As a real estate investor, you know that the 3 Ds can guide you to some sweet deals. Death, divorce, and defaults are often ripe for a fast and reasonable deal. But what many investors are not as familiar with, should be considered the fourth D. Distress can lead you to some very lucrative properties. But what you need to know is how to be one of the first investors, if not the first, to spot that distress before it becomes a beacon that attracts far too much competition.
Who Knows About Pre-Distress?
The secret to getting a really great price on a property is catching it BEFORE the seller has even put it on the market. But you are wondering how to know when these properties are headed downhill without using a very accurate crystal ball. The answer might surprise you. It is not a broker or another real estate agent who has gotten a call about a possible listing. By then it is too late for a great price. It is the lender who has turned the property owner down on a refinancing deal, a line of credit, or another attempt to use the equity in a property.
It only makes sense that someone with a property will try to leverage that equity to pay off a massive medical bill, college tuition bills, or other large bills looming overhead. When they are turned down, the only option is to liquidate the property to cover the bill. The one who knows about this first is the lender who declined the loan or refi request.
Knowing this piece of information, you might never look at your lender in the same way again. Not only is this the person who helps you finance great deals, but this could also be the person who delivers the amazing deals right to your door. This is not a happy accident. It is just an opportunity that you can facilitate by asking for a heads up when your lender knows of a property owner that needs cash quickly.
As you might have guessed, these are not the most glamourous properties to purchase. But when you are getting them for a fraction of market value, they begin to look much better. It could be a storage business that is just not making the profits that the owner had hoped for or a home that is being sold quickly to cover the cost of care for an ailing parent. Once the bank turns down the owner, he or she is happy to take just about any offer. And you can be the hero by making a decent offer and getting the deal done quickly.
Distress is an excellent fourth D to add to your list. But the secret is to create a pipeline of pre-distress leads from the one source that knows when someone needs cash. Reach out to your favorite lenders, and any other lenders in your area. Pass out your business cards, tell them that you are open to almost any kind of deal, and always show your appreciation when a great deal lands on your desk as a result of just a phone call or maybe a meeting over lunch.