Real estate investors often only look at a real estate investment only from their own investment perspective. However, sometimes it can be beneficial for you as the real estate investor to put yourself in someone else's shoes in order to see things from their perspective. Doing this can help you to think out of the box and if you can figure out how to resolve their problems then you can use creative real estate strategies to make a very healthy profit when you sell your properties.
Selling Investment Property Strategy #1 – Think Like a Buyer
I will give you an example of a very common situation in today's real estate market. Many people that are currently renting would like to own a home. They are aware that prices are ridiculously cheap and they would like to take advantage of the cheap prices by buying a house at a good price.
Some renters have good credit and should be able to qualify for an FHA loan if they have a FICO score of over 620, are currently employed and can document their income. Many of these potential first time homebuyers do not have much savings and are not able make a large down payment.
More importantly they are unaware that they can be approved for a mortgage loan and are not familiar with programs like the FHA mortgage which allows them to put down as little as 3.5% for their down payment. As an investor, the strategy for dealing with these renters is to screen them and see if they would be good candidates to become first time homebuyers. The best way to do this is to have a good relationship with a mortgage broker that is knowledgeable about the FHA program and who has experience working with first time homebuyers.
Selling Investment Property Strategy #2 – Think Affordable
As an investor you can purchase a cheap bank owned property or short sale using borrowed money from a private lender or hard money lender at a deeply discounted price. After you purchase the property you can fix up the property and make the necessary repairs to have the property ready to be listed on the market. You can then advertise this property for sale to a first time homebuyer at full market value. Experienced investors can purchase, fix and sell one of these houses 6 months later for a very nice profit.
The type of homes that are the best candidates for doing this in today's market are entry level starter homes which are priced affordably. These homes are located in decent neighborhoods that are affordable – exactly the type of neighborhoods where first time home buyers go shopping for a home. Since the US Median Income was $50,000 last year – most young couples shopping for their first home can only afford a monthly payment of around $1,200. In some states like New York, California and Hawaii prices will be higher.
The key to finding the right neighborhoods is to find affordable neighborhoods with working class people where there are many homeowners and not many renters. As an example, in South Florida investors can purchase properties for $50,000, spend $15,000 repairing the property and can then resell the property to an FHA buyer with a mortgage for around $100,000. Executed correctly the profit should be between $20,000 and $25,000 in this price ranged market.
The challenges with this strategy are the following:
- You need to have pre-approved buyers
- You need to know what the house will appraise for
- You need an appraisal to get the mortgage
- Market prices can change while you are repairing the house
Most novice investors trying this strategy are at the mercy of the appraiser and are dependent on listing the property on the MLS with a real estate agent. If they do sell via this strategy they will have to pay the real estate agent a commission and will in most cases also have to pay some or all of the closing costs since FHA buyers often do not have enough money for both the down payment and the closing costs. The seller should expect to lose 10% to 12% of the sales price just to commissions and closing costs. Ultimately whether or not the investor manages to pull off a quick sale will depend on:
- Finding a pre approved buyer
- Getting an appraisal
- The buyer's agent
Selling Investment Property Strategy #3 – Conservative Estimates
The two most critical components are the appraisal and pre-approved buyers. If the appraisal comes in low (say $80,000 instead of $100,000) then after deducting realtor's commissions and closing costs the investor may be looking at a very small profit or in some cases even a loss. Remember that while the investor is repairing and marketing the property they are still paying interest payments, property taxes and insurance which also need to be deducted from the net profit. The HVCC law makes getting an appraisal at the price necessary even more difficult since the appraiser may not be familiar with the local market and there may not be many retail comps. For this reason it is imperative that investors use very conservative estimates for what they thing the house is worth before entering into any transaction to purchase a house.
As an investor when you are contemplating a purchase ask yourself what the lowest amount that the house could appraise for would be and then plug in your numbers to see if the investment makes sense. Being conservative in your buying decision will mean waiting for the right opportunity to buy at the right price. You will need to be patient since this will take some time.
Selling Investment Property Strategy #4 – Networking with Mortgage Brokers
It is a good idea for you to network with as many mortgage brokers as possible. Investors need pre-approved buyers. Some mortgage brokers have pre-approved buyers looking for a house to buy. These mortgage brokers are great to work with since they will help you find a buyer for your home in exchange for doing the mortgage. Ask these mortgage brokers to screen their pre-approved buyers to ask what they are looking for and then go and find them a house.
As an investor, if you find a house that is a good fit for them then you should be ready to draw up a purchase contract for them to sign and you should meet them to show them the house. If they like the house you should have them sign the purchase contract and get a deposit from them.
One interesting thing that I have noticed with first time home buyers and mortgage brokers is that in many cases mortgage brokers with pre-approved buyers have no houses to offer their buyers. Ironically investors often have no first time buyers. That is why networking with mortgage brokers is very important. Every real estate investor should look to network with and find a good FHA mortgage broker that can help them find pre-approved buyers.
Selling Investment Property Strategy #5 – Seller Financing/Lease Options
You can also use creative strategies to sell your house without using a real estate agent and a mortgage broker. If you do not have pre-approved buyers and you are worried that the house will not appraise for a high enough value then you should consider seller financing and rent to own lease options. The advantage of seller financing and lease options is that when you sell the house you do not need a mortgage to be approved nor do you need an appraisal. You also do not need a pre- approved buyer. What you do need is someone that has more cash than your typical FHA buyer.
This is quite a bit of information we've covered today on creatively selling your real estate investments for near full price. Don't worry – there is a part 2 that will conclude this real estate investing training on “Strategies for Selling Properties At Full Price Part II”