Buying a House for Pennies on the Dollar

Can you really buy a house for Pennies on the Dollar?

Yes, you really can, and I have. And yes, there is a catch!

Recently a partner and I purchased a home that is worth about $300,000 for just $140,000. In case you don't have a calculator handy, that is 46 cents on the dollar.

This is a nice house in a nice neighborhood. So, what is the catch? Well, actually there is more than one.

Catch #1) ALL CASH and QUICK CLOSING

When you find a house that you can buy at a price significantly below the market value you must have access to a large sum of money that is available immediately. We had to close in less than three weeks from the time we found this deal.

Three weeks isn't enough time for traditional lenders to even finish determining if they think you will pay them back. Then they need to spend several more weeks scheduling and evaluating the house you want to buy. The bottom line is, a fast close for a traditional lender is six weeks and most won't get done in less than twelve weeks.

So, if you cannot get the money fast, then the deal will get away from you.

Catch #2) Lenders Will Only Consider the Purchase Price

When you find a deal like ours, most lenders will look at the contract price of the property and will only lend a portion of that value. This will still leave you with the need to come up with anywhere from 5% to 20% of the contract price in order to make the deal happen.

Catch #3) Lenders Will Decrease the Loan Based on the Property Condition

When you find a house at a great price, in most cases it is going to require some repairs. If the repairs are too significant, the bank won't lend you anything, regardless of how low the purchase price is. They don't want to end up owning it in case you walk away with their money. If the repairs are within reason, they will decrease the stated value of the home by the amount of the repairs and lend you a portion of the decreased value.

Catch #4) Fixing the Property Requires More Cash

With very few exceptions any house you can buy for 46 cents on the dollar is going to need some repairs and some updating. To do the repairs and updating will require more money.

Our deal was no exception. We had to put on a new roof within days of closing to make sure we didn't have the inside get damaged from rain that would have come through the old roof. Then we had to clean out the house and make several other repairs. Lastly, we had to update the tiny kitchen by expanding it and improving it.

All of this requires a lot more cash, in addition to what we paid for the house at closing.

Catch #5) You Have to Pay While You Wait

When you get a loan to buy and fix a house, you have to keep making payments on the loan even though you aren't living in the house. If you get a loan that doesn't require payments, then you are just deferring payments while the interest is piling up. That is what is known as the cost of capital.

Catch #6) If the Repairs Aren't Done Right It is Still Your Problem

When you are doing it yourself or even having others do it for you, if the repair or upgrade is messed up, you are still on the hook. You will suffer more for it than anyone else in terms of money, time, and frustration.

Conclusion

Every week my team and I find and buy homes for pennies on the dollar. We work with a group of investors who make money with us by lending us the money to buy and fix these homes. We pay cash and close quickly. Then we fix up these homes and make sure they are done up right. When we are done, we want to sell them fast, so we put them on the market at a discount price. That way you save m0ney even while we make money.

While it is true that you can find and buy houses for pennies on the dollar, there are a lot of hidden downsides to doing this for yourself. We know and understand the problems with doing this. We do it every week.

If you buy a home from us, you will save yourself the time and frustration of trying to find one of these deals and you will save yourself the aggravation and disappointment of trying to buy and fix up one of these homes.

Why bother when instead you can let us to all the dirty work and you still get a discount on a beautiful home?

Tom ~

Why Buy Retail?

http://www.buyahousebelowmarket.com/

See my latest blog about what we do at The Gold Seal Homes Group: http://www.youtube.com/watch?v=ACJx3wpKezQ

Easy Money: Why Buy Real Estate?

Real Estate is the Best Investment

Real estate has been the basis for the wealth of more millionaires than any other form of investment. This is true because real estate is probably the best of all possible investments.

You can make money and have a tax loss, legally with real estate. If your annual depreciation amount exceeds the amount of income you have from the property, it will result in a reduction of your taxable income, even though you actually made money.

Banks will lend you money to buy real estate, sometimes more than 100% of the present value of the real estate. See how many bankers will lend you $100,000 to buy $100,000 worth of stocks.

A good real estate investment will give you dividends and appreciation (growth), not just one or the other as most stock brokers will try to convince you to settle for when buying stocks. Rent payments can be the equivalent of dividends for the smart investor and in spite of the recent downturn in real estate values, the historical average appreciation of real estate exceeds the historical average gains in the stock market.

The value of real estate does not disappear overnight like it can with stocks and bonds. At worst case, if you own it, you can always go live in it. Try that with a stock certificate!

Like they say in buying stocks, the secret to making money is to buy low and sell high. In real estate, we say that money is made in real estate when it is bought, not when it is sold. If you buy low and ensure you have a positive cash flow, it is pretty hard to miss in real estate.

It is a simple formula, but a challenging one to execute. Most professional real estate investors spend a lot of time understanding their markets. They see a lot of houses for sale that they won't make offers on. They know how to tell the winning deal from a loser, because of their experience and training.

Unfortunately, the amateur investor often gets taken in real estate, just as they do in the stock market. Anyone who hopes to consistently make money in real estate investing has to be prepared to pay their dues by getting the right education, getting a good mentor, and then following directions to do deals the right way instead of trying to make it all up on their own, or improvise their own approach to the market.

Because real estate is a capital intensive field, it is easy to loose a lot of money investing foolishly. There are three ways people can profitably get involved in and benefit from real estate investing.

1) Become a private lender. Find an experienced, successful and reputable real estate investor in your area and ask him if he could use a private lender. Use your IRA, move the money in your old 401K into an IRA, or use excess cash you have parked in CDs or less profitable investments. Make it available to this investor to use. Don't try to tell him or her how to find houses or which houses to buy, but require that you get four things every time your money is used:

• A promissory note for the amount loaned, personally guaranteed by the investor


• A deed of trust on the property with your loan in the first lien position


• Lenders title insurance with you (0r your IRA) as the named beneficiary


• Hazard insurance with you (or your IRA) as a named beneficiary/lender

As I mentioned, don't try to tell the investor where or what to buy. But, do feel free to ask why she or he bought the house they did. Learn all you can from the investor and don't begrudge her or him their profits. You are getting paid to learn from them by getting a nice interest rate return on your money.

2) Become an equity partner with an experienced, successful real estate investor. Seek out this investor and tell him or her that you have a sizable chunk of money (this better be at least $500K) and you want to get into the real estate investing business. You commit to providing the capital in exchange for a 50% share of the profits on each deal you do with them.

Again, be sure to pick the brain of the investor as you do each deal so that you can learn how the investor picks the winners, how s/he acquires the property and profits from the deal. Once again you are getting paid to learn.

3) Become a professional (part-time or full-time) real estate investor. First, you will need to set aside about $30K to $50K and invest it wisely in the best real estate investing training you can find (if you ask me, I will provide a confidential list of the best I have seen and some to avoid). As soon as you complete the very first course, apply it, apply it, and then apply it some more - before you attend or sign up for any additional training. Do not sign up for any additional training until after you have worked solid for six months trying to do everything the first course taught you to do. I will make an exception for a coaching program and a mentoring program that can help you apply what you have learned. You probably should sign up for those right away and work them for everything they will give you during that six month startup period.

After you have successfully used your training to buy and profit from three to six deals, then it is safe to go back in the water to sign up for additional courses.

In another post I will discuss the perils of real estate training and how it can distract you from making money.

Of the three ways I mention above to make money in real estate investing, the first two require the least amount of time and effort. The third, even if you do it only part-time, requires a tremendous amount of work, dedication, persistence and applied knowledge. The rewards are greater and so are the risks. Decide for yourself which approach suits you.

If you would like more information on:

1. How to be a private lender see the Investors page of www.BuyAHouseBelowMarket.com.


2. How to become an equity partner, contact me directly at tsheppard@adbproperties.com


3. How to become a successful real estate investor, keep reading these blogs or contact me directly at tsheppard@adbproperties.com

Tom ~

Why Buy Retail?

www.BuyAHouseBelowMarket.com

Easy Money: Investors Buy Right

Four Universal Keys (plus one) for Investors to Buy a House Right

In my last post, I discussed four universal keys to buying real estate right. In that post I addressed those who are buying a house to live in. Today, I will address those who are looking to buy a house as an investment. I will show you how those same four keys apply, but in a slightly different manner.

Why do I give different advice to investors than for homebuyers? Because there are different tradeoffs each faces. For the investor this is business (or it should be) while for the homeowner pleasure plays a big role.

As you will see from my discussion, savvy investors must always consider cash flow on a property. Homebuyers should consider affordability, but also consider the pleasure they get from living in the home. Since the investor rarely lives in a home they buy, the cash flow has to be enough pleasure.

So, lets get to the discussion.

To recap, there are four universal keys in buying a house right. The first is to avoid falling in love with the house. The second is to not overpay for the house. The third is to avoid overborrowing (overleveraging). The fourth is to not overpay for the loan. And for investors there is a fifth, critical key, never buy for appreciation.

I. Don't fall in love with the house. If the numbers don't work, then don't work the numbers, just move on. This is business, not pleasure. This house is not your one, true love. There will be other houses. It is an investment and one day you will sell it.

II. Don't overpay for the house. Never pay retail. When you buy a house for investment, your calculus is different. You must start with the retail value of the home and work backward to figure out what is the most you should pay. Here is the calculation if you plan to sell the house:

• Retail Value - Seller Discount - Cost of Repairs - Carrying Costs - Desired Profit = Maximum Offer

Here are the calculations if you want to hold it and rent it out:

• (Annual Rent - Operating Costs) / Purchase Price = Return on Investment (aka ROI)

but this isn't all:

• Annual Rent - Operating Costs - Debt Payments - Reserves = Net Income Before Taxes (aka annual cash flow).


• Net Income Before Taxes - Depreciation Deduction = Net Taxable Income (in this case a negative number is not a bad thing)

The variables in these formulae are driven by a variety of factors. It would take too much space to explain here, so I will explain how to get those in another post. Still, you can see that investing in real estate requires a basic understanding of the math of investing.

III. Don't overborrow. Many real estate investment course tout buying property with no money down. That can be done, I have done it. But, it is often a dangerous game and can lead to financial disaster for the unwary. When you buy a property and you owe 100% of what it is worth, you have no room for error. Also, if you look at the formulae above you will note that debt payments play a role in determining your net income. If you cannot earn $1.20 in net income for every dollar in debt payments you are making, you should probably not make the investment. If you borrow so much that every dime of net income has to go to pay your debt, you don't have any income to make your life better. You can be a real estate millionaire and not have two nickels to rub together - You are four tires away from bankruptcy.

IV. Don't overpay for the loan. Borrowing to purchase investment property is a different animal from borrowing to buy your own home. Rates are higher, payment terms are often shorter, and the demand for a down payment is much stronger. The best way to keep your lending costs low is to borrow private money. It is good for you and it is good for the lender. The only loser in this scenario is the bank, because they don't get to turn your money and the lender's money into their money. There is a lot of great win-win opportunities with private lending. I will discuss it in another post or you can go to the "Investors" tab at http://www.buyahousebelowmarket.com/ and request an information packet.

V. Never buy for appreciation. This is the single biggest cause of failure for real new estate investors. If you buy a property and are figuring that you will make all your money on the deal when it goes up in value and you sell it, you are not investing, you are simply gambling. I know of people who bought a duplex that they could not rent for enough money to cover the mortgage payments. "It's OK!" they said, "with the market in this area, we will sell it in six months and make back all our money and still get a huge payday." The market collapsed and they lost the duplex, their savings, their credit rating, and much more.

I started actively investing in real estate in 2001. I weathered this market downturn without a problem because of this one simple rule. I never buy a property that does not have a reasonable expectation of giving me a positive cash flow.

At http://www.buyahousebelowmarket.com/ we sell beautiful homes to home buyers. We also sell package deals to investors - a beautiful home with a tenant already in it at a price that will cash flow.

Tom ~

Why Pay Retail?

http://www.buyahousebelowmarket.com/