In a strong housing market, you need to utilize every strategy possible to try and get a good deal. This post will teach you how to purchase property below fair market value.
Buying a property below fair market value is possible with just a few words. However, you must really make the effort if you want to get a good deal. Writing skills are vital. There's a reason why you took English in high school and perhaps in college!
In Real Estate Money Is Made On The Purchase
In real estate, there's a saying that goes, “money is made on the purchase, not on the sale.” With a well-timed purchase, you get to pay lower property taxes over the life of ownership and generate a much higher compounded return due to a lower base.
The market is a wonderful place because it allows two people with opposing views to swap assets at an agreed upon clearing price. But I had to keep a poker face during my SF real estate purchases in 2003 and 2005 because deep down I was thinking, I can't believe they are selling for so cheap!
Even with my single family home purchase in 2014, I couldn't believe they were selling a panoramic ocean view home on a double lot for 40% cheaper on a price/sqft basis than property on the east side of SF. No other major city in the world has ocean view properties that trade at a discount.
But now the property market has risen tremendously. The pandemic has created huge demand for nicer and larger homes. Pent-up demand for housing continues to build given low supply and life continuing to go on despite temporarily higher mortgage rates.
As a result, it's a good idea to negotiate more aggressively, just in case you buy at the top of the market. You also want to run the numbers over and over again and make sure you follow my 30/30/3 home buying rule.
Here are three strategies that may get you up to 5% below fair market value for a property.
How To Purchase Property Below Fair Market Value
All information can be relayed via a formal letter to the seller or via an e-mail from real estate agent to real estate agent. The transaction period usually lasts between two weeks to two months, so you'll have time to negotiate fine details.
If ever there was a time to improve your written communication skills, now is the time! To purchase property below fair market value, you must learn how to write a real estate love letter.
Let's go through three specific tips on how to write a fantastic real estate love letter. The real estate love letter is the key to getting the seller to accept a below fair market offer.
1) Focus on making a connection.
It's important to find some common interest between you and the seller. You can always find out something about the seller's background via an online search. People tend to like others with similar interests. Just look at how top management at companies all look the same.
Tell the seller how much their home would mean to you. Talk about the children you plan to play with in the backyard. Talk about your shared love of the Golden State Warriors. Salute their charitable efforts. In your letter, it's important to share with them who you are and why you are good people.
Selling a home is extremely emotional, especially if you've lived in it for many years. A seller would much rather sell to a family who works at a non-profit looking to eradicate poverty than to a 25-year-old trust fund kid whose parents are paying the entire downpayment, all else being equal. Tell your story in a positive light by sharing the struggles you had to overcome.
The purchaser of my home wrote a nice letter that told me how much he loved my house's brick facade. It reminded him of the colonial homes in Virginia where he grew up and went to college. Given I, too, went to high school and college in Virginia, I was more willing to entertain his offer, especially since he and his girlfriend had a two year old son.
Related: Three White Tenants, One Asian Landlord
2) Allude to end of the world scenarios.
It's much more stressful being a seller than a buyer. Buyers can simply shop around with no commitments. However, the seller is putting himself out there by listing his property online, signing a contract with a real estate agent, and allowing strangers to go through his home. Understanding this dichotomy will enable you to buy property below fair market value.
The seller also knows that if they don't sell within a certain period of time, the property goes “stale fish.” It's embarrassing when you put yourself out there and get rejected (no sale).
As a result of so much worry and stress, using “the end of the world” strategy can really motivate your seller to offload. You can start off with big picture scenarios such as discussing what would happen to the property market if the stock market has a 50%+ correction like it did during the 2008 – 2009 financial crisis.
Frankly, talking about doom isn't too far-fetched given the coronavirus pandemic and the 32% S&P 500 correction in the month of March 2020. But thankfully, things are better now.
Then you can go on to discuss what would happen if there was a terrorist attack. Finally, you can talk about natural disasters like earthquakes, flooding, and fire wiping away their property for good.
Bad Things Happen All The Time
Your goal is to make the seller believe their house is a riskier asset than it really is. When I was in the process of selling my rental property, I kept thinking how lucky I was to have escaped a big earthquake during my 13 years of ownership.
The house was in The Marina district, which has loose soil that's susceptible to liquefaction. Every San Franciscan is waiting for the big one to hit in the back of their minds.
If the buyer smartly pressed on the risk of damage in an earthquake by asking me about the soil underneath the house and whether I had experienced any earthquake damage during my time of ownership, I probably would not have negotiated as hard.
I would have sensed his fear of risk, which would in turn made me more fearful of losing him as a buyer. The key is to ask about the potential risk of each scenario, and not tell. Asking gets the seller thinking about worst case scenarios.
3) Focus on the benefits of a simple life.
Life is much simpler renting and owning fewer things. A simple life is the reason why I'm not in a rush to buy another physical property. Bad tenants, leaky roofs, endless maintenance, and ever increasing property tax are terrible things. A simpler life is why I'm focused on real estate crowdfunding. If I can earn 10% – 15% a year without any hassle, I'm all for it.
The older the property seller, the more appealing a simple life free from property maintenance will be. After a decade of homeownership, a property owner will have experienced more than her fair share of troubles.
But you can still argue about the joys of simpler living to younger property sellers too because they can definitely remember what it was like as a renter. If the sellers are close to retirement age or are retirees, you can make the case the retirement and minimalism go hand-in-hand.
As we get older, we long for a simple life with less hassles. The secret to a great life is to have strong relationships, not have lots of assets and stuff.
Highlight Your Value-Add If You Purchase The Property
The way to convince the seller about the benefits of a simple life is to highlight all the remodeling and upgrades you plan to do to the property. Not only do you make the seller feel good knowing you plan to take care of the house, by discussing all the work you plan to do, you also remind the seller how much work she has to do if she were to keep the property.
My old house's kitchen and two bathrooms were last remodeled in 1995. I had a 20+ year old HVAC unit that needed replacing. My back windows leaked, no matter how much I caulked around them. I also had an intermittent leaky light well that dripped through my dining room ceiling.
If I kept the house, I would have needed to spend $100,000 – $300,000 on remodeling. The whole process would have been a huge pain due to unreliable contractors, the need for permits, and multi-stage inspections by the city. I wasn't going to spend that much money and time for a rental, so I let it go.
Remodeling is a pain! Make them appreciate how you will take over their pain and make their house better.
A Home Inspection Contingency
There is one last item that will help you purchase a house at a discount. The home inspection contingency. A home inspection contingency is recommended, as the things you find during inspection can help you negotiate a lower purchase price.
You can also be your own thorough inspector of the home you want to buy every time you and your family members visit. Make sure you go through a detailed checklist of what to look out for. There are many things to look out for that will cost you money if you are not aware.
When in contract, you can then negotiate with the seller further on price concessions, depending on what you find.
Work On Your Persuasion Skills To Buy Below Fair Market Value
Everybody has their preferences. If you can figure out what they are and make a connection, you can probably get at least a couple percentage points off fair market value. After about 5%, financial fundamentals take over. This is true for any negotiation situation.
If my SF rental house buyer could have made a connection with me over tennis and got me paranoid about an 8+ Richter scale earthquake hitting SF in the next five years, I probably would have sold the house for $140,000 less (5%) than I did. Even 5% less was still 4% higher than my aspirational selling price.
But don't feel bad for my buyer. My house will do very well for him given how strong the SF economy is. I'm the one who occasionally feels bad about selling until I remind myself how difficult it was to deal with tenants and maintain a 1926 built house as a landlord.
It also feels nice to no longer owe a mortgage and write $24,000 property tax checks every year. Spending time stressing over my rental when I could be spending time with my son would seriously piss me off.
For those who choose to rent, that's OK too. Follow my Buy Utility, Rent Luxury strategy and continuously invest your extra cash flow to beat inflation.
I've personally decided to sell an expensive San Francisco real estate for a price that equaled 30X its annual rent, and reinvested a large portion of the proceeds in various passive income investments. Not having to deal with ownership headaches is amazing.
If you remain disciplined by consistently investing the difference, you'll do fine. But if you don't, you'll wish 20 years from now you held onto your property or bought a property today.
Diversify Your Real Estate Investments
Buying a property below fair market value is awesome. You get to live it it, enjoy it, and hopefully build long-term wealth. However, to get rich off real estate, you must investment beyond your primary residence.
Given interest rates have come way down, the value of rental income has gone way up. The reason why is because it now takes a lot more capital to generate the same amount of risk-adjusted income. Yet, real estate prices have not reflected this reality yet, hence the opportunity.
Take a look at my two favorite real estate crowdfunding platforms.
Fundrise: A way for all investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently outperformed the stock market during difficult times. I like investing in private real estate funds from Fundrise because of diversification, stability, and 100% passive income.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends.
Both platforms are free to sign up and explore.
I've personally invested $954,000 in real estate crowdfunding across 18+ projects to take advantage of lower valuations in the heartland of America. My real estate investments account for roughly 50% of my current passive income of ~$380,000.Â
Thank you for your post! I am tickled by the idea of a Real estate Love letter and will try it. Can you please clarify how you make a $300,000 passive income with Fundrise? Is there a specific portfolio you would recommend?
Hi Christina,
About 50% of my passive income comes from private real estate funds like Fundrise. Fundrise is a part of my private real estate portfolio.
Thanks!
Sam
Long time reader and fan!
One question I can’t seem to figure out nor had seen you post on: How to decide how long of a mortgage to get if you can afford it (15/20/30).
I’m able to afford higher payments and ultimate goal is to accumulate more rental property. My first purchase is 2 years in a 30 at 3.75 APR but can get down to below 3% now. Trying to understand if it’s worth it to have lowest payment possible (30 yr) so I can afford more in real estate in short term or pay off quicker.
Thanks!
One thing property investing has over share investing is the opportunity to buy under market value. There is no concept of buying under market value in the stock market since the only purchase you can make is at market value.
I love real estate and agree that you can purchase property under market value and bring it up to value. With stocks, you can, simulate buying below market at the current time. Just like stocks real estate can go up or down, so todays below value could be tomorrows above value.
With that said, selling puts on the stock you want will allow you to purchase below value at the current time. Selling a put at the current strike will increase your odds of getting called if you really want the stock.
Sam,
I believe I understand the dichotomy of the reply posts.
The right brained, more touchy feely “creative” types like the idea of the letter and attempting to play to emotions, because this is how they “feel”. The left brained analytical types disagree, because, generally, these tactics do are seen as an attempt to negotiate a lower price.
Regardless, the “I pay all cash and can close tomorrow, as is” is incredibly powerful.
I’m in this biz and ya know, I’ll take that letter and turn it around on ya! “Thank you so much for the thoughtful letter you and your family took the type to compose. We would absolutely love to continue discussing selling our property to a wonderful family such as yours. The vision of your children playing in the yard, enjoying the grounds that our family cultivated and created from dirt and plantings brings joy to my heart. Mrs. DoneAt 53 and I would love to sell our home to such a wonderful family. Please reach out to setup another time to meet so we can continue to find the best way to make our wonderful home your next home to build wonderful, lasting family memories.”
The challenge, is as mentioned, your poker face and determining who is sitting across the table from you and selecting the proper tactic. There is always a mark in the room, if you don’t know who it is…
Just imagine if the right brain and the left brain worked in concert. Magic I tell yah!
Great article–though I think this is great advice for slow markets or incorrect pricing. We sold a home outside of DC this year and priced it correctly based on 60-days of local sales data. It had six offers in 24 hours and the winner came in 10K over asking.
That said, we also saw people there trying to sell over-priced homes and sitting on their hands for 30 days or more–with the inevitable price drops 10K at a time. In those cases, your advice is spot-on.
Given that this is starting to be advice approaching mainstream, do you feel there is a chance that people can take advantage of this unscrupulously and create a false sob story or false connection just to garner an advantage?
I definitely don’t think asking about end of the world scenarios, and focusing on a simple life is mainstream. I don’t even think writing letters is mainstream if you look at the comments of this post.
I dunno about that, Sam. As you well know, all things real estate are front page news here in the Bay Area, and both the Chomicle and the Murky have published stories about buyers submitting letters to sellers— it’s not a novelty. The market is so flippin’ competitive that everyone is looking for any edge they can get, and buyers’ agents are always encouraging their clients to do the letter-writing thing. I’ve definitely heard this from my sister-in-law who’s been in real estate on the Peninsula for decades. And there are a lot of buyers with SO much money that their offers can just blow sob story letter writers out of the water.
That being said, you’re right that buyers still need to leave no stone unturned in attempting to improve their odds. It’s always a good idea to work relationships and the “human” angle whenever you have the option— it absolutely can make a difference. I’m just arguing that it’s a steeper hill to climb here than in most places.
If a letter works than more power to the buyer. As a seller I’m just looking at the numbers, their ability to close and if there are any contingencies. I really will have no personal attachment to the buyers. I’ve sold a couple of properties, both as is and both to the best financial offer.
I’ve also seen people write letters describing their family, etc only to just turn around and flip it. Another deceptive example is those that then turn a nice neighborhood home into a group rehab home. That creates all sorts of problems.
Sorry if all that sounds pessimistic but that’s why I keep emotion out of it as a seller.
I must be a hard ass. If I received a schmaltzy letter saying someone loved my house but wanted me to give it to them at a discount, I think I would laugh out loud. If I had two identical offers and one came with a schmaltzy letter and one did not, I would accept the one without the letter.
This is a business transaction – that’s all. The sales pitch of a letter is silly and turns me off. Make best offer that you are comfortable with (terms/price/timing/concessions) and move on.
Have bought and sold six houses around the country- never wrote a letter nor ever recieved a letter.
Your comment is exactly why people should write letters because so few do it. There’s a good chance you would’ve been able to save some money from your previous purchase transactions.
great post
i will for sure try these on my next property. One of my good buddies wrote a letter to the home owner of a house hw antes to buy stating how he loved all the custom work he did on the house and wouldnt change a thing but couldnt afford full price. He offered about 10% less and gor the house.
This is in ontario where real estate is red hot. It does work.
great advice
cheers
I somehow don’t think any of this works in the current Silicon Valley market EXCEPT at the higher end. In the $1m range right now, everything is going for 10-30% over asking. All the seller has to do is sit back and let his/her RE agent take in the dozens of bids after a single open house weekend and then rake in the dough. I don’t see where there’s a whole lot of opportunity to “schmooze” a seller for a discount of any sort in this environment. However, up in your stratosphere, Sam, I can see where buyers might still be a little thinner on the ground, and thus your strategy is viable.
I firmly disagree. As a seller, you look at all offers. In a competitive situation, the letter and the strategies or even more valuable. You might not get a discount in this case, but you might win the property.
Because so many people think this way, nobody bothers to do it. But if you are one of the few who do, you put yourself in a better position, especially when two offers are at similar prices.
Now at higher price points, yes there definitely is more wiggle room to negotiate. But people must not use laziness and ignorance as excuses not to write these letters and use these strategies.
There is little downside to spending 30 minutes writing a well-crafted letter.
Oh, I completely agree about writing the letter! My best friend absolutely benefited from a beautifully written letter when she purchased her home a few years ago, so I’ve seen it work. I was just addressing the issue of getting a DEAL in this price range. When the difference is between an offer of $1.1m with an outstanding letter, and an offer of $1.25m with a mediocre letter, it’s pretty hard for any seller to turn down that extra $150k just out of sentiment.
True. Which is why I mention the letter can make a 1% – 5% difference. An 8.5%, $150K difference in your example ain’t gonna happen.
But for me, and hopefully for everyone, spending 30 minutes writing a letter that could save someone $12,500 – $60,000 in your example is a NO BRAINER.
The ‘love letters’ do work. My daughter used it to win her house out of 10 plus offers. But there was no discount. Her offer matched the others because of a ‘escalation clause’. The letter was the discriminating factor.
But be careful. Discriminating is illegal. You may inadvertently violate the fair housing laws depending on what is in the letter. I have not personally heard of this case being brought, but the time is coming. Search and find: “Last year, the National Association of Realtors (NAR) denounced real estate love letters, and within the last two months, California’s Association of Realtors became the latest state group to denounce them as well.”
I expect them to be banned as ‘de facto discrimination’ in the current political environment.
It certainly will be interesting to see how someone can prove the seller discriminated by selecting one outstanding buyer. Perhaps realtors are no longer submitting the real estate love letter with offers due to this.
As a potential buyer, I will always try to make my offer as compelling as possible.
Another way to do it with a few words…”I’ll pay cash” ;)
Nice article Sam!
Hear lots of stories about letters to sellers here in Denver.
I think it is a great way to help an offer if the seller has lived in the home for a long time.
Ultimately though it will usually have to be over ask WITH a letter to be a winner.
Just so you know the purchase price only controls the property taxes in CA. In most other states they just reassess the property at current market values every year. It might help the first few years but that would be it.
Great advice on the content of the letter/email, although much of of this depends on the type of seller and the type of agent that represents the seller. If the other side is a flipper, then forget about it, money wins. If the seller agent is aggressive, he/she would convince the seller to take the highest offer on the table. A letter is probably the most useful when two conditions are met: 1) seller is emotionally attached to the house (intel can be obtained from asking why seller is selling, or if the house looks like someone has lived there for a long time), and 2) your offer is at least in the ballpark of the highest one. Curious when you said a buyer wrote you a letter that you related to and you were more likely to entertain his offer, was the offer price at or near the top of the other ones you got?
“I love the house, but I’d have to spend money to make it suitable for my needs.” However, I tend to sell and buy in rising markets, so often have little bargaining power. I try to get the highest price on my sale, and catch the unaware seller who does not recognize his or her power in a rising market. You have to be lightning fast to recognize this and make an offer and get it accepted on the spot. Pre-sales are a good way to get in way below market. Another way is to recognize value when the house itself is not very attractive. If location and layout work, the house and property are inherently low maintenance in design and there are no big hidden problems, just cosmetic updates, you can get it below market because most people cannot see beyond dirt, smell, ugly wall paper, etc. The sellers do not have a clue because if they did they would fix the problems. Estate sales can be great bargains. The family does not want to have it linger on the market, and smoke smells, old carpet, and empty house are not appealing to buyers. Another angle is a design that is currently unpopular — Vancouver specials were in that category at one time, but now are in demand.
What would I know I bought my place at the top and I mean right before the housing correction. What a blunder! But- I was forced to stay put and fix up the place as I went along. Now I like it since making improvements, and provided I don’t have to sell it, my plan is to never sell. P.S. -my next purchase I plan to lowball the heck out of them!
Cheers Sam, good post!
Great advice! Makes a lot of sense to try and make a connection with a seller when buying a property. I can imagine the stress of selling and if a buyer went above and beyond to try and relate to me and convince me that I was selling to a good family I’m sure that would help push me towards accepting their offer.