This economy has produced one of the hardest hit foreclosure markets ever. However, to a real estate investor, this means opportunity. In this report, I will cover several different strategies used by real estate investors to profit in this market. They are in order from least risk to the greatest.
Bird Dog
This is an excellent strategy to use with no experience and no money out of pocket. There are a ton of potential deals out there but investors and buyers just don't have the time to find them. A new investor can make easy money by putting the "feelers" out there and located deals to refer to other investors for a small referral fee of usually $500 or $1,000. This is the least riskiest strategy when starting and really only takes time and consistency. Bird dogs will usually drive around neighborhoods looking for distressed homes. They will contact the owners about selling and then refer them to their "investor partners" to do the deal. The bird dog will usually receive a referral fee when the transaction closes.
Buy and Flip Wholesale
One strategy that provides for quick cash is to buy and flip at wholesale prices. Investors using this strategy will make tons of offers on bank-owned and distressed property. Once a property is under contract, the investor will quickly line up another cash buyer and immediately flip it for a small profit. For example, Investor A will get a house under contract for $50,000 and then immediate sells it to investor B for $55,000 either as a double closing or assignment. Investor A makes $5,000 fast and Investor B gets a good deal on a house worth $90,000.
To use this method, investors must by homes at 65% or less of their retail value to ensure enough potential to make a profit while still giving someone else a good deal. This requires investors to valuate different types of property, make a large amount of offers, have proof of funds that you can close cash when making the offers, and have another buyer or exit strategy lined up when you get an offer accepted. Where investors get hurt is when they are not able to close on a house because of no money or they cannot find a buyer to wholesale it to because the home was not priced right. The most successful investors can flip the homes without using any of their own money! I recommend as a real estate professional and investor, that anyone using this strategy for the first time should limit their risk by partnering with someone who has the experience and has flipped homes before. There are several investors who have money to fund a deal or have a list of buyers to flip it to.
Buy and Flip Retail
This strategy is somewhat similar to the one before. An investor will purchase a home that needs repairs and then rehab the house to move in condition. The investor will then list the house for sale at a good retail price and sell it to a buyer who wants to move in. From the last example, Investor B (who purchased the home from investor A for $55,000) might spend $10,000 fixing up the home. After repairs, Investor B will have spent $65,000 total from purchasing and repairing the house. He will then find a first time home buyer or maybe a retiree to purchase the house for $85,000 therefore making him a $20,000 profit.
More potential profit usually equals more risk. This strategy requires investors to have enough cash reserve to pay for repairs and holding costs, like taxes and insurance. Also make sure to check with the local building and code enforcement as there might be problems with the property that are not disclosed during the sale. Title companies usually don't check for code violations unless it's a lien and some houses have up to a $10,000 dollar fine! Another major pitfall comes from selling the fixed up home to a buyer using financing. Financing guidelines have become very strict due to the lack of common sense and bad loans used by the banks in the past. These loans are complex enough as is but another element of difficulty is added when dealing with flipping a home for profit. Investors can have major problems with appraisals coming in too low. Again, this strategy is for experienced investors. Please find a partner or mentor to help when trying this the first time!
Buy and Flip using Creative Financing
This takes a higher level of management and time commitment then the previous strategies but can result in higher profits and potential cash-flow. To be successful, an investor will purchase a home for cash, repair the home if needed, and then find a buyer for it. However, instead of the buyer using a normal bank loan or paying cash, the seller will provide the financing by either holding a mortgage from the buyer or allowing the buyer to rent with an option to buy at a future date. There are other ways to do it as well but these are the most common. The buyer will give the seller a large amount down to show good faith and pay monthly until they refinance or purchase the house.
To be successful, an investor must be prepared for the long-term commitment. These deals can take anywhere from 1 to 30 years to complete. There is also the risk of the buyer defaulting and having to foreclose, which could take months in St. Lucie county from the large amount of filings every day. Make sure to have a good attorney helping with these deals and be prepared for anything to go wrong. Also be careful of any long-term deal due to falling home values.
Buy and Hold Long-Term
Most are familiar with this way of gaining long-term wealth. The investor purchases a home with cash or financing, and then rents the home out for positive cash-flow every month.
This is a proven strategy for growing long-term wealth. This is also a fast way to lose a lot of money and make investors go crazy if not done correctly. This depends on the monthly expenses and condition of the house, and also the quality of renter. Back in 2005, investors would purchased homes with expenses way above what the rent would bring in. They were losing $200 to $1,000 every month and justified this loss because of the rising values of homes. As a result of the downturn in the market, they could not sustain this amount of loss and went into foreclosure. The renters in these homes of course had to move and typically lost their deposits. Investors should always purchase these homes at a discount to ensure positive cash-flow and also allocate money to vacancies, repairs, and unexpected items. However, some of the distressed homes are extremely under-priced to the point that you can make all your initial investment back in less than 5 years!
Bird Dog
This is an excellent strategy to use with no experience and no money out of pocket. There are a ton of potential deals out there but investors and buyers just don't have the time to find them. A new investor can make easy money by putting the "feelers" out there and located deals to refer to other investors for a small referral fee of usually $500 or $1,000. This is the least riskiest strategy when starting and really only takes time and consistency. Bird dogs will usually drive around neighborhoods looking for distressed homes. They will contact the owners about selling and then refer them to their "investor partners" to do the deal. The bird dog will usually receive a referral fee when the transaction closes.
Buy and Flip Wholesale
One strategy that provides for quick cash is to buy and flip at wholesale prices. Investors using this strategy will make tons of offers on bank-owned and distressed property. Once a property is under contract, the investor will quickly line up another cash buyer and immediately flip it for a small profit. For example, Investor A will get a house under contract for $50,000 and then immediate sells it to investor B for $55,000 either as a double closing or assignment. Investor A makes $5,000 fast and Investor B gets a good deal on a house worth $90,000.
To use this method, investors must by homes at 65% or less of their retail value to ensure enough potential to make a profit while still giving someone else a good deal. This requires investors to valuate different types of property, make a large amount of offers, have proof of funds that you can close cash when making the offers, and have another buyer or exit strategy lined up when you get an offer accepted. Where investors get hurt is when they are not able to close on a house because of no money or they cannot find a buyer to wholesale it to because the home was not priced right. The most successful investors can flip the homes without using any of their own money! I recommend as a real estate professional and investor, that anyone using this strategy for the first time should limit their risk by partnering with someone who has the experience and has flipped homes before. There are several investors who have money to fund a deal or have a list of buyers to flip it to.
Buy and Flip Retail
This strategy is somewhat similar to the one before. An investor will purchase a home that needs repairs and then rehab the house to move in condition. The investor will then list the house for sale at a good retail price and sell it to a buyer who wants to move in. From the last example, Investor B (who purchased the home from investor A for $55,000) might spend $10,000 fixing up the home. After repairs, Investor B will have spent $65,000 total from purchasing and repairing the house. He will then find a first time home buyer or maybe a retiree to purchase the house for $85,000 therefore making him a $20,000 profit.
More potential profit usually equals more risk. This strategy requires investors to have enough cash reserve to pay for repairs and holding costs, like taxes and insurance. Also make sure to check with the local building and code enforcement as there might be problems with the property that are not disclosed during the sale. Title companies usually don't check for code violations unless it's a lien and some houses have up to a $10,000 dollar fine! Another major pitfall comes from selling the fixed up home to a buyer using financing. Financing guidelines have become very strict due to the lack of common sense and bad loans used by the banks in the past. These loans are complex enough as is but another element of difficulty is added when dealing with flipping a home for profit. Investors can have major problems with appraisals coming in too low. Again, this strategy is for experienced investors. Please find a partner or mentor to help when trying this the first time!
Buy and Flip using Creative Financing
This takes a higher level of management and time commitment then the previous strategies but can result in higher profits and potential cash-flow. To be successful, an investor will purchase a home for cash, repair the home if needed, and then find a buyer for it. However, instead of the buyer using a normal bank loan or paying cash, the seller will provide the financing by either holding a mortgage from the buyer or allowing the buyer to rent with an option to buy at a future date. There are other ways to do it as well but these are the most common. The buyer will give the seller a large amount down to show good faith and pay monthly until they refinance or purchase the house.
To be successful, an investor must be prepared for the long-term commitment. These deals can take anywhere from 1 to 30 years to complete. There is also the risk of the buyer defaulting and having to foreclose, which could take months in St. Lucie county from the large amount of filings every day. Make sure to have a good attorney helping with these deals and be prepared for anything to go wrong. Also be careful of any long-term deal due to falling home values.
Buy and Hold Long-Term
Most are familiar with this way of gaining long-term wealth. The investor purchases a home with cash or financing, and then rents the home out for positive cash-flow every month.
This is a proven strategy for growing long-term wealth. This is also a fast way to lose a lot of money and make investors go crazy if not done correctly. This depends on the monthly expenses and condition of the house, and also the quality of renter. Back in 2005, investors would purchased homes with expenses way above what the rent would bring in. They were losing $200 to $1,000 every month and justified this loss because of the rising values of homes. As a result of the downturn in the market, they could not sustain this amount of loss and went into foreclosure. The renters in these homes of course had to move and typically lost their deposits. Investors should always purchase these homes at a discount to ensure positive cash-flow and also allocate money to vacancies, repairs, and unexpected items. However, some of the distressed homes are extremely under-priced to the point that you can make all your initial investment back in less than 5 years!
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