Just Can’t Find Properties in This Market! - Posted by Bill Gatten
Posted by Bill Gatten on October 29, 2000 at 18:35:13:
Little long, but informative…(I hope)
Over the past few years, I have been [one of] the first to jump on anyone who suggests that deals are any more or less difficult in any market. My position has always been that “The Market” is a combination of an “up” cycle and a “down” cycle: not one or the other. In a buyer’s market, investors scream that buyers are too hard to find, even though properties are a dime a dozen; in a sellers’ market, the same folks complain that properties are too hard to come by.
Well, the good news is that there are two infallible, no-brainer, keys to success in any market–
- Deal only in that cycle of the market where no one else knows it, but values are about ready to start climbing back up again after a long slump and when there are lots of houses available at reduced prices: pure profit and little risk (…buy low…sell high…can’t lose),
- Be versatile enough in your dealings that when the market tide shifts you can travel in the other direction with equal strength and facility (e.g., if you hold on tight, it doesn?t matter which direction the trolley is moving, you?ll go with it). I.e., “If your boat don’t float both ways, you’re gonna be in trouble at tacking time (said best with one hand hand on hip and little finger of the oother dabbing at eyebrow)”.
Now, if anyone has learned how to consistently tap into #1, please let me know, because I haven’t been able to figure that one out yet. But #2? 'Got it down pat.
In California we are currently in a great seller’s market…multiple offers on most listed properties. Buyer’s scrambling to spend money, etc. Now, that?s a good deal if you?re a seller, but not so good if you?re a creative RE investor without a lot of cash or credit. It does pose some problems.
One way to ameliorate the problems (for the newbies, “ameliorate” means make it be all better)?
While searching for the immediately profitable (bargain) properties (flips, assignment, fixers, etc.), consider picking up a few of the properties that no one else wants, along the way. Remember, if you have fresh whole fruit on your tree that?s great. It?s highly salable in season. But when the fruit has been picked over, the smart fruit farmer goes into a different business. That broken fruit on the ground that the birds have pecked a little, that no body else wants, makes great jelly when boiled-down, and Mrs. Smucker says there?s good money in jelly if you do it right.
The overlooked properties I’m referring to are those that may have no equity, marginal or even negative equity); or properties with tax liens, judgment liens, etc.). Most folks in this business stay away from these properties because they don’t know what to do to make them profitable.
Well, consider the deal Jim Pasquini, our marketing director, appears to have picked up for himself this weekend (fingers crossed): the property’s worth $160K with a first on it of $140K and a 2nd of $20K with aggregate payments (PITI) of $1,600. Rent on it would bring perhaps $1,400 at best ('Hope talking about it won’t jinx your deal, Jim).
What Jim did in this case was explain to the sellers and their agent that since the proceeds of their $20,000 2nd had been spent on something other than the property (a pickup truck, I think), it shouldn’t be his responsibility, and that they should continue paying it. They agreed, securing Jim with a filing on another property.
Next, there was the issue of the Realtors commissions and closing costs (we abhor spending excessive cash up front). Jim asked the agent if she would carry her commission on a monthly basis, if he couldn’t get all of it for her up front ($4,800). She agreed (she?ll carry at $200 p. mo. for 24 months if necessary–why not? Otherwise, she?d get nothing–this is a dog listing).
Next step. On Monday, Jim will put an ad in the newspaper advertising a ?Beautiful $170K home only $1370 p. mo + tx & ins (note $10K equity bump) No Bank Qualifying and No Down Payment and as little as $10,000 moves you in."
If he has to negotiate on price, Jim has a $10K buffer (though the $10K is justified, in view of the no-down and no-qualifying benefits); if he has to negotiate on up-front cash he can drop below the 10K if he wants to, because the Realtor will carry $4800 of it if needs be?giving him the choise of paying her or putting it in his pocket and paying her later.
Regarding cash flow: Rather than renting or leasing, or lease optioning, Jim will give the acquiring party 100% of all the tax benefits and all the incidents of homeownership in order to get a monthly payment that is much higher (i.e., more commensurate with what a higher mortgage payment might be): I.e., comparable to P&I at 10% or 11% on a 90% loan -$1,370; plus comparable prop. tax of $166; and insurance premium of $45. The total monthly payment being then $1,582 from the resident, plus the $250 per month from the seller (the payment on the 2nd).
Now?the punch line–In addition to the cash up front (minus the Realtor?s commission) Jim will also be receiving 50% of the future appreciation; all of the $10K equity bump; a monthly positive cash flow throughout the next four or five (7?) years; and half of the equity build-up from principal reduction?while someone else pays all the bills and handles 100% of all maintenance, repairs, payments, insurance, etc?.
When the calls come in from the ad, Jim will say: ?Yup, I have this property over there in Corona, and if you can afford the payments of $xxxx and the 9 or 10 thousand it?ll take to get in, I?ll just give it to you. The only thing I want out of it is to have you agree to sell it or refinance in your name in a few years, and at that time, if there?s been any appreciation, I?ll just split it with you.
So far today (Sunday) I?ve taken 10 call on another property I?m running with an identical ad, and said the above ten times exactly as written. Guess how many callers didn?t think this was good deal for them (mine’s a $224K properoty with $2000 pmts). Try ?none.? Three would like a bigger house on the same terms, 4 didn?t have enough money (or enough ‘want-to’) and 2 are going by to look at it when the rain stops. One drove by in the rain and hasn?t called back yet.
With this approach, do you think we put any great stock in whether the market is “up” or “down”? Nope. Don’t care. In an up market there are more buyers; in a down market there are more sellers, but since we can buy them all anyway, it really doesn’t matter much. Candidly, we have so many buying opporutnities right now that we honestly don’t have time to get to them all.