In this current economic condition, the demand for a creative real estate investor who knows and understands the different strategies and options available to distressed homeowners is at an all-time high. While this next decade will bring more economic hardship to more Americans than any other time in our nation's history, it will also provide more millionaire opportunities for those investors who are able to invest in the knowledge and take action.
Here is a brief summary of the myriad purchase strategies most successful real estate investors employ to distinguish our purchase process from that of realtors.
Wholesale (30%+ Equity)
A wholesale purchase is loosely defined as a property that can be purchased at greater than 30% discount to after-repaired value (ARV). Properties in this category generally require extensive rehabilitation in order to present them to retail buyers via the Multiple Listing Service (MLS). The typical seller does not have the time, money, or inclination to take on an extensive rehabilitation project. Consequently, investors add a significant amount of value by purchasing the property at wholesale cost and engaging the services of a contractor to present the property for sale at a later date. Television programs like, "Flip This House" glamorize this process and make it seem rather easy. The truth of the matter is that transaction and carrying costs need to be carefully accounted for. Care should also be taken to engage competent contractors that have a vested interest in pleasing their clients because they will earn return business if they do so. A wholesale purchase allows investors to engage competent professionals and relieves homeowners of the financial and time burden of having to keep property that is a burden on them.
Fix and Flip
Buying a property well below market value, making repairs, and selling conventionally to an end buyer is generally known as a fix and flip strategy and is one of the most common ways real estate investors begin their career. The goal of a general fix and flip is to put as little time and capital investment as possible into the property and resell as quickly as possible at the low end of the market. For many handymen and tradesman, this strategy is the next logical progression of their careers.
However, this transition is not quite as simple and glamorous as TV shows may indicate, and a good portion of reason for the success and failure of a fix and flip is not shown on TV. Therefore, the purpose of the fix and flip chapter will not be to provide advice on how to purchase the lowest priced lumber or negotiate paint gallon prices, rather the goal will be to identify your team and skill sets and determine how to find and analyze successful fix and flip opportunities, and the financial aspects of running a fix and flip company.
Short Sale (-10 - Equity)
A short sale is a purchase strategy where a professional investor engages the seller's lender to discount their lien on the property in order to get it to sell. There is generally some form of financial hardship that accompanies a successful short sale, like medical problems, death of a family member without life insurance, job loss, etc. Whatever the underlying cause, a homeowner generally needs to be able to demonstrate a hardship to the lender in order for them to agree to a short sale.
In order for lenders to justify discounting their notes a property generally needs to be "upside down," or have a negative equity position. Short sales are particularly successful when there is a 2nd mortgage on the property that is likely to be wiped off the books entirely via a foreclosure sale.
The main benefits to a short sale versus a foreclosure to a homeowner is less long term damage to credit score and opportunity to negotiate for the satisfaction of the loan (no deficiency judgment). Also inform sellers of their rights under The Debt Forgiveness Act of 2007, so that they are not sent a 1099 by the government for debt that is forgiven.
Subject-to (0% - 30% Equity)
Subject-to purchases generally involve a considerable amount of paperwork and are often misunderstood by sellers and many investors. The simplest way to think of a subject-to purchase is to recall the time when notes were fully assumable. Legislation was later passed to discourage or virtually eliminate assumptions so the modern day assumption analog is to purchase properties subject-to. The deed for a property and the financing for a property are two completely separate documents. Purchasing a property subject-to simply means that you take ownership by taking the deed subject-to the existing financing remaining in place. The distinction between a formal assumption and a subject-to purchase is that the lender for the property does not have to "sign off" on the transaction.
Selling a property subject-to generally benefits sellers financially. Transaction and holding costs eat through any notional equity that sellers will be left with when they sell. Realtors conveniently avoid discussing this with sellers when they arrive at their house to get a listing agreement signed. Our goal as investors is to give you the same amount of money you would get if you marketed, listed, and sold the house with a realtor. The primary value that we add is giving you this same amount of equity and completing the transaction in 5-7 days instead of the months of work and worry that are created using the traditional sales process.
A subject-to purchase is typically used when there is good financing on a property relative to the current market interest rates or the possibility of executing a load modification to make the financing favorable. Properties are typically purchased at less than a 20% discount to after-repair value (ARV), which equates to around the same net sale proceeds using the traditional realtor process. If loans are delinquent or small repairs are needed the investor will pick up the tab along with the minor transaction costs for title insurance and escrow fees.
Contract Assignment (-5% - 10% Equity)
A Contract Assignment (CA) purchase strategy is generally used for properties where the debt is relatively high as compared with the market value of the property. Properties that have between 10% and -10% equity generally fit into this category. This purchase strategy is similar to subject-to described above in many respects. The distinction is that the original seller agrees to take the financial burden of making mortgage payments going forward instead of the investor agreeing to do so. Financial gains from the transaction are also borne by the seller. The investor shows the seller how to execute this type of transaction and assigns the contract to a new buyer.
The primary source of value for the seller in this type of transaction is that it opens the buyer pool up significantly. Instead of having to market the property to a cash buyer that has a sufficient down payment and credit rating to purchase with third party financing the seller can finance the transaction with the help of an investor professional. Sellers are also relieved of having to bring cash to closings to fund transaction and holding costs implicit to the traditional sales process
The more you learn about creative ways to buy and sell properties, the more opportunities you will have for wealth. As Sophocles once said, "Wisdom outweighs any wealth." There has never been, nor will there ever be, a better time in America to take action in real estate!
Tom Bukacek is a real estate investor specializing in pre NODs in Austin, TX, and Phoenix, AZ, and is working on his first book, tentatively titled 'The Real Estate Millionaire Blueprint', due out later this summer. Tom is also the Marketing Director for the Entrepreneurs Incubator, a company dedicated to providing real estate investors with turn key marketing solutions and processes. Visithttp://www.entrepreneurs-incubator.com for more information. Article Source: http://EzineArticles.com/?expert=Tom_Bukacek |
