a low price. However, be aware there are laws to follow when emailing and calling or texting people, and violating these laws can come with a large price tag. Additionally, homeowners have been so inundated with these unsolicited contacts in recent years that there are many rants on the community website NextDoor.com about it. So if you use these tactics, be aware that you may be alienating a lot of potential future sellers and tarnishing your brand.
Property Tax Lien Funds
If you are looking for a property related investment but do not necessarily want to purchase and deal with a property, tax lien funds are another option. These funds offer investors the opportunity to passively invest in tax liens without the same types of risks that come with purchasing tax liens directly at auctions, such as an unexpected additional lien or a problem with a title.
No matter where you decide to shop for distressed properties, remember how important it is to do a title search and purchase title insurance. If you don’t, you may be surprised to find you are responsible for any liens that are attached to the property or survived foreclosure.
Check out some important auction related terms in this article: