Below is an extensive guide to the four basic steps of real estate investing. Real Estate Investing for beginners can easily be covered in four fundamental tenets: The Find, Funding, The Fix and The Big Finish – Getting it Sold! Let's dive in and dissect each key area that are important to beginner investors.
The Fundamental Four Fs of Real Estate
===>>First F: Find
Once a real estate investor has a desire and the financial capabilities to invest in real estate the first step is obviously finding a high-quality investment project. There will always be situations where a seller is motivated to sell a property at a great discount. Sometimes a property in serious disrepair is inherited by an individual who doesn't have the money, experience or desire to rehabilitate the home, and they would be ecstatic to find a real estate investor that would help them with their problem so they can get on with their life.
Other times people lose their homes to foreclosure and the bank wants to liquidate the property as soon as possible and recover as much of the loan amount as they can. There will always be hundreds of different situations that will create opportunities to find deals. We will go into detail about the best practices to evaluate and choose the best investment projects later but first we will cover the four basic avenues of finding properties. The one you decide is best for you will be based directly on the amount of time you have available and the level of experience you have with real estate investing.
Avenues of Acquisition
Realtors – Everyone knows a Realtor. Be aware that a lot of Realtors are accustomed to working with owner occupant buyers and have little experience or appetite for properties sold AS-IS and in distressed condition. Be very mindful of a specific Realtor's clientele before considering working with them, if they spend their day driving around with families in their car looking at beautiful retail homes then they will not be of much use to you in finding investment quality homes.
However, do not discount these ‘retail' Realtors entirely. You should get to know several of them, as they are exactly the person you need to sell or rent your finished product down the road.
The kind of Realtor you want to find to locate investment properties is one that deals only with investors. These real estate agents will understand the principals of investing and have the stomach for walking through ten or twenty houses that are close to falling down from disrepair. For brand new investors, finding a Realtor like this is usually a good idea as long as you have an abundance of time available to look at lots of properties and make tons of offers.
Real estate agents will generally only have access to properties listed on the MLS, as they make their living collecting seller's commissions, and this means most of the properties you will see will be newly listed bank foreclosures, but you could also come across some time-consuming and unreliable short-sales, and some incredibly complicated estate and probate sales, if you have little acquisition experience you would be well advised to stick primarily to the bank foreclosures in the beginning.
The process you will follow to purchase homes listed on the MLS will be first setting up a showing and viewing the homes the Realtor has selected to show you. Usually you will walk through about 10 homes and select three you will make offers on. The other seven will be ones you're not interested in due to situations like major structural issues, black mold, or maybe the DART rail goes right through the backyard, etc. Be prepared to spend 8 hours per day engaged in this type of activity for at least a month before you have an accepted contract that actually works out.
Also be prepared for sellers today to have almost no interest at all in accepting your contract if you are using conventional financing and/or require a 30-45 day close unless your offer is very close to the retail value of the property. You will generally only obtain the discount you need if your offer is all cash or you can close in a week or less.
Most new investors do not realize the level of competition in the market for high-quality investment homes, the speed at which the truly good ones sell, and the difficulty and time involved in actually contracting one. Although working with a good investment-based Realtor is a great way to get your feet wet and learn the basics, like evaluating property values and the cost of repairs, if you have the time to invest.
Professional Acquisition Companies – Every large real estate market will have generally one or two major acquisition companies, which specialize in the acquisition of government or bank owned assets which they break up and sell off individually. These companies only deal with real estate investors so the properties they offer have already been filtered down to only include investment-quality homes that can be purchased at good discounts. The properties they offer generally sell much faster than properties listed on the MLS even though they are not available to the general public, mainly because they are priced correctly upon release. Properties are usually available for no more than 12-24 hours in most instances.
The main disadvantage of purchasing a property through an acquisition company is that they will have more rigid policies. Do not expect an option period for inspections, any contingencies whatsoever regarding financing, or any real flexibility on the required closing date, although you can expect them to guarantee clear and marketable title to the property. They will request a down payment at the time of contracting usually in the realm of $3,000-10,000 which is refundable only in the event of title issues.
The biggest upside to buying from an acquisition company is time savings. You can expect the properties to be of good investment quality and to sell on a first come, first serve basis, so they are available immediately. Unlike finding properties from the MLS that are available to every Realtor in town, you don't have to waste large amounts of time submitting countless offers and waiting days for a response just to find out a handyman owner-occupant outbid you by paying full retail. Even if you are a new investor and are working with a Realtor you should also look into aligning yourself with an acquisition company. Because the properties are already prequalified to meet investment standards, you will spend very little extra time to greatly quantify your investment options.
Also since these companies tend to operate on a volume level they usually rely heavily upon repeat business and investor relationships similar to the way a Realtor would. Due to their size and exposure in the industry, acquisition companies can usually offer a wide array of resources and contacts to help investors achieve success after the sale. They will almost always have references for proven property managers, reliable contractors, hard money lenders, and since they are generally licensed real estate brokers too, they will usually list your rehabbed property free of charge and save you half of the sales commission on the back-end when you sell or rent your house.
Acquisition companies can provide a great source of properties for both new and seasoned investors alike, however due to the speed at which these companies operate this avenue is only recommended for serious investors which are certain they want to be involved in real estate and can make quick and decisive decisions. A good example of an acquisition company is New Western Acquisitions operating out of Texas, their properties and buying process is posted on their website.
Flippers – There generally exist a large handful of flippers in every market. These individuals are also referred to in the industry as property wholesalers. They generate leads through various marketing efforts such as letter campaigns, internet websites, mass emails, etc. Flippers specialize in locating motivated sellers that are in pre-foreclosure or other desperate situations. Their goal is to contract the home and assign the contract to a real estate investor for a marginal fee. The real estate investor will be the end buyer for the property and the flipper will collect an assignment fee at closing. Most flippers are usually small professionals who offer just a handful of real estate opportunities per year and generally work from a home office.
Like Realtors their levels of professionalism and integrity range largely from one to the next. Unlike Realtors they usually do not carry a real estate license so they are not subject to the same legal obligations. For the most part flippers are honest and professional individuals. Although just to be on the safe side, before you decide to contract a home from a flipper, it's a good practice to make sure you have a real estate professional not related to the flipper to review the basics of the transaction such as the true after repair value of the deal and the contracts. Always get a title insurance policy.
The Courthouse Steps – On the first Tuesday of every month foreclosure auctions are held at the county courthouses in Texas. This day is commonly referred to as Texas Tuesday and it can be an extremely confusing experience for those not familiar with the auction process. Limited information regarding the auction properties is posted 21 days before the foreclosure date.
Very sophisticated investors filter through massive amounts of these foreclosure postings (Dallas County alone auctions many thousands of homes each month). These courthouse buyers narrow down the list of homes to select a smaller group which they then run title history inquiries on to determine an even smaller list of properties that do not have various judgments or liens, or otherwise majorly clouded title issues that will survive the auction sale.
Then a massive amount of research is required to estimate the value of the many remaining properties to determine the maximum bid amount they will offer at auction. This can be very risky and complicated due to the fact that the investor does not actually receive physical access to the properties because the home owner facing the foreclosure still technically owns legal title to the property.
On the day of the auction, the investor needs to be extremely familiar with the properties he or she wishes to bid on. The trustee that auctions off the properties operates very quickly and identifies properties only by legal description and not the street address. Not only is the investor competing against other buyers but he is also bidding against the bank that initiated the foreclosure and which is usually intimately familiar with the property.
The bank is often even in possession of a full appraisal. After each sale, which usually lasts 30-60 seconds, the winning bidder has literally minutes to hand over the full purchase price in cash, usually in the form of multiple denominations of cashiers checks, and additionally, because of the nature of the transaction he will not be able to obtain a title insurance policy.
There are also various other forms of courthouse auctions such as tax sales, etc, which come with their own set of equally complicated dynamics. Buying directly from the auction requires not only extensive real estate knowledge, but also a massive amount of detailed preparation. Even the most experienced investors are subject to enormous amounts of risk. The courthouse steps are not for the conservative investor; they can bring profits much higher than traditional real estate investing but can also lead to losses large enough to end a real estate investing career in a single day.
What's A Good Deal?
Every investor is going to develop their own opinion of what is or is not a good deal. Generally what most investors consider an excellent deal, whether they are buying houses to rent or sell, is a property in a marketable area that they can acquire for between 65-75% of the ARV (After Repair Value) minus the cost of the repairs the property will need. This simple formula insures that after all closing costs, repairs, and dept servicing, there will remain approximately 20% equity in the property. If an investor can capture this equity several times per year then its a great business to be involved in. If a landlord can start out with an 80% LTV (Loan to Value) then its a fantastic head start to positive cash flow and paying down the mortgage and owning the property free and clear.
DOM (Days on Market)
DOM is a great indicator to judge how long you may have the property on the market after you complete the repairs. Every real estate agent has access to the MLS and this information. It's a good practice to look at all of the comparable properties in the area that have sold or rented in the last six months to see how long they were on the market. This way you can easily factor the estimated financing costs incurred by the property being vacant while you market it for sale or rent. Expect to pay more for areas with a lower DOM. It's better to turn 4 deals per year and make $20,000 per transaction than wait all year for the homerun that could make you $50,000! The same policy goes for landlords; a lot of the time it's wise to pay more for a property in a desirable area that you never have to worry about finding a tenant for.
===>>Next F: Fund
– Phew, I know this is a lot to soak in. Breathe. Take a minute and let it soak in and even re-read the first fundamental, The Find, again if you have to. I'll give you a mini-break this week and look forward to continuing the Fundamental Fours F's of Real Estate in Part 2 beginning with “Funding”.