Hi Moguls, Patrick Riddle here with an interesting perspective on the difference between working with MLS-listed properties (which means you do deals through Realtors) and working with non-listed properties (which means you negotiate directly with sellers).
There are a number of differences between these two options and we’re going to talk about the most important ones.
I’ll start this off by saying that if you have an abundance of resources, if you have perfect credit and available cash to close the deal, then working with listed properties may be the best way for you to go.
Is anyone out there raising your hand to having all that in place? Probably not.
So… if you don’t have an abundance of resources, then working with properties that are not listed is by far the easiest way to get that first deal. Here’s why…
Realtors have a lot of unnecessary rules that they impose on everyone. They do that for a reason. Some of it is to keep things legal - but a lot of it is so the agent can maintain control and keep them protected. As I like to say, it’s their sandbox that they play in. They make the rules.
Most of the time, they’re dealing with unsophisticated buyers and sellers who don’t ask enough questions and demand very few changes. The agents’ typical ways of doing things are in direct contrast to how we creative real estate investors think and act.
You’ll want to play outside the sandbox, here’s how…
Earnest Money
Let’s start with earnest money and how to handle it. With listed properties, the standard for earnest money is to put down 1% of the purchase price. An agent is going to expect you to put down around $1,000 as earnest money on a property. Generally, that deposit is not refundable. If you don't close, you lose it.
Because they require 1% earnest money – and because they do that so much – people assume it’s a legal requirement. It’s not a requirement at all. You can have $10 earnest money. You can have an entirely different form of consideration other than money and it’s still legal consideration for contract. A lot of people don’t know that.
Remember, investors, you don’t play inside the Realtor’s sandbox.
As creative real estate investors, when dealing directly with sellers, we usually put down $10 – sometimes $100 – in earnest money. Our contract states that our closing attorney holds those funds until the closing. If the deal closes, then the payment is processed. If not, those funds are returned to us. So by dealing directly with sellers, we're not risking any earnest money. (That’s our sandbox.)
Closing Time
Next, let’s look at closing times. Realtors typically set closing time on their listed properties as 30 days. That's what you see on most traditional contracts.
In the creative real estate world when you’re negotiating with the seller, it's much different. You’re the one who sets the time frame for the closing. Asking for 45 days, 60 days or even 90 days is not unusual. You have the freedom to set up the deal however it makes sense for you.
Try asking for 90 days to close on an MLS-listed residential real estate transaction, and you will be laughed right out of their sandbox.
Adding the Out in a Contract
What’s an out in a contract? This refers to a contingency, which if it’s not met, the deal is halted.
A standard one that we use is:
"This agreement is subject to partner's approval."
Or you could write in:
"This agreement is subject to satisfactory inspection of the property."
If you put a clause like that in a standard contract with a listed property, it will devalue your offer greatly. They know that if you found out anything on the deal that you don't like, you're out the door and that seller has lost time in marketing and selling their property.
Not so when you're negotiating directly with the homeowner. These clauses are standard inevery transaction that we do. We make it subject to partner's approval, which puts us in the driver’s seat. We are in control and we're looking out for our best interest as investors.
We're the ones sticking our necks out making these offers for homeowners who are in need. Adding an ‘out’ in a contract direct with a seller is standard business for us.
Special Stipulations
Special stipulations consist pretty much of whatever you can imagine. For instance, if you wanted to contract the property and then seek a buyer (another investor) to purchase it from you, and either assign or wholesale it, you can add that as a special stipulations.
If you're negotiating directly with the seller, you could say,
"This agreement is subject to finding a suitable buyer for the property."
That way, if you don’t find that other investor to purchase the property from you, you don't have to close and you don't risk your earnest money. You’re totally risk-free in the deal.
Realtors would never allow this. Not because it’s illegal. They would just simply say, “You can’t do that.” (That’s not how you play in their sandbox.)
Here’s When it’s not Worth it
I was on the phone recently with one of our students who had discovered a good deal on an REO property that was listed with an agent. She contacted them because she wanted to make an offer. They told her that she’d have to put down $5,000 in earnest money.
Are you kidding me? Put down $5,000 and risk all that cash? (And this would have been her first deal.) I told her it just wasn’t worth it. Not one bit.
This is why I am such a strong believer in working directly with sellers.
What we want to do is help you get into a contract with little or no risk at all – that will allow you to market the deal and wholesale it. It will give you enough time to go out there and find cash to close your deal.
Marketing Plan
The MLS often seems to beginning investors like the quick and easy way, but is it the best way?
If you agree with me that the pros of working directly with the seller outweigh the advantages of dealing with MLS listings, then you need to create a marketing plan that consists of several different strategies to get a whole boatload of motivated sellers responding to you in some way – calls, emails, etc.
This is where you, as the creative real estate investor, can do your best and also limit your risks. And it’s much more fun playing in your own sandbox!
Holla at Me
Do you have some thoughts to add about working directly with sellers rather than with agents and MLS deals? Tell me about it in the comments section below.
Limit your use of listed properties and Realtors as your main resource for deals
Market smartly by targeting inherited properties, absentee owners, fire-damaged houses, etc. (a.k.a. distressed, motivated sellers)
Stay consistent – marketing doesn’t create results overnight
Don’t be tempted to revert back to the MLS just because it’s easy to access and has ‘deals’