How You Can Make Money In Any Real Estate Market.
by Jon Morrow
Donald Trump makes billions of dollars purchasing run down or vacant properties and building fantastic structures on them. Warren Buffett makes billions of dollars buying "troubled" companies and turning them into financial powerhouses. Little ol' me makes millions of dollars by purchasing hard-to-sell houses and making them dream homes.
There's a theme here. If you look closely at the investing strategies of billionaires, you'll find a single principle hiding in all their actions On the other hand, if you look closely at the investing strategies of struggling investors, you'll rarely find it. What is this principle and how can you profit from it?
The Law of Supply and Demand
You might remember this principle. Your high school Civics teacher probably droned on about it for hours, subjecting you to all kinds of nasty mathematical formulas and charts. If you're like me, you passed it off as economic mumbo-jumbo and went back to sleep.
Big mistake. This one little principle is what separates the struggling investor from the successful one. It separates the bad deals from the good deals. Once I started using it in my favor, I saw my income transform from nothing into over $1 million the first year. Life was so much easier.
Foreclosures: a supply and demand case study
Example: You've heard that the foreclosure market is hot, right? Enthusiastically, you signed up to one of the foreclosure web sites and started bidding on houses in your price range. Then you discovered something. Everyone else is doing the same thing! The clever little banker dumped you into a bidding war, driving up the purchase price and driving out the profit.
What went wrong here? You made an offer on an investment with a low supply and a high demand. Lots of gurus have popularized investing in foreclosures, leading to masses of beginners snatching up all of the lower end houses--for ridiculous prices. If you lost a bidding war, don't feel bad. Chances are, they lost money on the deal.
Foreclosures are an example of The Law of Supply and Demand working against people. You can also make the Law work for you. If you want to buy a good investment, look for the following:
Low supply, high demand: An example of this market is Southern California. Tons of people want to move there and the number of houses are limited. Because of these factors, property is appreciating at extraordinary rates.
High supply, low demand: Sometimes, you'll find a surplus of a kind of property. In Charlotte, NC, for example, the rental market is glutted, leading to high vacancy rates. You can buy multi-unit properties for big discounts.
Making money from low supply, high demand properties in hot markets is simple. Buy the property and sit on it. Monitor the market on a regular basis to see if supply is increasing or demand is shrinking. Eventually, it will happen. You'll notice appreciation rates starting to flatten out. When this happens, you need to sell before the bubble bursts.
The real trick is making money from high supply, low demand investments. For example, if you try to sell them in the same economic condition (high supply, low demand), then you'll most likely have difficulty selling at a reasonable speed at a reasonable profit. The reason? Nothing has changed.
Getting rich from high supply, low demand
We've all heard the secret to real estate is buying low and selling high. Well, you've managed to buy a property for next to nothing. How do you go about raising the price? Once again, the Law of Supply and Demand tells us what to do.
For the price to increase, one of two things has to happen. Either the demand has to increase or the supply has to decrease. Normally, you have little control over the supply of properties in your area, so we're left with one option: increase the demand.
In the residential market, the best way to increase the demand is to make the house more desirable. Rehabbers are familiar with this strategy. They buy fixer uppers for a big discount, make all of the repairs, and sell them for a juicy profit. By making the house more livable, they increase the demand. The result is a drastic jump in price.
You can follow a similar strategy for houses that are in good condition. At any given time, in almost any market, there are oodles of good, well-kept houses that people are having difficulty selling. They're often slightly older houses with a few cosmetic problems. Tidy them up and sell them for a quick gain.
Increase desirability on the cheap
"That sounds expensive," many people whine. My answer is this: Would you spend a few extra dollars to sell the property three times faster? It's also cheaper than you would think. Use the following seven tips to give your house a fast, inexpensive boost in desirability:
Spruce up the landscaping
Repaint the walls
Install additional lighting
Replace damaged or cheap fixtures with something nice
Add crown molding
Decorate the front door step
Buy a nice mailbox
Take it a step further
So far, we've stayed inside the limits of your standard, residential investments. You can make decent returns, but if you want to make the big bucks, you need to think outside the box. The best investments are almost always undesirable properties that you can transform into the hottest on the market.
For example, my company is buying a lot of luxury homes right now. Many of them sit on the MLS for one or even two years. We buy them at a steep discount and then turn them into dream homes. When we're done, the house usually sells within three months for twice what we paid for it!
What is the high supply, low demand property in your area? Sometimes it's multifamily, retail, raw land, or other less common types of investments. Whatever it is, go out and survey the market. Find a property that you can buy cheap, make a few changes, and sell for a big profit. Then you'll be investing like the big boys... and you'll start making their kind of profit.
About the author...
Jon Morrow and his team of multi-millionaire investors work to make the big deals happen. He has helped facilitate over $20 million of real estate deals, spanning three states and multiple projects. His favorite investments are large, undeveloped tracts of land, multi-unit properties, and luxury homes. You can contact Jon at jon@morrow.net or (704) 675-5104.
How to Find Good Private Investors
by Zack Wiest
Looking for private investors? It is not easy, but it is completely possible. Private money is an amazing thing, and it will make real estate investing so much easier once you find it. If you find a deal--I mean a real money maker, the money will always be there.
Step one: Target prospective investors
First, you need prospects, right? You need to target people who CAN (if they decide to) give you money. Some ideas are relatives, friends, co-workers, doctors, dentists, lawyer, accountant, neighbors, etc. Once you have a couple prospects you need to know what to tell them.
Step two: Create a plan for both you and them
[You] Buy houses in need of repair at substantially less than fair market value. Renovate the house and resell it quickly to an owner/occupant for a profit. We call this retailing.
[Them] They lend you money at 10%, 12%, even 15% simple interest for a term of twelve months. You pay them interest only payments monthly, quarterly, or whatever you agree. You promise them you will not ask for more than 70% of the after repair value ensuring their loan will be protected by sufficient equity should the deal go bad.
You give them a title insurance policy, a homeowners insurance policy, a first mortgage position, a personally signed promissory note, and an appraisal on the property. You share with them your plan of what you are going to do to the house (buy, fix, sell, etc.).
Step three: Turn your plan into marketing tool
Now that you have a plan, convert it into a marketing tool you can use to recruit private investors. Create an "Introduction" to your opportunity explaining what it is you do and what you can offer them.
Jazz it up with questions like, "Are you happy earning 4.9% on your CDs? If not, I can help." Stuff like that will keep their attention. Put this Introduction in the hands of all of your prospects.
Step four: Prepare your presentation
Prepare a presentation to sell this opportunity to your prospect. Create a package building your credibility, for instance, a credit report, list of assets, previous deals, referral letters, employment information, whatever makes you look good. Present the opportunity educating your prospect on what Private Lending has to offer.Pay, pay, pay them back and do another deal.
Here's how I did it
I have successfully raised over $1.3 million in private money in the last eighteen months. I found two people--one started me out with $100k; he is now up to $500k, and the other started me out with $50k, then $100k. I showed him how he can make money by raising money from other people.
He has since raised over $700k from family and friends, and he takes three points off of every deal they do with me. Half of his people use their IRA money and run it through Equity Trust Company in Ohio. This guy now makes about $50k a year raising money for me. Sweet, isn't it? Good luck!
Is Foreclosure Investing For You?
by Ronald Starr
If you are new to real estate investing and considering buying foreclosure properties, you need to be realistic about what you are facing. If you feel more sober about foreclosure investing after reading what I have written below, I will have accomplished my goal.
Foreclosure investing is not a good investment approach for beginners. I recommend that you have at least a couple of years' experience with more traditional real estate investing first.
The profits from foreclosure investing can be huge. That makes foreclosures attractive. There is an awful lot to know in order to avoid the problems that can occur. If you don't know what you are doing, one disastrous foreclosure investment can wipe out your capital and your enthusiasm for all real estate investing.
Three ways to buy a foreclosure property
There are three basic approaches to buying properties in foreclosure depending on the stage of the foreclosure process: buying pre-foreclosures, buying at the foreclosure auction, and buying from lender after the foreclosure sale.
If you buy from the delinquent property owner before it goes to auction, you have bought a pre-foreclosure deal. Buying at the auction is self-explanatory. If nobody bids, the lender ends up with the property.
Buying from the lender after the auction is called buying REOs (real estate owned) or Repos, (repossessions). Sometimes you will see them referred to as "corporation owned" or, my favored term, "lender owned."
REOs are the least risky way to buy foreclosures
You may have more risk than you would in a regular real estate transaction, but REOs are less risky than in buying at the auction. Since REOs are somewhat similar to a regular sale, they can be pretty safe. You might not get a seller's disclosure.
In California, a lender who acquires a property through foreclosure does not have to offer a disclosure to you as a buyer. But, if there are problems after you buy the property, you might be able to sue the lender who sold you the property, or at least threaten to sue them, and they might make things right or pay part of the cost. There's a good chance they will still be around after the sale.
The risks of buying pre-foreclosure real estate
The next riskiest foreclosure purchase is the pre-foreclosure. If an owner of a pre-foreclosure disappears, you risk not getting anything from him after the sale. A pre-foreclosure seller might be desperate and lie to you about the condition of the property and the neighborhood.
There might be liens on the property that the seller "forgot" to mention. The big utility bills become the buyer's responsibility if the pre-foreclosure investor failed to check them out. Ditto for unpaid property taxes. There may be another person on title who did not sign the deed, and so on.
In California and, I believe, some other states, there are special laws related to dealing with and buying a property from a homeowner occupant who is in default on a loan.
If the contracts and the sale are not done according to the law, the seller has the right to rescind the sale and could, long after the sale, sue to have the sale reversed. There are extreme penalties for violating the law. Remember, "Ignorance of the law is no excuse." You need to know the state law when you do pre-foreclosure investing.
Can the seller can legally deed the property to you? What if the seller is already in bankruptcy? The deed is likely not valid unless it has gone through the bankruptcy court. You have to call the local bankruptcy court to check for a possible filing. And, of course, the seller could have filed bankruptcy in another bankruptcy court that you did not call.
And, even if the seller does not file bankruptcy until after your purchase, you may have to deed the property back to the seller up to three years after you bought it.
If selling the property made the seller destitute, and the seller sold for much below market value--which you hope he did so you could make a good profit--the bankruptcy trustee can require you to deed the property into the bankruptcy estate on the grounds that the sale was a "fraudulent transfer," wherein the seller deprived his creditors of an asset which could help pay the debts.
At that point, you become a creditor of the bankruptcy estate. Is this really what you planned when you bought the "great pre-foreclosure deal"? A lot of pre-foreclosure buyers may forego some of the inspections because they are hurrying to buy before the foreclosure auction.
Sometimes the buyers will give money to the owner, get a deed, and record the deed themselves in the land records office of the county. The pre-foreclosure buyer has to be very alert to a lot of possibilities and check them out. You must have superior knowledge of real estate investing before you start doing pre-foreclosure investing.
But, if you sign a proper sales contract with the owner, get appropriate inspections, go through an escrow with a knowledgeable escrow agent, and look at the property yourself, you probably will not be at great risk. If you use the safeguards above, you are going to have less risk than in most foreclosure auction buys.
The risk of buying at the foreclosure auction
Buying at the auction is the riskiest foreclosure purchase. At the auction you have no real estate agent to lead you through the process. You have no escrow and no title report let alone title insurance.
In most jurisdictions it is an all cash sale. In some states you may have a week to a month to come up with the full purchase price. If you do not raise the money, you lose your deposit.
At the auction the people conducting the sale will announce that the successful bidder will receive NO WARRANTY OF ANY KIND. You have no assurance that there are not other liens or loans on the property.
You do not have any inspections by contractors, roofers, pest inspectors, building inspections, water well, or septic system experts. You get no disclosure from the seller as to the condition of the building or what is happening in the neighborhood.
Usually you cannot see the inside of the building; perhaps not even the back of the outside. You know nothing about the electrical system, the plumbing, the heating, or air conditioning.
If you buy an occupied property, you have to do an eviction, which, in some states, can drag out for a while, preventing you from getting into the property quickly to prepare for resale. Sometimes the occupants, if they are former owners, will vandalize the properties before leaving or steal items, such as cabinets, doors, fixtures, lamps, etc.
If you are buying to resell the property quickly for a profit, you had better know if your buyer can readily get title insurance when buying your foreclosed-upon property.
When you get a very good deal at a foreclosure auction, you may find that the former owner files a lawsuit to attempt to overturn the sale. So be prepared to hire an attorney and fight for your profit.
Experience and knowledge build your foundation
Now do you begin to understand why I recommend that beginners not start investing in foreclosures? Start with simpler buying approaches and get some experience with properties, laws, ordinances, deeds, and loans, and so on to provide a foundation.
Learn to do title searches as fast as the professionals. Get to know intimately the government offices that have property records and tax assessment rolls. Get to know the property values in an area where you invest.
Learn about the problems with properties in different neighborhoods, such as bad soil, poor construction in certain subdivisions, problems with septic systems and wells, and soil contamination.
When you have learned all that, start studying up on foreclosures. Study the foreclosure laws in your state. Study law books on the priority of liens, bidding at auctions, title insurance, and bankruptcy. When you fully understand foreclosures, start buying them.
I am not trying to stop you from investing in foreclosures. They can be profitable for those who can practice it well. But, few beginners can do it well. I'm telling you to be realistic and get the background that will allow you to be successful in foreclosure investing.
The field is rife with risk. You can easily lose your whole investment if you make a single mistake. Please believe me, even with all my years of real estate investing experience, it has happened to me.
Good Investing, Ron Starr
Great Ideas for Finding Pre-Foreclosures and REOs
by Tanya L. Bowen
These are the tools and techniques I've used successfully when looking for pre-foreclosure and REO properties. I hope other investors find them as useful as I have.
Pre-foreclosures
The availability of pre-foreclosures depends largely upon the type of debt instrument recorded against property titles in each state, mortgages or deeds of trust (also called trust deeds or TDs).
TDs contain a "power of sale" clause that basically allows lenders to exercise their right to repossess collateral (in this case, real estate) for a loan in default WITHOUT having to file a lawsuit; mortgages do not.
Generally speaking, we prefer mortgages because TD foreclosures move too quickly (whereas lawsuits are slow and cumbersome) and provide limited visibility (mortgages have more public records associated with them, therefore they're easier for us to find).
To make it confusing, some states require lawsuits for ANY foreclosure, regardless of the debt instrument recorded; that's okay- -it's the suit itself that gives us time to be able to work with the property owner, so those statutes actually work in our favour.
You'll probably want to do some due diligence just to make sure you're not wasting your time trying to go down an avenue that turns out to be a dead end.
To find out if pre-foreclosure is an option for you, call the County Recorder (or Recorder of Deeds) and ask them what type of debt instrument is recorded against a property's title when someone takes out a loan to make a real estate purchase.
If the answer is "a mortgage," you're on your way; if the answer is "a deed of trust" or if you don't get a clear answer, you'll need to do some additional research into state laws to find out what the foreclosure process is.
Try looking for statute, code, administrative law, etc. in Primary Materials under the "U.S. State Resources" section of www.findlaw.com. (Excellent material, and all FREE).
Finding properties in pre-foreclosure
Here are three ways to find properties in pre-foreclosure:
1. Try contacting your local county court. Ask if Notices of Default (NODs) have to be recorded as court documents. If the answer is "yes," find out how you can search the new filings; if the answer is "no," try one of the other options below.
2. Find out if the County Recorder has data available online. An easy resource to use is www.netronline.com. Simply click on "Property Data Online," select the state you want, then click on the county, and voila! You'll be able to see what (if any) info is available over the Internet through the various real estate-related offices in that county.
This is my preferred method because the county I live in makes title abstract data available on the web. Plus I can do what's called a KOI (Kind of Instrument) Search and look specifically for NODs that were filed on or after a certain date.
I do most of my research this way because it's easy and convenient, it's FREE (I love that word!), and I can also see any other liens or judgments that are be recorded against the property that could adversely affect the deal. If this option isn't available in your county, try option #3.
3. Look in the "legal notice" section of the newspaper. Look for properties that are coming up for sale at public auction (sheriff's sale, trustee sale, whatever), jot down the addresses, the property owners' names, and the tax ID, or at least as much info as you can get from the ad.
Then go to the County Recorder's office to look up those properties, find the NOD on the title, and see who recorded it; you're looking for a title or abstract company that you can work with. They provide you with a list of the NODs they've recorded, and when you close on any of those deals, you use their services for closing ("you scratch my back, I'll scratch yours"). I've also used this approach in the past with great success as well.
Finding REOs
First of all, keep in mind that most lenders list with realtors for a specific reason (cost-effectiveness, driven by several different factors), so we should respect that business decision and not try to work directly with the bank on REO properties until the realtor becomes more of a hindrance than a help (happens more often than not, unfortunately). But try these steps, not in any particular order:
1. Most lenders these days have web sites. They may have a list of their REOs posted along with contact info for the realtor listing the property for them.
Every lender's web site is different, of course, so you'll just need to nose around a bit; sometimes those listings are buried in some obscure corner of the web site. If I'm poking around on some lender's site and can't find what I'm looking for in less than an hour, I try a different approach.
2. Call lenders and ask to speak to someone who handles their foreclosures. (or REOs, or repos, or their real estate portfolio, or whatever they call them). Ask that person for the names of the realtors they use to list foreclosed properties. If he says anything like "Sorry, we don't have any foreclosures," I find it very hard to believe that in this economy they haven't had to foreclose on any of their mortgages.
So it's more likely that I've reached a branch office and those repossessed properties aren't handled locally; they're all sent back to their corporate office to be managed at a central location, or they've been farmed out to an asset management company. Again, ask for the name and phone number of the person at Corporate who handles foreclosures.
3. Pay attention to business signs! Believe it or not, there's a realtor's office on one of the main streets in my town whose marquee says: "FREE FORECLOSURE LISTING, NO OBLIGATION, CALL TODAY" I did, and got another list to start working on and a good contact to boot.
4. Check newspapers Check not only the local dailies, but also the "cheapie papers" like the Thrifty Nickel, Penny Saver, Green Sheets, etc. for ads posted by realtors with REOs they're trying to sell:
Lists of properties that the realtor has: The ad will mention "bank owned," "foreclosure," "free list," etc. and will have a person's name or the name of a realty company and a regular phone number.
NOTE: I do NOT like ads that are only for government foreclosures (i.e., nothing but FHA, HUD, VA, FNMA-owned properties); I don't know who I'm calling, there's a "free 24/7 recorded message" or a toll-free number with an extension. These are usually subscription services, and more often than not, I find that their data is very limited, out-of-date, and over-priced.
Individual foreclosure properties: Look for listings with key words like "bank owned," "foreclosed," "REO," "repo," etc. If that realtor has one foreclosed property, most likely he's got others.
5. Attend the next public auction. Not to buy property, but to make note of what DOESN'T sell. Jot down the addresses, then a couple of weeks later, drive by to see if there's a sign in the yard. That's probably the realtor who's selling the property for the lender. And again, if he's got the one foreclosure, he's most likely got others.
Regarding option #3 for finding pre-foreclosures and ALL of the research options for REOs, these aren't necessarily ongoing processes; they're just groundwork. Once you have those foundations laid and those relationships built, you probably won't have any need to continue to do these things. Always remember: Be polite, but firm, and be persistent. Hope this helps…Best of luck!
