I am a new real estate investor and I want to start investing SOOO BADLY and I am trying to figure out the best way to get started. I want to be able to do single family deals to make money to use as down payments on multifamily properties. Anyway enough about me…
I have an idea and I was wondering what you thought about it; if it would work, do other people do this, etc… I live close to an area where single family foreclosures are extremely cheap right now so I would take advantage of that fact for my idea.
Here it is, what if I went in and paid cash for one of these foreclosures. I would make sure that the foreclosure that I would buy would not be completely destroyed inside but it would need some work. I would then turn around and offer to sell the property with my own financing on a lease to own basis and advertise that the house does need some work but that it would be perfect for a handyman looking for a great deal. I would require a down payment of say between 2-3 thousand and then would offer monthly payments after that. The person who would buy the house from me would make the payments to me and also do the repairs to the house. After the set term of the loan, say 5 years they would now own the house free and clear.
On a house that would cost me 10-15k to buy in cash, in five years I will have made 15-20 thousand or I could decide to sell the note to another investor and cash out right there.
Now on this idea I am looking for honest feedback and honest answers as to what you think. Does this sound like a good idea or do you just see too many problems and headaches with it? Do other people do these types of deals? Your honest, credible feedback is more than welcomed and feel free to ask me anything!
Also, would I be able to make a listing price of whatever I want (within reason) or does the list price have to be based strictly off of an appraisal and comps?
Buyers will pay for a property what it is worth to them…you can list the property for what you want to. That said, unrealistic price points will cause the property to sit and sit - you probably won’t even get any lookers.
I know someone in my town here who has been buying cheap houses for cash for years–around $5,000-$10,000 cash per house. These are old fixer homes with no loans on them.
Then he goes in and gets the utilities working, puts up miniblinds. cleans and paints, hauls junk out of the yard, cuts the weeds, makes it habitable and looking good enough.
Then he sells it to a first-time buyer on a note at 8-10% for 3 years. The buyer is supposed to get a new loan within that time. Most buyers don’t, and so he forecloses and gets the houses back. Then he starts over.
I think it would be smarter to just make the loans fully-amortized, collect over a longer period. Avoid trashed-out foreclosed homes. Give people a break where they are not stuck in an impossible re-finance scheme.
This guy does 8-10 houses a year. He gets lots of checks coming in. Not a bad plan at all in my opinion.
Land Contracts can be a good money maker - if you do your research. Here are a few things that could kill your profit and how to prevent the headaches:
Title Problems: You should seriously consider purchasing title insurance for every property. It will protect you from breaks in the chain of title and/or other liens.
Structural or Mechanical Issues: A visual inspection can show you a lot but it can also miss huge ticket items. You can make good money off a fixer-upper and you can lose your shirt on a money pit. Cover your basis and get a home inspection. As good will you include a copy of the report to your rent to own tenants so they come into the house knowing all the facts.
Bad Credit: I sold a home on a land contract. Great deal. They couldn’t get a bank loan, I got good interest and there was a 3 year balloon. The background check and credit report showed that they were higher risk. I took the risk and lost my shirt. After $6,000 of repairs and $2,500 in attorney fees, I got the house back and had to re-list the house. Creating land contracts with people who are dependable, honest and with good credit is essential to a smooth transaction.
That being said, this can be a great opportunity. Make sure your bases are covered to reduce your risk and go for it. The only visible downside would be that if you write a 5 year land contract payable in full for today’s market prices (not foreclosure but market value) and the price increases 5% a year for 5 years, you could be “underselling” the property. Nevertheless, factoring a good interest rate could offset this risk. Good Luck!
What you described is doing a Land Contract (another name for it is Contract for Deed). You buy the property then you sell it on Land Contract which is a type of owner financing. On a LC deal the deed does not transfer to the buyer until the entire loan is fully paid.
However, the buyer has the right of full property ownership and you act just like a Mortgagee. To make this work first you need to determine the after repair value of the house. Let’s say its worth $30k fixed up and you’re able to buy it for $10k, so you’re buying it for 1/3 of its repaired value. And let’s say it needs $7k to get it to a habitable condition. And also, similar homes in the area rents for $500 a month.
You can sell the house for $1,000 down, $500 month, 100% Owner Financing for 15 year term @ 6% interest. You want to make it affordable to people who would want to live in that area.
Lastly, make sure you have a buyer criteria such as someone who has a full time job, credit score of 600 or higher, very handy and able to fix the home themselves, etc…