7 Tips For Investing In Distressed Real Estate

Tip # 1 Only Buy From Sellers That Have To Sell

You should only buy properties from desperate sellers that have to sell because they are in foreclosure or their property is damaged or there is some other pressing issue that makes them want to sell right away. Do not waste your time with people that want to sell or are thinking about selling. Those people can list their property with a real estate agent. If you want to be an investor and get good deals at wholesale prices then you need to buy from distressed sellers that have to sell because their property is damaged or they have some other reason that requires them to sell right away. Only buy from sellers that have to sell.

Tip # 2 Advertise To Find Desperate Sellers

You must advertise to find desperate sellers. If you want to get deals that no one else has access to then you will need to advertise and market to desperate sellers that are facing foreclosure and considering a short sale. The three methods that work best are bandit signs, classified ads and postcards to homeowners in foreclosure.

If you are not marketing and advertising to desperate sellers then you will be restricted to bidding on properties that everyone else is bidding on (like properties on the MLS) which will be very competitive resulting in a lot of frustration and a lot less deals. The one thing that separates beginners from professional real estate investors is the willingness to spend money to generate desperate seller leads on a consistent basis.

Tip # 3 Understand the ARV Formula

After Repair Value (ARV) x 65% Less the Repair Estimate (RE) = Your Maximum Offer Price (MOP).

Hard money lenders will loan based on this formula and if you are fixing and flipping properties then you should never buy a property for more than the Maximum Offer Price (MOP). This formula is the basis of wholesale real estate. Make sure that you understand it because if you are wholesaling properties and selling them to other investors then the investors that are buying from you will be paying attention to this formula.

Also note that there are only two inputs to this formula namely the ARV and the Repair Estimate. You will need to have access to comparable sales to establish ARV and you will need to understand material and labor costs in order to establish a repair estimate.

Tip # 4 Know How to Estimate Profit Potential

If you want to calculate your expected profit on a property that you intend to fix and flip then remember to add in all the components that eat into your profit. Use this Formula as a guide:

Sales Price – Commission – Purchase Price – Repair Estimate (RE) – Your Holding Costs – Maintenance and Repairs – Your Closing Costs = Your Potential Profit.

Don’t forget to include insurance, property taxes, repairs, maintenance, interest, points and closing costs and always leave some room for extra repairs that might arise that were not accounted for when you purchased the property.

Tip # 5 Be Conservative with Your Estimates

Always anticipate the worst case scenario and be conservative with your estimates especially when rehabbing properties to fix and flip. Your repairs may cost more than you originally anticipated and the house may sell for less than what you thought it would. It also may take longer to sell your house than you originally anticipated.

For this reason you should always use the lowest retail comparable sale to arrive at a conservative number for ARV. You should also always assume that your repair costs may be higher than your initial repair estimate. Over estimating ARV and underestimating repair costs will result in your profit being much less than anticipated.

Tip # 6 Invest In Your Real Estate Education

You should be continuously educating yourself to learn as much as you can about investing in real estate. Understand the difference between wholesale real estate and retail real estate. Know why investors would pay cash for a property when others only purchase with a mortgage. Understand why someone would sell their house for less than what it is worth. Be prepared to spend some time reading as much as you can on the subject of wholesale real estate and distressed real estate.

Attend as many seminars, workshops, boot camps, webinars and real estate events as you can. Be prepared to invest in your education since the cost of your training will be a lot less than making a huge mistake on a property when you purchase. You should network with other real estate investors by attending local real estate investment club meetings.

Understand that there is a learning curve and that it will take some time for you to learn how to wholesale real estate and fix and flip houses. You can shorten your learning curve by finding a full time real estate investor in your city or town that can be your real estate mentor and coach. Offer to located deals for them for a small fee and learn as much as you can in the process by being a “bird dog” (deal locator) for them.

Tip # 7 Have a Clear And Concise Vision Of Your Goals

Understand and acknowledge that one of the things that is holding you back is not having a clear and concise vision of your goals and what you want to achieve. The other thing holding you back is your own fear and self-limiting beliefs. Read books like “Think and Grow Rich” by Napoleon Hill to understand how important this concept is.

Invest in your real estate education by learning as much as you can in order to understand the topic. Once you have acquired the information it will be easier for you to act on this information and overcome your initial skepticism. Attend your local real estate investment club meetings and speak with other investors. Knowledge will set you free from self-limiting beliefs.

When you meet other investors that have successfully wholesaled or fixed and flipped their first property then you will be more likely to realize that you could also be doing what they are doing. It is okay to be skeptical and cynical initially but you should do your own research and educate yourself to overcome your initial skepticism. And once you have done your homework then you need to act.

Education without action is a waste. Action without education is foolish.

Be ready to take action but first do your homework. It will be much easier for you to take action if you have a clear and concise vision of your goals. Write down your goals and give yourself a time frame to achieve them. When you write down your goals it will be much easier to act on them. Do you want to own a rental property within the next 12 months? Do you want to fix and flip a house in the next 12 months? Whatever your goals are write them down. And then create some action steps to move closer to achieving your goals.