Finding properties

FINDING DEALS: "You make your money when you BUY"

This is the BIGGEST lesson - if you overpay for a property several things happen. Firstly the LTV (loan to value) is too high and your lender will probably not cover 100% of the purchase price AND the improvements. I've seen it a hundred times .... a new investor wants to buy their first property and has been looking for over a year. Then a 'deal' comes along and the new investor is determined "this is the one!". Unfortunately, desperation is not a good quality to have when risking $000's. Typically, in this case, the lender will require money to be brought to closing to cover closing costs, survey, appraisal fees, and often rehab costs, although these may be held in escrow forcing the investor to find MORE money (usually credit cards) to fund the rehab. The investor then decides to "do it yourself" taking 3-4 months to finish a rehab (with no experience in construction) and then too long to sell the house. Holding costs eat up any profit and if it's on a 6-month hard money note, the property may go BACK into foreclosure!

OK ..... it happens. So how can we get around this? The answer is use someone else's EXPERIENCE in locating good deals AND construction, marketing etc. to turn the property QUICKLY. Seriously, there are plenty of good investors out there who can and WANT TO HELP with your first deal, such as referring a great realtor, or suggesting some good wholesalers. I think I learned early on not to "re-invent the wheel". If I knew then what I knew now (isn't that a common truth!) then I would have joined an investor club early, and found a realtor who UNDERSTANDS investor property deals, read a few more books and found a "buddy" who would have helped me a little, maybe for a slice of some profits (no-one wants to work for free!). Look, you never see a RICH HERMIT! This is a TEAM SPORT! Anyway, here are some very good sources of locating DEALS:

Use a REALTOR for FREE !!!

I must admit, we have had mixed results with using realtors. For the first couple of years trying to find the right 'deal' I was referred to some 'great' realtors who found me some "deals". Or so THEY thought. Most realtors think a 'deal' is a property that lists for about 80-90% of its retail value. A true example: our realtor found us a bank-owned property which was listed for $79,900. At best this property was worth about $100K so it was what I call an '80 percenter'. By using hard money (5 points up front) plus about $12K in basic updates we were already up to $97K in costs NOT INCLUDING closing costs (buying AND selling - about $5K) and, of course, HOLDING costs (note payments, utilities). Well, if we took THAT 'deal' we would have LOST about $5K. Now, most 'retail' realtors don't believe you can buy a property for about 50-60% of ARV (after repair value). Let's face it ... can you REALLY THINK a seller will let that property go for nearly half price? The answer is DEFINITELY YES! A few "investor" type realtors (including us) have bought deals at these ratios. It takes some searching, however, and 99% of them are bank-owned, or "REO's" (real estate owned - by the bank) HERE'S THE DEAL - to a bank, or asset management company retained by a lender, a property on their books obtained through the foreclosure process is a non-performing asset. All banks have quotas on holding and releasing assets and, frankly, they're in the business of lending money, not holding empty property. They employ a listing agent to advertise the property for sale and the costs of both the selling AND buying agent is PAID BY THE BANK! A buyer's realtor generally makes 2-3% of the sale price. The GOOD NEWS is that the investor who wants to purchase pays the realtor NOTHING! It's a great deal for the investor because the realtor should be spending his/her time searching out prospective DEALS. Note: we generally need to search about 1000 property listings to find about 10 decent deals, or about a 1% return on our efforts. BTW, if you're in the Dallas/Fort Worth Metroplex area, contact us at www.themillwoodgroup.com Check out our deals page!

Wholesalers

Now, I have certainly wholesaled a number of properties myself and it takes a certain kind of individual to do this successfully. So what is a wholesaler? You may have seen on late night TV how to make money in real estate using NONE of your own money, and frankly, this is mostly TRUE for wholesaling! What a real wholesaler will do is scour the neighborhood (usually the VERY low-end neighborhoods) to find an empty or distressed property. Most of these 'deals' have been empty for years, or even condemned! It is usually owned by someone who has been left the property in a will, or just been unable to keep it in a livable condition and gone to live with family or some variation of this. Unfortunately, the individual is still liable for property taxes and these may have gone unpaid for years. So, the wholesaler will find the owner, and offer to "buy" the house for CASH within 45-60 days. In that time, while the house is "locked-up under contract" the wholesaler will advertise and email all his investors to see if anyone wants to buy this 'deal'. The profit may be $1,500 to $5,000 typically. In general, these deals have to be ALL CASH because no lender will want to loan on this poor quality property. To sell this deal the wholesaler may "assign" the contract using a one-page form showing the original purchase price plus the assignment fee. The only negative is that the new buyer knows EXACTLY how much profit the wholesaler is making. If the wholesaler's title company can do a "double close" (see title company) then the first transaction is actually invisible to the new buyer and the wholesaler can make as much as he wants with no-one the wiser except him and the title company. Now, what does this mean to you? Actually, a good wholesaler can be an excellent source for deals as long as you are able to close quickly. I've found that once a deal has closed and the wholesaler gets paid, then they are more likely to call you FIRST with any new deals that come along. it's all about trust, really. Now, don't get hung up on how much the wholesaler is making, after all that's his BUSINESS! The purchase price, again must make sense to you and follow our 50-65% of ARV guidelines. I recommend nearer 50% if the house need roof or foundation work. If a property is "paint & carpet" then go ahead and look at 60-65% of ARV.

Newspapers

Personally, I have SOLD many wholesale deals through the paper, but never bought one. Why? It's quicker to use a realtor to buy as described above. In addition I get all kinds of "deals" emailed to me from other investors every day. Of course, if you like to scour the papers for deals go ahead. There are many "FSBO's" (for sale by owner) which may fit your buying model. However, get a good realtor to do your comps (or CMA's) so you know how much to offer. BTW, some FSBO's may offer owner financing which can be useful if you're tapped out at the bank.

Foreclosures

Now, some people think "foreclosures" are deals you buy on the courthouse steps ... and they'd be right. Once a bank has secured the property by way of the foreclosure process, which may take 3-6 months, then they get the trustee (who may be the foreclosure attorney or representative) to auction the property on the courthouse steps. It's a process that goes back for centuries. If the property can be auctioned for more than what was owed on the note, then it will be sold to the highest bidder. If not, it goes back to the bank or lender and is then called an "REO" (Real Estate Owned - by the bank). There can be some decent deals at the auction, but you have to pay CASH (or cashiers checks) IMMEDIATELY the auction is finished. Closing may take a couple of months so you don't even get possession of your purchase right away! Another whole subject of foreclosures is "pre-foreclosures" where you work with a homeowner who is very behind on their mortgage and are facing foreclosure. By paying back payments, penalties and fees and coming to an agreement with the homeowner on a little cash to move, you can take over the home (usually as a "subject-to"). Again it's a tedious process and may take time. I don't particularly like these deals because it's an emotional deal and may cause distress to the family whom you are about to evict. Still, horses for courses, as they say. many investors like these deals - I'm just not one of them

What I really like ..... is when the property goes back to the bank as an REO, described above. Why? It then becomes a non-emotional deal, and the bank doesn't WANT to own it. It is usually put up for sale by a realtor and negotiations after that are all about the NUMBERS.

MYTHS ABOUT BUYING REO'S (bank owned properties)

Here are some things you hear and read about buying bank owned properties that just aren't true:

1. YOU SHOULD MAKE FRIENDS WITH THE PERSON AT THE BANK WHO HANDLES THEIR REPO HOUSES AND YOU'LL GET THE BEST DEALS.
This one makes me laugh the hardest. Good luck even finding the person who handles this part of their business, let alone making friends with him or her. Nine times out of ten they'll be located in another city thousands of miles away from you. Even if they are local and you can locate them, this person can't help you so don't take it personally if they don't return your phone calls or accept your invitations to lunch. The bank must always sell its real estate inventory using an "arms length" transaction to both satisfy its investors and the banking regulators. Creating relationships with investors who then buy some of their inventory could be creating a conflict of interest and every banker will avoid doing this.

2. BANKS DON'T WANT TO OWN REAL ESTATE AND WILL ACCEPT JUST ABOUT ANY OFFER ON A HOUSE THEY OWN.
It is true that Banks don't want to own and manage real estate but it isn't true that they just give property away. Generally a bank takes a loss when it takes back a house and has to sell it, so they need to get the highest sales price possible in order to minimize this loss. They also need to be able to show investors and bank regulators that they marketed the property at an appropriate price. I do recommend that you submit lowball offer as your first offer on a bank owned house....the Bank will almost always counter any offer you submit just so that they can prove to their investors that they tried to get as much as possible for the house.

3. YOU NEED TO BUY THE HOUSE AT THE SHERIFF'S SALE TO GET THE BEST DEAL.
I've actually found the exact opposite to be true. Because Banks have to protect their assets and take the least amount of loss possible, a Bank will generally bid the amount of the outstanding mortgage on the property regardless of the true market value. So in many cases, houses are sold to the Bank for more than the market value at the Sheriff's Sale. The idea behind this is that once the Bank owns the property, they can then market it at a price that seems reasonable based on the market rather than accept the much lower price that the auction might bring. Once the bank has had the property on the market for a while (usually listed with a Realtor and in the multiple listing service), they will start reducing the price until the house sells. The best bargains are found when the price of the house has been reduced twice, especially if the second of these reductions is substantial. This is the bank's signal that they realize that the house is not worth anywhere near market value....and also their way of attempting to determine the real value of the house.