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Screening Properties // Flipping Properties // 3 Important Factors // Under-used Resources
One of the most important lessons a real estate investor can learn is the technique of quickly and accurately screening properties. By effectively learning to screen properties, you will assure that the properties you pursue fit within your particular investment strategy… When screening properties, you are looking for motivated, flexible sellers who have property that meets your predetermined criteria. There are several ways to make money in real estate investing, depending on what real estate strategy you are using will determine what you look for in a property. Keep in mind that you don’t find deals; you create deals by finding motivated and flexible sellers and making effective offers. Motivated Sellers A motivated seller is someone that is desperate to sell their property. They generally have a specific reason as to why they need to sell a property. This can mean many things. Motivated sellers come in all shapes and sizes. A divorce, a job transfer or the loss of a job may motivate a seller. The key is that the seller needs to sell the property fast. As a real estate investor, you should adopt the attitude of looking for people that you can help them in their situation. Once you think you have found a motivated seller, interview the seller to find out if you can help them out Finding Motivated Sellers Now that you know what a motivated seller is, you need to know how to find them. There are many ways to look for motivated sellers. One way is to look through ads for property. When you find an ad, there are often keywords that you can look for that may signal a motivated seller. Oftentimes, when you see the following words in ads, it signals motivated sellers: • Divorce • Must Sell • Moving • Urgent • Lost Job • Death In Family • Foreclosure While there are many other words, these are just a few to look for. Once you find ads that appear to be motivated, you can contact the realtor or the owner of the property. A good question to ask is what they will do if they don’t sell the house. Some sellers may have a backup plan, while others might tell you that the bank will take the house if they can’t sell. Pursue both, but put a higher priority on the one without a backup plan. Consider Your Plans For the Property If you want to rent out the property for a period of time, you will want to choose a home in an area that isn’t too pricey or too inexpensive. If you pick a home that is in an expensive neighborhood, you will end up having to charge a large amount of monthly rent just to keep up with expenses. It would be a better choice to resell that property. If you decide to rent a home in a lower income neighborhood, you might end up with tenants that can’t pay rent on time or pay it at all. Your tenant turnover may also be higher. So, generally, the best places to rent are middle-income neighborhoods. Places where you can rent a home on the corner of a street in a neighborhood where most people own their own home is ideal. Another key is to look for the house in the neighborhood that may be different than all the others. You want the two-bedroom, one-bath home surrounded by three-bedroom, two-bath homes. Then, after you complete your renovation and your house is now a three-bedroom, two-bath home, it’s value will rise to meet the worth of the homes that surround it, rather than being the most expensive house on the block. Screening Properties Now that you understand what a motivated seller is, you are ready to look for properties that fit into your individual investment strategy. Usually there are three factors to look at that help you screen properties, which include: Classification After you have done your market research, you should make a list of types of properties that are in high demand so that you can focus on these properties. As a general rule, you will have success if you find: • Houses with three bedrooms and two bathrooms with 1,200 square feet or more • Houses located in middle class or lower areas which will price the home in a range that most people will be able to afford so you can sell it quickly • Properties in high demand, depending on the area where you are investing, will determine which types of houses are in demand—one way to determine demand is looking at the DOM, which stands for Days On Market—make sure the types of homes that you are trying to find are not sitting on the market too long, as this signals lower demand • Houses that are rundown and in need of repair • Sellers that are in despair, typically they need to sell their home quickly and will be sufficiently flexible • Stagnant properties, houses that have usually been on the market 60-90 days longer than average without selling—this is generally due to a problem that you might consider fixing When you find a property that you think may be worth pursuing, start by asking questions about the house. You want to ask questions such as when was it built, what size is the lot, how many bathrooms it has, or how large the garage is. This gets the seller to open up to you, and lets you start asking the more important questions. This also reveals any areas that you may want to avoid.
Screening Properties
with the situation they are facing. Take the time to find out exactly what their situation is. If you can’t help the seller, let the them know and look for another lead.
Price
Location
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Flipping often means different things to different people—most of which include:
• Wholesaling, which is setting up a contract to purchase the property and then assigning the contract to a new buyer before closing on the sale.
• Quick turn, meaning you buy a property, make a few repairs and then sell the property as soon as possible.
In general, flipping properties means that you resell a property as quickly as possible, instead of keeping it long term as a rental property. There are generally four things to look for in determining whether you should hold a property. They are:
• The property will appreciate in value.
• It doesn’t use up your time—it is easy to manage, is in an area where tenants plan to stay awhile, etc.
• Buying it doesn’t tie up all your resources—you don’t want to spend all your cash in one place.
• Has positive cash flow—this will allow you to keep it, even if the economy or circumstances turn sour.
Once you have made the determination that flipping the property is the best option for you, there are some regulations regarding flipping properties, but they typically only apply if your buyer wants FHA financing. Many times, if the seller has owned the property for less than 90 days, the buyer cannot get an FHA loan.
Other terms and conditions also apply when selling a property you have owned for less than a year. Some of these regulations can make it harder for you to resell, but if you follow the rules it is not illegal to flip a property quickly. Make sure to take the time to know the laws in your area; this will save you time and heartache later.
A few states have passed what some call ‘anti-investor’ laws, such as ‘Executory Contracts.’ Texas, Maryland and North Carolina currently have such laws. These contracts mean that lease option agreements or land contract sales are considered a sale of the property.
This is important because if you have ‘sold’ the property using either a lease option agreement or a land contract sale and your buyer defaults, you must now foreclose on the property rather than evicting them. These laws also require a number of additional disclosures, with huge penalties for not properly following these disclosures. In addition, you are not able to resell the property after foreclosing until you own the property free and clear. One way investors have worked around this is putting the property in a land trust and selling the beneficial interest in the trust.
Other laws may be in effect in different states as well. Some laws regard buying a property by taking over payments. Regardless of the state in which you conduct business, always consult with and close property through an attorney that knows the current laws in your state.
Some real-estate investors look for the cheapest house they can find, planning on painting it and selling it quickly for a profit. You may find some issues with trying to find a cheap house that just needs a little bit of work.
Some of these problems may include:
1. People are no longer willing to offer deep price reductions because of a few cosmetic issues. Prices in some areas have escalated so far that it may be hard to find a seller willing to give much of a discount just because the house looks bad.
2. Some buyers are willing to do this work themselves to get into a house that is a little more affordable. This increases the number of people looking to buy these houses and reduces the number of these homes that are on the market.
3. In the recent hot real estate market, sellers are trying to squeeze every dollar they can out of the sale of their house, and there are more buyers willing to pay those high amounts. Buyers are purchasing properties thinking that even if they overpay for a house, prices are going up so fast that they will always be able to find someone else willing to buy it from them for more than they paid. (Plan on avoiding this at all costs).
When you make an offer, base the price you pay for a property on what houses in that area have been selling for and how long they are staying on the market, not on how much you think it might appreciate to in a few months.
Consider the following investing scenarios:
Wholesaling—make an offer on the really junky, stinky property in town and find another investor to sell it to before you ever have to close on it. You can do this by assigning the contract.
Quick Resale—be a problem solver by finding good properties with motivated sellers. It is not always fun to have to find sellers that are in dire need of selling a property. In hot markets, it may be more difficult to find motivated sellers. If you do find a good property, you may need to invest thousands of dollars into repair before you think it is ready to sell it. By being creative, you can find deals in ways that other people are not thinking about. A good option may be to find a buyer that can’t quite afford the house if it were fixed up. You can sell without doing the work, turning a quick profit and allowing the buyer to get into a house they may not be able to afford otherwise.
Fixing Up—look for houses that are not as nice as the ones around it. If you can find a run down house in a nice neighborhood you can often fix it up, selling it for a price that the nicer homes are selling for. This improves the neighborhood, and allows you to find properties in a more unique way, rather than just looking for people in need of help.
Increase the Value of the House and Resell—look at unique ways to increase the value of the homes you buy. Adding on to the home can be done in many ways, such as building additional levels going up, adding on if there is enough land on the property or changing the look or function of the existing layout.
Have a Plan in Place Before You Buy a Property—it is usually good to have a plan ‘B’ and a plan ‘C’ as well. Things do not always go as planned and you want to know how to get out of a place if it is not working out. Your plan may even include reselling in a variety of creative ways. The point is to make a plan before you start on how you will make money, not looking for a way to make money after you have bought the place.
Taxes
Generally, short-term capital gains result from reselling for a profit a property you have owned less than one year. You are taxed on this profit as if it were regular income for that year. Long-term capital gains occur when you sell a property for a gain after having owned it for longer than a year. Long-term capital gains taxes are 15%, rather than your own tax rate. There are a few ways to avoid these taxes, such as a 1031 exchange. If you do a 1031 exchange on a property you have owned for less than one year, this will likely raise a red flag to the IRS, resulting in an audit. Always consult with a qualified tax professional when investing; only these professionals can answer all of your tax questions.
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Need help finding deals in a seemingly worn-out market?
Try these underused sources…
Property Managers
Many investors hire individuals or companies to manage their properties. This is especially prevalent for out-of-state owners—but often, local owners do it, as well. They can often tell you who is indifferent about their property, or who is thinking of selling it but hasn't listed it yet. Sometimes property managers are investors themselves, offering the same opportunities for networking and information, as well as partnerships and joint-ventureships that all investors offer.
City Code Enforcement
This source may surprise you. There will always be homes that don't match up to local codes. Often the house has been condemned, but it needs no more work than your average buy-fix-and-sell deal. However, the local code office has to pay for certain maintenance activities, such as lawn mowing. It may also be recording a lien for weeding or mowing to the tune of $250 per incidence. Meanwhile the owner of the house is nowhere to be found. Certain cities may have hundreds of such properties, many boarded up. Not long ago, Columbus, Ohio, reported that it had 900 such, and Richmond, Virginia had over 2000.
Appraisers
You should always have an appraiser on your team. You can learn a lot from appraisers what needs to be done to qualify for FHA financing, what comprises a “like neighborhood” etc. They might also know when deals wouldn't work because the house doesn't meet code. Many of them know a lot of investors and know the tricks used to get a house to pass code. Many also are aware of liberal money sources, since they have seen where other investors have acquired their financing.
Attorneys
Contact all bankruptcy attorneys. The attorney doesn't necessarily care what a house sells for, since he or she gets the same amount of money, regardless. The homeowner may want it sold quickly. If it is necessary to sell the house to implement a bankruptcy plan (Chapter 13 Bankruptcy—personal reorganization), they may want to act quickly. In the case of a liquidation (Chapter 7 Bankruptcy), the court just wants to get it done and pay off the creditors. The creditors may find it better to settle quickly for pennies on the dollar, rather than let the house go through a protracted marketing and sales campaign. Contact attorneys that handle Probate (check yellow pages). Get yourself on their contact list, so you can be the first person they call to sell property.
Bail Bondsman
When a person is arrested, he or she often puts a home (the detainee's or one belonging to a friend or relative) as bond in order to post bail. If the detainee jumps bail, the bondsman forecloses on the house. Most likely the amount of the bond is a small percentage of the home's value, and the bondsman wants to recover the cash quickly because his business needs it for the next bail to be posted. This is a good group to send postcards to.
Health & Senior Services
Most communities have a local agency to take care of elderly or handicapped people who have no family. Very often the elderly person signs over all assets to the care agency, including the house. As in other cases, the agency needs the cash, not the house, but the agency or nursing has the right to sell the assets. Again, this is a good group to send postcards to.
Using these under-used sources may get you more homes than you dreamed were even on the market. They are the perfect places to go for motivated sellers—the kind who can be flexible, who can agree to your terms.
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3 Important Factors
These three factors are important to remember when looking for properties to invest in. Once you understand the market that you are working in, you will be better able to determine the types of properties that you will be looking for…
Demand is everything. Typically, you will want to focus on properties that are in high demand. Why? Because you must always have an exit strategy—and that means your properties have to have appeal to potential sellers in your market. This will vary between areas of the country, but is important to know. For example, A-frame houses are not your standard house style in many areas. You may not want to deal with them, as they could take longer to sell.
But if properties are in demand, doesn’t that mean you’ll have to compete with other buyers in the market? Absolutely. That’s why you’ll focus on the second market factor in your search—the availability of flexible sellers. You’re looking for people who are flexible for one reason or another. Either they need to liquidate quickly, or they’ve had a difficult time selling their property due to a problem that no one else wants to tackle.
When talking to the seller, ask questions about how they came up with the price for their home, what repairs are needed, and the best price they could offer if you could have cash in two weeks. The focus of these questions is to find out if they are motivated and flexible.
If they are flexible on price, ask questions to see if they are flexible on terms. Ask if they will consider seller financing or a rent to own situation. Some may be curious why you ask. Simply tell them you want to know all the different methods available so you can buy their house as quickly as possible and give them what they need out of the sale.
If they are flexible on at least price or terms, they may still be worth pursuing. If they are flexible, ask about their financing. What is their mortgage balance, the monthly payment, do they have more than one mortgage and are they current on their payments? If they are delinquent, you want to know their reinstatement amount. This is the amount required by the lender to reinstate the loan. Also, you want to ask if they are near foreclosure, as this will require you to move much faster.
They may again ask why you need to know this information. One thing you can tell them is that your lender needs to know so that they can tell you all the loan programs and financing options to help you buy their house as quickly as possible and give them what they need out of the sale. If they still resist, you may find that they are not really that motivated.
Again, your plans for the property will determine the amount that you will want to offer. If you are flipping or wholesaling a property, the offer you make will typically need to be less than if you are planning on purchasing the property as a rental.
You want them to drop their price by 10,000 dollars or more (depending on your area). If they do not come down this far, ask, “Are you sure that is your best price?” If that is still the lowest they will go, this tells you that they are probably not very flexible on price. That house may not be worth pursuing.
The third factor is location. This will also vary depending on the market you are investing in and what you plan to do with the property. If you plan on flipping or wholesaling a property, it is usually best to look for properties in middle class or poor areas. If you are looking for a property to use as a rental, generally you will find better tenants if you purchase middle-class homes.
While these three market factors may seem elementary, you’d be surprised at how many new investors miss the obvious. Whatever you do, don’t be pressured to get started and jump into a deal just because it seems like the only one out there. Remember, your motivations for buying are not like the average consumer, so you can take your time to find the right deal in your market.