It’s important to know your market area and your product.
Zillow.com can be a good source of general information, although you should’t depend on websites to provide a precise assessment of value when it comes to your investment. Look for comparable properties (comps) that most closely resemble your investment in appearance, condition, geographical location, and room count to determine an accurate overall assessment.
Check with the local municipality for violations, liens, or any ongoing court cases that may not always appear on the property’s title report. Work towards building industry network relationships that the average investor might not have, with REO managers, Scavenger Tax buyers, or judicial certification buyers. Finally, look into hedge fund firms that purchase portfolios of mortgage notes in bulk and sell them off individually at a wholesale discount and be open to contract assignments. With a little more legwork, these off-market sources should provide a variety of different wholesale assets to choose from at a discounted rate.
2. Always Negotiate
Once you have found your desired asset/property, you want to show a strong offer.
A cash offer and a quick closing usually entices a seller to take less than if you are submitting an offer with a finance contingency. In the event you need more time, you can always ask for an extension, but the ability to close fast is highly attractive in any offer.
When the offer has been accepted and you’ve started to negotiate the contract, you don’t want to play your entire hand upfront. You may have observed a defect in the property while doing preliminary research (that you then factored into the offer) but the seller doesn’t always know that. This is where a thorough detailed inspector is imperative. An inspector can lay out the problem in detail and emphasize the various issues to your benefit, which will be key to re-trading the deal based on the condition of the property.
Other than the visual physical defects, there could be some logistical issues from violations that could still benefit you — even if they are minor but still require legwork. Time is money, and you should be compensated or be given a credit for it at the very least.
3. Establish Good Credit
There are a few secrets to quickly building credit for those who have little or no credit and don’t want to wait years to establish the necessary credit history.
Assumption of credit is as simple as having a friend and/or relative add you to their credit lines as an authorized user or a joint cardholder. After as little as thirty days assume whatever length of history the credit line has had.
For example: if your mother has been in good standing with her credit card for 8 years and you’re added onto the line as an authorized user or as a joint cardholder, within 30 days your own personal credit will be reporting as if you have the credit history that spans 8 years as well. You usually don’t need to apply for the credit card and can just be added by the primary card holder. This comes with a caveat that the credit history doesn’t discriminate and the report will show a bad history, so it’s important to verify in advance that the credit line has good history! You should also be aware of credit repair companies offering services to add tradelines to your history since could potentially hurt you in the long-run without knowing what stipulations are attached to the services.
4. Have a Vision For Your Investment Property
Have a clear vision for the investment that will enhance the value of the property.
This is where the return on investment (ROI) comes in. You don’t want to replace a relatively new 5-year old roof if it is not going to reap a return of at least the cost plus a minimal percentage — otherwise you’d be throwing away money by getting a negative ROI. For example: if the siding on the property façade is outdated and needs to be updated, then replace it with a more energy-efficient siding.
This will essentially allow you to compare your property to those that have high efficiency and often generate a high rate of return on investment. Converting extra space within the property into additional bedrooms or storage space and finishing basements is also great way to get the best bang for your buck. If the asset is a land parcel, a zoning change alone could increase the value of land substantially as long as it’s for a popular purpose for the market. (A good zoning lawyer is usually instrumental in pursuing this method.) Breaking up the property into separate pins and selling them independently is another way the deal could maximize its potential.
5. Assemble a Team
There may be an “I” in investment but not in team, which is why there isn’t much of an investment without a good team.
Simply put: become your own general contractor. In most municipalities, it is fairly easy to obtain a GC license and insurance, and it can go a long way towards saving on construction costs. You can hire your own construction contractors at a sub-contractor rate and also hire tradesman and pay a salary allowing you to bypass those hefty project manager/GC costs. This approach can usually save you up to 30%+ on construction alone.
6. Assess Your Financing Options
Not everyone has cash to purchase an asset/property outright, but there are several options to allow you to realize your vision.
Option A: Find a worthwhile venture capitalist. Many people don’t realize that there is an abundance of private money available for those who genuinely have good deals. Private money allows you to submit what would be considered “cash offers” as opposed to a conventional finance offer, which appeals much more to sellers. In most cases, sellers opt to taking a lower price involving a cash offer with fewer contingencies than one that is a higher-priced finance offer with several contingencies and a long turnaround time.
Option B: Seller financing. This option only works in certain cases where the seller is flexible with time and ultimately has a clear title on the property. This type of financing requires the seller to be willing to act as your lender by changing his interest in the property as the deed holder (owner) to the mortgage note holder (lender). The seller would simply lien the title as the mortgagor on the property and you would pay the seller on a monthly basis just as you normally would any other conventional lender.
Option C: Utilize both venture capitalists and seller financing. You may be in the position where your venture capitalist wants you to put more of your own money down but it may not be available. In this case, you can ask the seller to “seller finance” a second mortgage lien position that would fill the void for the deficiency in your down payment (that’s being required by your VC). Keep in mind when negotiating — a first lien position is more secure and always gets a superior rights over second mortgages. To have a better understanding of every perspective or available option, it would be best to have your real estate attorney lay out these plans in detail.
Option D: Incorporate a joint venture. This entails a form of partnership between you (as the buyer) and the seller. Typically, the seller would participate by allowing you to enhance the value of the property while he remains in an equitable position until it is sold for a profit. However, only you and an attorney can determine the best method whether it be a land contract, a deed in escrow or a recorded agreement.
7. Invest in the Sales Process
Hire a experienced realtor who is a team player and not overly busy with other projects.
Sometimes the best realtors are the people who are willing to put the time and energy into the sale as opposed to one who is overloaded in business and may not give the sale much attention. Use professional photos that can go a long way towards making the property look bigger and better and increasing the traffic towards the property. Before the photos are taken, consider renting furniture from an interior designer or real-estate staging supplier. This gives potential buyers an idea of how their furniture will look within the space, and will ultimately increase the buyer’s comfort level throughout the shopping experience. You should also try to work with a flexible, performance-based realtor. This way they have a more vested interest in making the best sale. It’s a win-win either way, because at the end of the day, more for you means more for them.
As an Asset Strategist, my focus is on strategically enhancing the value of my client’s real estate assets. Read my analysis of real estate trends Globally and in the Chicago region. Opinions are all my own.
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