Techniques for a hot market - Posted by John Behle
Posted by John Behle on March 19, 2005 at 18:54:30:
I don’t have much time right now, so I may need to do this in a couple parts - but here is a start.
In a hot market, there are many approaches for profitable investment.
1 - Don’t wanters are always available.
In any market, there are still “don’t wanters”. People get transferred, divorced, get into financial trouble, etc. There are still foreclosures. In a great market, there may be many at the sale, but the key to foreclosures is getting there long before that. Bidding at the sale is one of the worst times and approaches to foreclosure investing. Finding properties before the sale is advertised is better. That means finding them once the notice of default is filed. But, getting there before that is even better. Many times there are comments in the listings like “nearing foreclosure” or something similar.
You might be able to negotiate a sale with good terms on a pre-forclosure deal, work a sale-lease back with the owner or make a hard money loan to the seller to keep the home and profit from the loan. If the margins are good (LTV ratios) you can have a safe loan and if not, a discounted property.
The same things work for other don’t wanter sellers.
2 - Profit through the loans.
Sometimes you have properties with bad financing. Just consolidating loans, refinancing for lower rates or even getting a loan with a longer term can raise the value or marketability of a property. In particular, you sometimes end up with apartment buildings where the a high loan constant kills the cash flow.
The “Paper Trade” technique is one that can work in a good or bad market. Even in a good market, there are still people willing or in some cases that need to sell with seller financing. With the “Paper Trade” technique, you can pay market for the property and achieve your discount by buying existing paper (seller financing, private loans) at discounts of 20-40%.
Sometimes the easiest deals are with properties that already have existing seller financing on them. You can then make your profit by using discounted mortgages in trade to the holder of the seller financing.
Regarding financing also, you can make profits in a good market by looking for existing financing on properties that are a couple points or more below the existing rates. You can then arrange to buy the property, assume the financing or take title “subject to” and then sell it on a wrap at a higher rate.
You buy a $100,000 property and sell if for $100,000 and make a couple hundred dollars a month for the next thirty years. All with none of your own money needed or invested.
3 - Change the use of a property.
In a good market, the potential for changing the use of a property is an excellent way to make profits. For example, converting an apartment building to condos. Or what most people don’t realize is many times you can do a co-op for much less and not even have to make major upgrades or repairs.
You can find land in the path of progress. You can get a property re-zoned. You can do “earnest money options”. The later is a technique where sometimes you can tie up a property that is being built for a very low amount at it’s current market price and then sell when completed at a much higher price. When I started in real estate in both selling and investment, my first brokerage was a developer and we bought and subdivided the land, sold lots to builders and then sold the homes when they were built. We could tie up properties sometimes with as little as a hundred to a thousand dollars in earnest money and it might be worth 5-10k more when finally finished 3-6 months later. Lending and building procedures can make this harder and more complicated these days, but it can still be done.
4 - Change the condition of a property.
Even in a good market, a property that is run down, ugly, needs specialized repairs, etc. can sell for much less than they are truly worth. A gallon of paint can be worth a thousand dollars. Here’s an example. My first listing in real estate had a kitchen that was very slanted. It drove almost every potential buyer away and those that checked into it more came back with estimates of as much as $40,000 to fix the foundation. I had already entered into the exhange world and pitched it at our exchange meeting. A creative mind there ended up picking the deal up at about $50,000 less than it was worth and only spending $5,000 to jack up the foundation where it had slipped.
As I said, time is limited and I need to go, but I’ll add to this later if I get the time and addition ideas or examples.
