Our guest poster shares four opportunities you can leverage to find an underpriced home in your market. For Sale By Owner properties (FSBO’s), scouting for soon-to-come amenities, and more.
J.P.: Today’s guest post comes from a reader and friend of mine, Jayce, who lives in an East Coast suburb. He and his wife have a lot of home-buying experience, and recently purchased a dual home and investment property at approximately 20% below market value. He shares some of his best tips below.
The only thing better than buying a dream home is buying a dream home below what it should cost. But the Internet has made home buying such an efficient market that the chance of finding something actually underpriced seems nearly impossible. If anything, every seller seems to be wildly optimistic in valuing their own property. And it can sometimes seem that the only bargains to be found are houses with serious hidden issues.
But recently, my wife and I bought a house for considerably less than it should have cost. The place was so good that we were ready to offer tens of thousands of dollars more for it, but we didn’t have to. How did we do it? I’ve listed three of the tricks involved in the home we bought, plus a bonus trick from J.P.’s recent home purchase.
1. For Sale By Owner (FSBO)
Brokers are one of the main reasons it’s hard to find an underpriced home. An even minimally-competent realtor will have a good idea of the market and what the place is correctly priced at – and then list it at a price higher than that.1
However, sometimes people choose to sell their home themselves (called “For Sale by Owner”, or FSBO), usually out of a desire to save on the 6% broker’s fees2 and/or plain distrust of brokers. I don’t blame them – 6% can translate to tens of thousands of dollars, and the Simpsons summed up my view on brokers pretty well.
The problem is that these people are competing against professionals. Real estate is a cutthroat, competitive business. Unsuccessful brokers do not last very long in the real estate world. And so for an amateur to try to compete in that world – well, the odds aren’t in their favor. They often haven’t done it before, or worse, last did it decades ago in a totally different environment. Or they don’t follow the market. Or they don’t know how to write a good listing. Or they take subpar photos (more on this later). They probably have little or no experience in negotiation. And most importantly, they often don’t know how to set the right price.
What all this means is that a FSBO home can be an opportunity for you. If you treat home-buying as an adversarial, zero-sum process, buying a FSBO home means you’re up not against a professional, but against someone who is likely no more experienced at this than you. (Probably less, in fact, since you’ve been looking at a whole bunch of places, while they’re only focused on their own.) All of those weaknesses I listed above are weaknesses you can take advantage of in the buying process to get yourself a better price.
Our experience buying a FSBO is a good example. We had been scouting out the real estate in this town for months, so we had a good sense of the market. When this listing hit the Internet, we immediately knew it was severely underpriced, given its size, proximity to public transit, and school zoning. (Mistake #1.) We visited in person that same day and confirmed that it didn’t have any major issues – indeed, it was actually better than it looked in the listing pictures, because the seller’s listing pictures had been terrible (more on that below). (Mistake #2.) We made an offer that day at about 10% under list.
The day after we visited, the seller withdrew the listing because he had received a ton of visitors and had already started receiving offers, so he assumed that he was set and didn’t have to go through the hassle of continuing to show the home. (Mistake #3.)
Now, he initially did the right thing here, which is to have his lawyer to respond to our offer with a “thanks – we’ve gotten enormous response – we’ll let you know – contact us if you have anything you want us to know”. It got us worried, because with a FSBO, you have no idea how they’ll make decisions. With an agent, you know what would happen – multiple rounds of bidding to extract every bit of value you can from the buyers. But with a FSBO, he might just pick somebody and be done with it. And since we knew the place was underpriced, and we had made a below-list offer, we figured there had to be someone who had made an offer closer to the place’s actual value, and we didn’t want to get cut out of the process entirely.
So we asked to visit the place again, and we ended up talking to the seller’s brother. (Mistake #4.) In our pocket we had an upped offer letter ready to hand him. But during our conversation, he started talking about how he and the seller couldn’t wait to get down to Florida. (Mistake #5 – more on this later.) So we asked about how quickly we could put together a sale given the timeline, and he said, “Oh, his lawyer’s just waiting to hear back from the other couple that put in an offer.” Which told us 1) there was only one other couple that ultimately put in an offer (despite the “enormous” response); and 2) we were the high offer. (Mistake #6.)
We thanked him, walked away, and ripped up the improved offer letter. After the other couple did not match our offer, the seller accepted our offer without further negotiation (mistake #7), given his time pressures and the fact that he never got any more interest after pulling his listing so quickly.
Those seven mistakes ultimately cost the seller tens of thousands of dollars – far, far more than what a broker would have cost. Other places have since sold in the neighborhood, each for quite a bit more than what we paid. Today our Zestimate is 20-25% higher than our purchase price.
I’m not suggesting that every or even most FSBO listings are like this. A FSBO doesn’t automatically mean savings. Some FSBO sellers are very good at what they do, and a good FSBO seller is likely a tougher adversary than the average broker.3 And even a bad FSBO seller might not be a good thing for you: they are just as likely to overprice their home, be unreasonable in negotiation, or make outlandish demands. We saw plenty of FSBO listings that we passed on for those reasons.
But the key is that you only need to find one good place. When you only care about finding a single good outcome, more volatility in the form of looking at FSBO listings might be just what you need.
2. Bad Pictures
Learning to read listing pictures is a vital skill. As anyone who’s visited a listing knows, what you see is most decidedly not what you get. Wide-angle lenses, unnatural lighting, and even Photoshop means real estate photos are about as reliable as online dating profile photos.
The flip side is that because the standard is set so high, a place with bad pictures tends to get overlooked by buyers. But if you’re good at “seeing through” listing pictures, not only will you have a more accurate sense of what a place with good pictures is actually like, but you may also see the value in a place with bad pictures, where other buyers might not. And any time you have less competition for a place, you put yourself at an advantage in negotiating.
This blog post shares a good example. Although the author wrote the post to demonstrate to sellers how important good photos are, the post is also useful to buyers, because it demonstrates how poor photography can make a room that is great looking in person look unimpressive. This creates an opportunity for you.
Try to force yourself to “see” the second room in the first photograph.
In our case -as mentioned above – the listing had terrible pictures. And I mean truly awful – they looked like they had been taken by a 1990’s flip phone that went through the laundry. The lighting was dim, the photos came out blurry, there was absolutely no attempt at perspective or scale, and for one picture, the photographer had actually stood in the middle of the room, making it look smaller than it actually was. Who knows how many buyers ended up passing on the property for that reason? But when you took a closer look at those pictures, and mentally corrected for all those deficiencies, you could tell that the place was gorgeous inside. Its pictures just didn’t do it justice.
3. “Motivated sellers”
The phrase “motivated seller” is now so overused in listings it’s about as meaningful as “walking distance”. Most of the time, all it means is that the seller wants to sell the house, in case you couldn’t figure that out from the fact that they put it up for sale. Worst case scenario, it’s used to mask serious structural issues – as in, “the seller is motivated to sell because the house is about to get washed away during the next rainstorm”.
However, there is one specific breed of motivated seller that is actually important to look for: the seller who has another place lined up, often in another state, but needs to sell the old place first for financial reasons. A disciplined seller and agent will never leak this leverage to you, but sometimes you can infer it from conversation – e.g., talk of a move to another state, a big life change in the works, or an odd emphasis on how quickly the sale can get done.
If you are positioned correctly, this is an opportunity for you – if you have great credit, have financing ready to go, or are paying cash, the seller will truly be “motivated” to sell to you ASAP, and you have the upper hand in negotiation to extract concessions.
In our case, the seller and his wife were eager to move to Florida. Every day without a sale meant another day before they could buy their place in Florida and start enjoying the beach.. And when it became clear we were the only offer, they did not bother negotiating with us, because if we found another place and backed off, we’d set back their beach plans another few months.
Bonus: Forthcoming Amenities
So this was a trick J.P. used that I’m super envious of. They have an adorable dog who is addicted to exercise and green space. And yet when they moved to their new place, there were puzzlingly no parks anywhere nearby. At the time I chalked it up to cost savings: in her area, a place that size next to a park typically costs upwards of $30k more. Maybe she was just being cheap and mean to her dog, I thought.
But J.P. had done her research, and sure enough, 6 months after they moved in, a brand new, gorgeous park (with a dog run) opened up two blocks from her place. Now she had all the benefits of the park without paying the “park premium”. Even better, as soon as it opened up, real estate prices in her area jumped; now the “park premium” is all captured in the value of her place as 100% gain for her upon resale.
In a perfectly efficient market, this probably shouldn’t have happened – if there’s a 75% chance of a park being built soon next to a listing, that listing would in theory bake in a 75% “park premium”. But in practice, a busy or inattentive seller and broker may not be so on top of things. And again – you only need to find one market inefficiency. So if you are up-to-date on the local neighborhood’s happenings, learning of forthcoming projects like these can have major effects on your home value, and get you something well below what it “should” have cost.4
What advice do you have for a home buyer looking to get the most value for their money? Do you have questions or comments for Jayce? We’ll put the best answers into a Part II of this post.
1 The way brokers get hired only further pushes up the listing price for brokered sales. When multiple brokers are pitching to sell the same property, you better believe that they are going to be, let’s say, generous in how much they tell the seller they’ll be able to fetch for their property.
2 Sellers typically pay both the 3% seller’s agent’s fee and the 3% buyer’s agent’s fee. Technically a FSBO only saves on the 3% seller’s agent’s fee, but rest assured that a person doing a FSBO is not going to look kindly upon an offer from a buyer’s agent. If you do decide to pursue a FSBO, you’ll probably have to figure out a way to not involve your buyer’s agent in the process.
3 This is because brokers are incentivized to sell places as quickly as possible and will often pressure the seller to accept an offer quickly; a good FSBO seller likely won’t face those same pressures.
4 The flip side, of course, is that you have to watch out for this in reverse. Before you commit to a place, you should do your homework and make sure that the lovely park next to your new place isn’t about to be bulldozed to make room for a new sewage treatment plant.