Everybody has driven by a house that has been on the market for what may seem like years. You know the house: there might be a broken window here or there, the grass hasn’t seen a lawnmower for the last few summers, and the property overall has the look of negligence.
It might seem ironic, but this is the dog with fleas property that Filthy Riches has based its success upon. We all know in today’s market, these unwanted houses are practically a dime a dozen. These properties are everywhere. They are located in nearly every state and likely even within easy driving distance for you. This is the type property that everyone else avoids – including real estate agents, if they can help it.
After all, who wants to be saddled with an ugly, dilapidated structure like this? There is little to no chance to move it off the market. Or the selling price is so low, the realtor’s commission is practically nonexistent. What realtor wants to put the time and effort into the small commission from selling a $25,000 home when the same energy could be spent selling a home with a selling price six times higher?
This is where the emerging real estate investor (you) comes in.
It’s important to note that while you are looking around, there are areas to avoid. For example, those cities that are on the national news for being in a heavy economic slump, such as Detroit, Michigan or Gary, Indiana. On the other extreme, avoid the notoriously high priced areas like most of California.
Once you’ve found the area you want to focus on, start looking for houses $25,000 or less. From here, it’s time to utilize the following formula: offer 18-22% of the asking price in cash. There may be times when you have to use a higher percentage or can get away with a lower one, but 18-22% is a good starting place.
What about double wide homes? These mobile homes can figure into your formula very nicely; just make sure the asking price includes the structure and the land and that the double wide is in the late 90s to early 2000s.
When you’re looking for property, avoid complete dumps. They need to be structurally sound and properties that you will be able to either turn around and resell, or sell after putting in some minor work. If there are huge holes in the ceiling, missing floors, no windows or a buckling roof, join the many other buyers who took one look at the property and walk away. If there is fire damage, water damage, or the walls have been torn out to the studs, don’t consider the property. If you don’t feel the home is either livable or could be made livable with a little work, it’s not worth your time. There is very little chance you would be able to turn that property around to resell without putting significant money into the project.
Don’t remain content to look at one or two properties. Make and maintain a list of properties to consider. Inevitably, deals will fall through and you don’t want all your time and cash flow in one investment.
When you get to the point that you’re ready to buy, don’t get hung up thinking that going to get laughed at when you make an offer at 18-22% of the asking price. Agents need to move these dog with fleas properties because it just looks bad having them on the books. Of course, there will be some realtors that tell you that your offer is ridiculous. But the more you hone your negotiation skills and practice this formula, the more realtors will be willing to listen to what you have to say.
If you are able to purchase a property within the ideal guidelines outlined above and using the 18-22% budget, you can expect to invest around $5,000. Again, this isn’t a concrete number, but it’s a good rule of thumb as you’re considering your purchasing options.
The reason this price range is a good choice for the beginner investor is because of the spread it can generate. If you are buying a home for $5,000, you can realistically plan on reselling it for six times the price. Selling a home for $30,000 with financing is well worth the initial investment. Imagine trying to do that with a $50,000 house. You would have to sell it for $300,000. There is no way you would be able to get six times your investment with more expensive properties.
So, the sale goes through. Now what? Now it’s time to turn the property around and resell it. When you sell your property, you will sell it with a low down payment and finance the balance. So, if you buy the property for $5,000 and sell it for $30,000, you can ask for a $1,000 down payment and finance the remaining $29,000. If you finance that amount for ten years, at 11% interest, the payment will be $399.48 per month. Most people will be able to afford a $400 mortgage and they should be able to find a $1,000 down payment as well.
You always have the option to change the terms. For example, if a buyer can only afford a $500 down payment, you can finance the remainder for seven years with a higher percentage. Other times, you may be able to get a higher down payment. For example, properties that you can sell on eBay can benefit from a bidding war where the down payment may be raised to $2,000, $3,000 or even more. If you can get a down payment of $5,000, you will immediately recoup the $5,000 investment you initially made on the property.
If you’re serious about becoming a real estate investor, you can see how easy it is to find those oft overlooked, dog with fleas properties that realtors and banks want to unload. When you find a handful of potential properties, it’s a simple numbers game to make your low investment work to your favor.
This is one of the many tips and ideas you can find in Larry Goins’ Filthy Riches program. For more information, contact REIA NYC Office at (646) 278-6724.