Many properties end up online and in databases, and the largest by far is the Multiple Listing Service (MLS) so let’s start there.

For decades, the broker-controlled MLS® system has been the primary marketplace connecting buyers and sellers of real estate in the United States. You can easily access the listings online and tailor your search by zip code, price range or an assortment of criteria. The MLS will show what homes are selling for and will also show homes that are rented and what rents you can expect.

You can also visit any real estate agent’s web site for much the same information. These web sites pull the same data from the local MLS but what most such sites provide is a type of “property alert.” You can specify your search criteria and as each new listing hits the market you’ll receive an email, phone call or text message.

We provide search tactics in the next lesson.

If anyone is thinking about buying a home, the MLS is a great start. But recently the Internet and the ability of consumers to easily share information with each other without the need for a middleman has threatened its dominance. But MLS is not the only way to find an investment property.

Let’s first talk about those guys on cable T.V. that show up at a foreclosure auction. Looks fun, right? Sure it’s supposed to appear fun; otherwise no one would watch the show. But real estate is a purchase that stays with you. You can’t make a mistake buying a property at the wrong price, that won’t cash flow and has multiple liens on the property. Oh, and the foundation is cracked. It’s not an item you can return at the store for a refund.

Before you buy at an auction, attend one first without bidding to get a feel for what happens. One can imagine an auctioneer babbling for bids and investors yelling and screaming and waving their arms in the air. I’m sure that happens somewhere but it’s really not like that. Some auctions, for example, are simply held by an attorney with folks sitting around a conference table.

Here are some things you absolutely must know before you bid on a property.

• Condition
• Market Values
• Title Issues

Condition

A home that is foreclosed upon and vacant typically doesn’t provide access to the property. That means you may not be able to physically inspect the home for defects. You can see the roof and look for any telltale cracks on the outside walls or foundation but many times that’s as far as you can go. Foreclosure homes are sold “as is.”

Market Values

You must know what the home would sell for in good condition in the current environment. Are property values going up, holding steady or going down? Is the neighborhood in a good area or surrounded by a sea of foreclosed homes? What about rents? You need to know ahead of time if you can create cash flow.

Title Issues

There can be liens filed on the property that must be settled before the home can be transferred to the buyer. Delinquent property taxes must be paid. There may be a lien filed by the IRS for back taxes. You can scour public records on your own or pay a fee to a title insurance company for a title report.

If the foreclosing lender doesn’t get the minimum bid they require, the home will be transferred into the Real Estate Owned, or REO, department.

If a home fails to sell at an auction it ends up in the lender’s REO department. In this instance however, the home is typically brought to good condition with needed repairs made. The lender will have a report that lists any known defects with the property. You may not get as good of a deal buying in this fashion but you have a better idea about what you’re buying.

Banks and lenders, especially the larger ones, will often contract with local real estate brokers to market their properties for them and you’ll work with the listing agent. However, other lenders have an internal department that takes care of disposing of the homes. Banks are anxious to get these properties off of their books as they’re an expense, wiping out other profits. To contact a lender’s REO department all you need to do is call or email them but most today have an online inventory of homes.

This is the central location where lenders are required to file legal notices of a pending foreclosure. When a borrower misses two payments in a row, the lender is required to file a Notice of Default, or a Lis Pendens (notice of pending action). This document must be sent via certified mail to the borrower but will also be filed in the public record for all who care to see. This notice will provide all the pertinent information regarding the homeowner, the lender and loan amount. This property isn’t likely to be on the MLS because the home hasn’t been put up for sale, but the owner very well needs to sell the home and avoid a foreclosure, losing any and all equity in the property.

This same office houses the filings for a foreclosure. The foreclosure filing is made when the borrower misses three payments in a row. This isn’t an automatic filing if the owner and the lender are trying to work things out, but getting to an owner who needs to sell quickly can be a true win-win-win—the bank avoids foreclosure, the owner gets out from under the mortgage and you get a great deal.

A FSBO (pronounced FIZZ-bow) is the acronym for “For Sale By Owner.” An owner can decide not to list the home with a real estate agent and save money on commissions, although in most cases that’s a dubious claim because the home doesn’t get the kind of exposure it could have when placed in the MLS. To find FSBOs make sure you’re visiting the area you’d like to buy in regularly and keep an eye out for a “For Sale By Owner” sign.

There are also online resources for FSBOs that can be found easily. Also, Craigslist has a section on homes for sale.

A cost-effective way to find potential properties is using “bandit” signs. You’ve seen such signs at intersections or along the roadway with handwritten slogans reading, “I Buy Houses” or “Avoid Foreclosure!” or “Cash 4 Your House!” These signs are designed to catch the eye of a distressed homeowner who needs to sell quickly. They’re called “bandit” signs because many cities across the country have ordinances that ban them. They’re cheap, effective but make sure they’re legal in your area. If you’re not sure a quick call to the city will answer your question.

HINT: I’ve called these numbers and asked about their deals and offered to buy them for a finder’s fee. There can be shady characters out there so be careful.

Turnkey real estate companies find below-market properties, rehabilitate when needed then find a tenant. Turnkey companies perform the evaluations to determine if the property will cash flow once repaired or if a flip, whether there will be enough profit after the sale. Most don’t list on MLS or through a real estate agent.

Turnkeys solicit real estate investors to buy their homes once rented. The individual investor needs to fully evaluate the provider and decide how the property meets their goals. Don’t expect to buy a property from a turnkey significantly under market but instead buy for the monthly cash flow and long-term appreciation. Perform your own due diligence and get references from other investors. If you buy a turnkey property, work with a company with a solid track record and a stellar reputation.

1. Online resources are everywhere with most properties first entered into the local MLS
2. Foreclosure auctions require a fair amount of preparation and the properties may be in poor shape along with title issues
3. REO departments are where homes go that don’t sell at an auction. These homes may still be listed below market but should be in good condition
4. Public records will list recent foreclosure filings providing you with an opportunity to buy directly from the current owner, avoiding a foreclosure
5. Turnkey companies are a “one stop shop” for rental properties but are purchased for cash flow, not a flip
6. The FSBO market is another way to find real estate not listed in the MLS