If you’re new to real estate and rather broke it’s not a good idea to get started investing in real estate with REOs, short sales, or listed properties. Stick to the fundamental advice given by every creative real estate guru I’ve ever read or heard, which is to start out dealing with private motivated sellers.
I assume so many newbies gravitate to listed houses because it’s easier to look through listings than marketing to motivated sellers. This is true, but the easy road ends up much harder here. Here’s why:
First off, the Realtor usually gets in the way…he/she will need to be paid somehow, and probably doesn’t even understand what you’re trying to do.
Your exit strategy is limited pretty much to paying cash or wholesaling, and this alone eliminates 50-70% of your potential business right here because seller financing, lease options, etc ain’t flying with listed properties.
You need to at least seem like you can close or the Realtor will dismiss you as a waste of time. If you’re new the Realtor may realize you are broke and just got out of a seminar and therefore won’t take you seriously.
Your deposits will be MUCH larger on listed houses.
REOs have a ton of red tape, disclosures, and other nonsense.
Everyone with access to the MLS sees the same deals you do which drives up the price.
Short sales are akin to pulling teeth, plus you never know when you’ll win.
Not to discount any of these methods, they are all viable…but not so viable if you’re brand new. It’s so much easier to cut a deal with a private motivated seller.
So what do you do to get leads? Get a course for starters. Doesn’t even have to be brand new. A bad course is better than nothing. I guarantee you’ll see tons of marketing techniques in the course, but for starters try yellow letters & bandit signs.
I just thought I’d provide some real world numbers here to accentuate NSU’s points about buying rentals if you don’t have a lot of available funds. We primarily deal with houses that we get under contract somewhere in the 10-25k range. Some of these houses only need about $1500 worth of work while others may need close to 10k. Even houses that look move in ready need something (electrical upgrade, plumbing repairs, etc). You can expect banks to want anywhere from 15-30% for a down payment. Our bank charges about $200 for loan origination. Our lawyer charges $400 for closing. Title insurance can be $150-200. Insurance is around $400/yr and we have to pay for a whole year up front.
So let’s look at a 25k house:
$7500 (30%) down payment
$1200 misc charges above
You’re looking at nearly 9k just to get started. This isn’t counting any repair/rehab money. You’ll also have to have funds to fix things that go wrong once you put someone in there. Also - don’t plan on banks going out 30 yrs on a rental property mortgage. Plan on 15 or even 10 years when figuring your payments.
Yep…I once heard it put like this: Financially if you can’t make it a week past Friday the last thing in the world you need is a tenant. Landlording is an advanced REI strategy if you’re gonna do it correctly (like you are). Most newbies I run into aren’t in a financial position to absorb the inevitable costs yet many seem to gravitate towards buying rental properties as a way to break in the business. Aside from rehabbing, landlording is perhaps the toughest way to make a buck in this business (although long term it will make you very wealthy).
justin0419 and nsu1997, I really get a lot out of reading your post, but on this one I want to offer than done right a REO can be a good deal.
Here is the deal I am closing on feb 1, I’ll round the numbers to make the math easier
purchase price $60k
rehab budget $15k
ARV $110
closing $5k
I have a LTV of 70% (HML), so I will be out of pocket $3k plus insurance, so total out of pocket $4500,all rehab money is escrowed, after rehab I will put a renter in and convert to 30 year conventional (at 75% LTV so second closing cost is built into loan, and yes you can get a 30 year mortgage on rentals),my monthly cash flow will be $300 a month.
I will end up because of holding cost etc having about $6k in the property, cash flowing $3600 a year, with an unrealized capital gain of $25k.
I closed on a nearly identical property just before Christmas, my renter is moving in feb 1, and we have started the process to convert to conventional financing.
Now to get those terms you have to have good credit and some cash in the banks to show you have reserves,but with the right team in place and by looking at all new Reo’s online each morning and running numbers (I only deal in one geographical area),you can find those deals
Andy,
Congrats! I guess my experience with the shorter loan am’s is probably due to doing deals thru an LLC. Are you doing deals in your own name?
I definitely have nothing against REO deals especially since there are so many of them out there. In fact, roughly half our deals have been from normal sellers while the other half were REOs. Sometimes the banks have an extra couple hoops to jump thru, but nothing too bad and our Realtor handles all the paperwork/communication issues. Our best deals, financially speaking, have been REOs.
Sometimes it’s a waiting game with the REOs as the banks will price them for top dollar when they need significant repairs. Over time they will usually walk the price down (almost on a schedule). You just have to wait until it makes sense for you. Of course you can submit any offer at any time, but you’ll usually have to wait for the asking price to get somewhat closer to you offer before you’ll really have a chance of getting it.
Good post nsu, and I liked the breakdown of realistic figures justin. I think seeing realistic figures is very important to people just starting, as it can be easy to get in over your head if you aren’t aware of possible costs.
I’ve worked with investors that have 20 plus years of experience, and they still lose their heads on deals from time to time, but they have the cushion to absorb it. But it just takes one of those deals to ruin the person starting of.
I’m of course a big fan of LO’s because of the fact it allows you to really learn the different areas, so when or if you decide to move into rentals, rehabs whatever, you have a much better feel for what to avoid. But, of course, LO’s are NOT a cure all, nor do they work for every situation or every area.
I’ve helped investors buy at foreclosure sales, which is a circus in itself, but never done a short sale, so I may branch off on that arena, but at least I’l know the area much much better then someone starting off. I see a lot of good info here on SS, so I’ll pull up a bottle of 40 Creek Double Barrel and do some reading…
Justin, yes the deals are in my name, which is how I can get the 30 year rate locked in,I am shocked at the pricing some of the REO’s have,I saw a house finally sell for $85k (REO), the house across the street was listed as a REO a couple of months later, it was the same house except this one didn’t have a pool,they listed it for $135k (?),its down to $104 and finally has a contract (but who knows at what price)
I’ve also seen them price them so far under market that you would have many contracts on it the first day it hit MLS,of course you get the famous “best and highest offer” request,which I never win,guess I’m too cheap
I don’t know how a regular person with a regular house can sell it in this market,its horrible for anyone trying to sell
BTW-keepinvesting, for my marketing, I actually utilize the MLS almost solely for my leads, but I’m hitting listed houses. Not looking for SS or expired etc, so it really depends on who your target is.