Getting Started in Real Estate: Part 2 – Approaches to Finding Profitable Deals
In Part 1 of this series I suggested that there is a Million Dollar question every beginning real estate investor wants answered before they jump in. That Million Dollar question is this…
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As a new real estate investor what strategy should I focus on to get started?
I am going to focus on Marketing or the “art of finding the deal” in this part of the series! While marketing is not a specific strategy in itself, in speaking with many beginning investors, the first thing they want to know is should they focus on short-sales, or pre-foreclosures or probate or insert a specific approach here…
The problem with this question is that once answered, it still doesn’t provide the investor with the EXIT strategy which is where profits are obtained. Yet, the process of finding that perfect deal is critically important. Just realize that while you may end up with a deal using any one of the below discussed approaches… you are only getting started when it comes to extracting the cash from the deal.
So… lets start with a brief discussion:
The many approaches to finding “profitable” real estate deals
Conventional Marketing — I consider conventional marketing to include techniques that work well at any given time, but are mostly ignored in today’s short-sales and REO driven environment. Some of the approaches included in this category in no particular order:
1. Letters to Absentee Owners, Tired Landlords, Financially Distressed Owners, Vacant or Poorly Maintained Properties, Estate Administrators (Probate), and others…
2. Bandit signs or magnetic car signs.
3. Flyers posted on doors, in small stores/shops, as inserts in newspapers.
4. Ads in newspapers, PennySaver or on the Internet.
While none of these conventional approaches require you to be a rocket scientist to perfect and execute, they do require that you take action and send out letters, post cards, write ads and any number of things just won’t get done unless you or someone completes them.
Pre-Foreclosure/Foreclosure — I debated about including this “marketing” approach in this discussion because there are many states that have made the practice of contacting homeowners in financial troubles illegal. So, if you are not sure of the laws in your state about buying properties from homeowners who are in pre-foreclosure or heading directly into foreclosure, find out.
This approach requires that you find out who is more than 30-60-90 days late on their mortgage payments and contacting them to determine if they might sell their home to you. Typically you can find the names of these individuals at your local court house or for some locations you can buy lists on a monthly basis.
The opportunity with this approach is that you may be able to assist someone move on from their financial challenges. The difficulty however, is that once you find them and you discover that they don’t have much equity (very common in today’s environment), you must be versed on a variety of other approaches such as Short-Sales or Subject-To’s. Each of which discussed in further detail below.
Short-Sales — This has got be one of the “hottest” approaches today. Hardly a day goes by where two or three posts are made to the BP forum regarding short-sales. In its simplest form a short sale is where the lender agrees to accept an amount less then that owed on the mortgage in exchange for allowing the homeowner to sell the property at that reduced price. If you have been paying attention you know that the Feds have made a concerted effort to make short-sales the preferred method of getting properties sold before they head into foreclosure. The success of that program is yet to be determined.
While some great deals can be obtained through a short sale, the biggest challenge has been that they require a very specific approach, more then a little bit of work, and patience as they can take forever to complete. This is one area where specific expertise and a strong team will make a huge difference in your results.
Subject-To’s — This marketing approach provides a great way for investors to obtain the deed to a property with little or no funds invested on their part. While I don’t profess to be an expert in this approach, there are several experts on BP. I do know that in today’s market this is a very profitable approach to real estate investing and offers several techniques within this general category to extract substantial profits. As with short-sales, this approach does require specific knowledge and expertise… and may be restricted by local/state laws.
Options/Lease-Options — This is one approach that seems to have gotten crowded out by the rush of investors heading for REOs and Short-sales. In essence, this approach is nothing more then the investor obtaining specific rights to a property (locking it up) in exchange for a deposit to the owner, usually non-refundable. All options must be exercised within the specified time-frames or the deposit will be lost.
In a straight option environment the deposit is all that is tendered. In a lease-option environment both the deposit is tendered and usually periodic payments will be paid as well.
Real Estate Owned — In today’s market very similar to short-sales this is where most of the action is. Real Estate Owned (REO’s) are those properties which have been foreclosed on and taken back “owned” by the lender. As you have read there are literally millions of these foreclosed properties sitting on lenders books. It is a target rich environment.
For those who have been able to assemble sizable war chests purchasing large groups of REOs have proven extremely profitable. These purchases are usually made directly from the lender, are in bulk and contain the entire spectrum of deals, from the great to the trash.
For most of us however, our first experience with REOs is through our local multiple listing service and a real estate broker or agent. The closer you can get to the listing broker when purchasing REOs the greater the chances you are going to get a sweet deal.
If you find yourself competing based on the REO being listed then you should be prepared to make non-contingent, all cash offers, with high ($5K to $15K) earnest money deposits. To do otherwise means you will be left with the dregs.
Remember that although you will get a deal following one or more of these approaches (keep in mind the worst number in any business is the number ONE… meaning you need to use several approaches) once you have the deal under contract you still have execute an exit strategy to claim your profits.
Well… there you have it. A nickle tour of the many approaches that can be used to find deals. If there are others which are your favorites please add them to the comments below.
I will be delving into the three primary exit strategies, Wholesaling, Retailing and Rentals each in the next three articles.