The Other Six – For Investors Only
These are among the subjects that I teach in my courses and coaching programs. These are advanced techniques that should not be attempted by the untrained. To use the words of Adam and Jamie from one of my favorite old shows, “Myth Busters”, “NEVER ATTEMPT ANYTHING ON THE SHOW, WE ARE TRAINED PROFESSIONALS AND DO THIS FOR A LIVING“. If you do these wrong you may only lose a few bucks, but if you really screw up, you may find out that you broke some law and are liable for damages to a seller or a buyer or both.
Buy Low. We call this Wholesaling a house or a Wholesale Flip. When you buy below market you get instant equity that will be converted into a profit when you sell. There is too much involved to go into the details here, but basically it works like this: Find ugly house, get seller to put ugly house under purchase and sales agreement, sell purchase and sales agreement to another investor via “assignment of contract” for a reasonable profit, cash check. Offer a reason for the seller to sell low: fast closing, cash, assume some debts or liabilities, etc. Or just make a low offer. The seller may have his own reasons to sell it cheap, so you never know. This technique is an awesome way to get your feet wet in the world of investing because it takes no money for all practical purposes and only depends on your willingness to do some work and do some talking to people.
I started doing real estate part time in 1990, but I really did not get serious about it, until I became burned out with Civil Engineering around 2001. I attended a free weekend seminar on the subject of investing where among other people I heard a man by the name of Ron LeGrand speak. He talked all about a number of tactics including wholesaling and like all the rest of the speakers tried to sell me his courses. Well, I bought his course for a number of reasons. One was the fact that he said that I had 30 days to look through the stuff he gave me for signing up and if I thought I made a mistake I got my money back no questions asked.
Being an engineer I was SURE his techniques would not work even on a good day so I determined to prove him wrong. I followed the directions and within 10 days I had my first wholesale flip under contract and it closed about two weeks after that. The course cost $4995.00 and it just so happened that I made $5000 on the flip. Needless to say I did not get my money back, and it has been an adventure ever since.
Sell High. Clean it up nice, make it easy to buy, and find the right buyer to get top dollar. This is a Rehab and Retail or “Retail to End User” deal. You still start with an ugly house, but you make it a pretty house and then you flip it to an owner occupant. There is a ton of money in this method if you do it right, and to be honest it is my favorite way to do houses. There are easier ways to make money in this business but there is just something that tweaks my ego when I see some young newlywed couple move into their first home, a home that I have had remodeled, a home that used to be the nastiest piece of crap on the block. I take that which is old and junky and make it new and pretty. I build monuments. Okay, maybe that’s taking it a bit far, but hey everybody has to do what they like and even though this is not the fastest, most stress free, uncomplicated buck in this business, I like rehabs.
There are many potential problems with rehabs not the least of which is hiring the contractors that are worth a rip. In my book titled, “Stop Contractor Rip Offs Now” I go into great detail on that subject alone and even give the reader sample forms in MS Word that they can use to plan their rehabs and hire the guys that will do the work right as well as sample specifications to give them an idea of what needs to go into a contract to cover them and their assets. If you are interested in a digital copy go to www.AskAlHow.com/contractor/ or you can get a paper copy at ammazon.com or lulu.com. (ISBN #978-0-557-03087-3).
Also, a word to the wise on doing a rehab: keep the work at about 1/3 or less of the total cost of what you have in the house according to my MAO formula.
MAO = (70%)*(ARV) – Repairs
Your Maximum Allowable Offer can be no more than 70% of the After Repaired Value based on a strong CMA and other evidence minus any repairs that are needed.
In other words if you have a home worth 100k of it was the prettiest thing on the block, do not buy it if it needs more than 20k in work unless you REALLY know how to estimate repairs and you are highly experienced in running remodeling construction jobs. How do you think I know THAT?
Subject To. If you hang out with me very long you will learn that this is what I call getting a FREE HOUSE. This technique works best with pretty houses in pretty neighborhoods that can be flipped for a quick profit, but will even work with the homes in the poorer areas, provided they are rentable and don’t need any substantial work. The neatest thing about doing these deals is they are way less about the home and way more about all the paper attached to the home.
I think the best way to explain this type of deal is to give an example. I got a call one day from a couple who had a major problem and needed a quick fix. He was a forklift operator for Wal-Mart and she worked as a waitress. They had an average home, in an average neighborhood. He had the opportunity to get a promotion from Wal-Mart but he would have to move nearer to their home offices which was a little more than a three hour drive from Little Rock. There was no way for them to afford two mortgages on their salary, and the realtor they talked to said to expect their home to stay on the market for 90-120 days based on their location and the market conditions at the time.
They called me and let me know what was going on. I got a deed for their house “subject to” their existing mortgage, and based on the equity they had offered them 10K in the form of a second mortgage on the property with no payments and no interest until I sold the house. What all this means is, the first mortgage stayed in their name, and I did not owe anything on the second until I got rid of the house.
The total of the first was 42k and the house was worth around 85k. The payment was about 400 per month. I rented it on a lease with the option to buy for $700 per month for nearly two years. That person did not buy, in fact she broke the lease a month before the two year term was up. The next couple were able to buy after about 6 months and I cashed out after paying the original owners their 10K. Here are the results of that sale:
Sales price: 85K
First mortgage (paid down by tenants) : -40K
Second Mortgage paid off at closing: -10K
Subtotal , Profit on sale: 35k
“option fee” collected and forfeited from first tenant 2k
Profit from rent for 2.5 years @300/month 9k
Total Profit 46k
Ok, it took me 2 and ½ years to get all that, but what did I have at risk? In the worst case scenario, I would not have been able to find tenant owner and would have given the property back to the original owners, who would then have to list it with a realtor and make payments for 4 months, while they waited to get it sold.
Offer financing. You can often get substantially more for a property if you offer financing. This is especially true if you let someone buy it with little money down. You can also get good interest on the loan. Financing can work both ways; with the sellers in the form of taking back a second mortgage or with the buyers in the form of anything from “down payment assistance” to a “lease option” to straight out owner financing through either a land contract or “contract for deed” or if you are in Texas a vehicle called an AITD, “All Inclusive Trust Deed”.
There is no way I can go over all of these types of financing in a small space such as this, however here is a quick overview of each.
Taking back a second mortgage refers to a seller “loaning” the buyer some of the money they need in order to buy the home. It can be both an effective selling tool for the buyer with little cash and a good investment for the seller if he needs out quickly. I always shoot for “No Payments and No Interest until I cash out when I resell the home to an end user. My justification for this is simple: If I am going to help the seller out by removing the problem of two mortgage payments, one at his old house and one at his new house, It is certainly fair that he not stick me with two payments, a first and a second. Besides, although he is in second position, it still gives him a secured interest in the home until I get it sold. It is fair for everybody. Everybody wins. Everybody makes money.
I use down payment assistance when somebody has no money and bad credit but still wants the chance to buy. It works like this. I install them as a renter with a one or two year lease, we agree on a future price, and we put it in writing. Let’s say the lease is two years, $700 per month and they gave me a $700 security deposit. Anything they pay beyond the $700 bucks per month becomes part of their down payment should they decide to buy the house and be able to qualify for a loan.
A Lease option is the logical next step for folks in the financial boat I just described. These folks may have a few thousand to put down, but based on credit challenges, they just can’t qualify to buy right now. We settle on a price and I take a NON-REFUNDABLE OPTION FEE from them. If you use this method make sure it is very plain and written on paper that they sign in the presence of a notary or you will end up giving them back their fee in court when they say the big bad real estate investor took advantage of the poor defenseless little wannabe homeowner/renter.
If they have between 5 and 10 percent down I will owner finance to them but usually only on a 10 year balloon. I don’t want to be “married” to a homeowner for longer than that, and in this state, even if the buyer defaults on a land contract, the courts will treat the contract as a mortgage and you will have to drag the buyer through a bankruptcy and foreclosure and they may still get to keep the house. Remind me to tell you sometime about the home where I was forced to give away 100k in equity over that very thing. Hey, I still made 70k but when you compare that to losing a lake front house that you had intended on moving into, making 70k feels like a loss. How do you think I know that?
Change use. If there is a higher use for the property, you can convert it to make it worth more to the next owner. Sometimes this means making condos into apartments, or apartments into condos. Maybe converting a home into office space will get the biggest return. Most gurus will tell you that homes on busy streets are not a very good investment, and to some extent I agree with that statement; however, once you get a bit of experience, these homes that nobody else wants can be a freakin gold mine if you are savvy and can play the political game with the city.
I know you have seen this occur all over your town, but maybe were unaware of what actually happened. As a city grows they need to convey more and more traffic from one area to the next. Many times that means putting a four lane where there was previously only a 2 lane residential road. These house become fairly undesirable for people because of the traffic noise and the inherent danger to children as the play near the busy streets.
Sometimes, an investor can buy a home cheap in these areas and turn it into a commercial office space. Many times, when the city changes the road they will also change the zoning so that you CAN change the use of a home. Sometimes you will have to have it changed.
Sometimes, just changing the zoning of an area makes it worth substantially more money. If you get in the growth path and are able to buy raw forest or agricultural lands and have them rezoned t residential or commercial property you can turn around and sell the engineering plans alone for big bucks, but be careful. This is NOT real estate 101, this is for proven operators whole know what they are doing. I want all of you to think big, but if you think that your first deal is going to be a 25 million dollar land development, you are probably going to be rudely disappointed. Go flip a house or two and get your feet wet.
Sell in parts. In real estate, the parts are often worth more than the whole. There are many examples of this from splitting off an extra lot or two from a larger parcel to selling timeshares and fractionals. Just as in the “Change Use” section, this is pretty advanced real estate investing, but it is a creative way for many investors to get extremely rich with just a single parcel of land. I am not going to go into these types at all, but I did wan to give you a few definitions.
A timeshare is a form of ownership or right to the use of a property. It has also come to mean the properties of this type themselves. These properties are typically resort condominium units, in which multiple parties hold rights to use the property, and each sharer is allotted a period of time in which they may use the property. Units may be on a part-ownership or leased “right to use” basis, in which the sharer holds no claim to ownership of the property.
A fractional purchaser typically receives an undivided percentage interest in fee simple in an individual residential accommodation and the related common areas of the applicable resort or other property, affording the purchaser the right to occupy such accommodation or one of similar size and type and use the property’s amenities for a certain number of days or weeks each year. A fractional accommodation is most often a condominium unit but can also be a townhome, detached single family home, or hotel suite. Some fractional projects participate in an exchange program, whereby purchasers have access to other properties of comparable quality located throughout the United States and abroad.
Finally:
Some of my friends have been asking me lately why I am starting to teach. “After al Al, You don’t have to work, and you make plenty of money sitting on your butt”, they say. I have made my living and continue to make my living in real estate; it is by fair my first love. To be honest, whether I teach a single person what I do or not, I will still do deals. Some time ago I got to feeling like “is this all there is”. I read allot and have noted that this is a common problem among people who have achieved their goals, particularly at an early age. Many of them go on to teach others what they know. They do it for two reasons and these are the same reasons I am doing it: Its fun and it makes money.
The day it isn’t fun I will stop, trust me. I have worked many jobs that aren’t fun, and they suck. It is a chore to even get up in the morning and take a shower and go to them. I swore two things when I walked from my last engineering job; first, that I would never let another human being ever treat me again the way the sorry excuse for a waste of air main supervising engineer of that office treated me, and second that I would never again do any job that wasn’t fun. One of my favorite quotes is “Do what you love and you will never work a day in your life”. I think Mark Twain said that, but I’m not sure.
I have a few courses and books available for those of you who would like to learn more about how to become what I call “gainfully unemployed” using real estate investing as the vehicle to do so. I also offer a coaching and mentoring program and a private “for students only” real estate forum where I and other experts do ongoing trainings, webinars and even some one on one counseling and consulting for a monthly fee. If you have any questions drop me a line at or visit me on the web at www.AskAlHow.com .
Whether you ever attend one of my courses or not, whether you and I ever meet or not, whether you make it in the real estate business or some other business, the best advice I can give is another quote by Mark Twain, “Keep away from small people who try to belittle your ambitions. Small people always do that, but the really great make you feel that you, too, can become great”; and one by me, “I have never met anybody who sucks at everything, everybody is great at something”. Find your something.
