There’s five big problems that beginning real estate investors face. The good news is that by focusing on cheap investor houses you can either overcome or cut these challenges down to size. Here’s the 5 big problems (in no particular order):
Lack of Money for a Downpayment
This is the most common reason people give me to explain why they are waiting to get started investing in real estate. The funny thing is that if you are saving up your money to use as a down payment on investment properties then in most areas the value of that house may be going up faster than you’re building up your savings.
For the person who’s trying to save up for a down payment, each year that goes by actually puts them further behind than they would have been if they’d found a way to get into investing by starting out with cheap houses. If they realized that owners of cheap houses are much more likely to agree to creative financing that doesn’t always require a big down payment then perhaps they could get started much more quickly.
Don’t Have a Track Record
I was nervous when I first got started investing in real estate. I was an auto mechanic afterall, what right did I have to go out making offers on properties telling the sellers that I was a real estate investor?
In hindsight, because I was focusing on cheap investor houses, the sellers of these properties were probably thrilled to have someone with or without experience who was willing to take over their cheap houses. The owners of many of these homes are not only open to, but need someone like you or I to go in and buy their properties.
No Funding Available
The great thing about cheap investor houses is that sellers of properties like these are WAY more likely than the average homeowner is to consider accepting your “carry back all the financing” or other creative real estate buying strategy. Once you discover how to get the seller to provide the financing, or how to take over the existing financing, this problem goes away completely for you.
Hard to Find Investor Friendly Realtors
Most of the cheap investor houses that you find will be for sale by owner. The reason is that Realtors don’t want to put their time into a low priced deal with it’s correspondingly low sales commissions. This is perfect because you can talk to, connect with, and make deals directly with the sellers.
I’ve also discovered that when you do find a Realtor who’s involved in cheap investor houses they are worth getting to know because they are more likely to understand the investing business.
Fear of Making a Mistake
Hey, mistakes are a part of life. Real estate investing is no exception. The secret is to either keep your mistakes small and learn quickly from them, or to find someone who’s already made most of the mistakes for you. It’s usually cheaper and easier to learn from someone else’s mistakes rather than your own.
I hope you’ve found something useful in this post. Let me know what you think by posting a comment below : )
One of the best places to start finding real estate deals is by looking at cheap investor houses. In most towns cheap houses like these can be found in decent working class neighborhoods.
Look for an area that has plenty of lower priced homes but that is not in a war zone. The measure that I use is that you and your contractors need to feel safe while you’re in the area. If you’re concerned about your welfare or safety then you need to find a better area.
If you want to keep your costs down then it makes sense to use some of the proven cheap house finding methods. Putting up bandit signs (making sure that you follow all your local ordinances), or having “I Buy Houses” flyers delivered door to door is a great place to get started.
If you walk the neighborhoods yourself in the beginning you’ll get a better understanding of the area and maybe even meet a few sellers in person that you can connect with, who knows, maybe you could even buy their house.
I’m partial to the free cheap house finder tool that you can find at www.cheaphousefinder.com One reason that I like this tool is because we created it. The other reason is that it’s free and it finds cheap investor houses that you can’t find in the MLS.
This is basic stuff here but I’ve found over the years that sometimes the simplest things make the most sense.
When I got started investing in real estate it took me awhile to figure out out to actually put together a deal without using much money. The problem was that I did things like working with Realtors who didn’t understand what I was looking for.
Sure, I had explained that I wanted to get into fixer uppers and that I wanted to put as little of my money down as possilble. What I didn’t realize was that most Realtors don’t really understand what a motivated seller is or why that’s so important for a real estate investor who wants to put together a winning deal.
“You can get into this one with just $40,000 down.” The Realtor mentioned as we were leaving the third property he had shown me that day. I almost choked in response to this. First off, I didn’t have $40,000 and if I did then I most certainly wouldn’t put it all into one property.
Before long I discovered that focusing on cheap investor houses made so much more sense than trying to buy that really nice home that had already been fixed up. As for Realtors, I said goodbye to this one but ended up meeting others who had a better understanding of what us real estate investors are all about.
One example of a cheap house that I bought – by calling on an Realtors ad – was an older home that the owners Bill and Gloria had inherited from Bill’s father when he died about five years previously. I found out later that Bill and Gloria had originally sold the house for $110,000 and carried back the financing.
That’s one of the reasons that I like to look for cheap investor houses is because the owners are often more willing to finance it for you. This may be due to the fact that it’s harder to get new financing in some of these areas.
The home was divided up into four units which included a 2 bedroom apartment, a 1 bedroom, and two studio units. When I spoke with the Realtor he told me that two of the units were vacant and that the owners had just taken the property back in foreclosure from the people they had sold it to 5 years previously.
It had been on the market priced at $89,000 and the owners had just lowered the price to $79,000. I ended up getting it for $69,000 with the owners carrying back the financing for most of the purchase price.
After all the prorations at closing I ended up needing about $3,500 to buy the house. I learned quite a bit while owning this properties and some other similar cheap investor houses including how to put down carpet, vinyl flooring, and how to fix basic plumbing.
When I sold it a few years later it was fully rented and looking much better than when I had originally bought it. I found another investor who was going to live in one of the units and therefore qualified for owner-occupant financing.
The check that I took home from closing was equal to about three years salary when compared to what I used to make as an auto mechanic. Cheap investor houses may not sound glamorous but they are a good way to get started investing in real estate.
Beginning real estate investors tend to have many of the same fears that I did when I first got started investing in real estate over 25 years ago. Here’s a few of them:
One of the best ways to work through these fears while keeping the risks low is to “Flip a Contract.” The way that you do this is to get out there and make plenty of low, all cash, offers.
Don’t worry about the “all cash” part because if you do this right you won’t be closing on the property and buying it yourself. You’re goal is to get a great deal under contract and then “Flip” your contract to another investor in exchange for two to five thousand dollars or so.
There are three keys to making this work:
Make sure your offer price is low enough
Your accepted, under contract, purchase price should be at the very most equal to 70 percent of the “After Repair Value” of the property LESS the cost of all the repairs that are needed to put it in ready to move in condition.
The biggest mistake many new investors make is to agree to pay too much or to underestimate the cost of repairs. The nice thing about using the “Flip a Contract” method is that if you make either of these mistakes then you won’t be able to find another investor who wants to buy your contract and your deal will fall apart .
This isn’t your goal of course, but it’s not a big deal as long as you make sure to:
Use a contract with a strong escape clause
The purchase contract that you use should absolutely have a strong escape clause in it. Get your attorney to look over any contracts you use before putting your real estate deals together. It’s very much worth it.
The typical escape clause gives you plenty of time to inspect the property and the financial details (including your repair estimates, etc.) so that you can get out of the deal if you can’t find another investor to flip your contract to.
As far as earnest money goes I don’t put any earnest money into a deal until I know for sure that the deal is a go. When you’re flipping your contract the way that you know you have a green light is when you’ve found the investor to flip to and they have given you the earnest money. That’s right, they give you earnest money to buy the flip which is what you use as your earnest money for your contract.
This takes us to:
Begin building your investor/buyers list ahead of time.
Call all the “I Buy Houses” signs, ads, and websites that you can find in your area. Create a list that includes the investor’s name, email address, phone number, and mailing address. Make a note of their preferences – what areas they will consider and what types of properties they are looking for.
Because you’ve built this list ahead of time when you get that hot little deal under contract you can let all of your investor/buyers know that 123 Main St. is available for X dollars. The price you give them is your purchase price PLUS the two to five thousand dollars that you are going to make by flipping your contract.
If none of them want your deal then you don’t really have a deal. You’ve agreed to pay too much or you’ve underestimated the cost of repairs. In deal making language, you didn’t leave any money on the table for the investor coming in after you.
If this happens, make sure to let the seller and or Realtor know as soon as possible that you are going to exercise your escape clause option. Obviously you’ll need to get your numbers dialed in sooner or later since no one’s going to want to deal with you if you fail to close on the deals that you sign up.
I hope that you’ve found this helpful.
It is so much fun to be around friendly people. One of the best things about investing in real estate is that you get to meet wonderful people and help them out. In a recent webinar I shared some ideas on how to quickly make friends with sellers and get them to say “Yes!” to your creative offer.
I’ll describe a little known secret for making friends quickly which means that you’ll be able to get more sellers to feel good about selling you their house when they accept your creative offer.
One of the concerns that was brought up by many of the beginning investors that I met was this: “I’d really like to make a full time income as a real estate investor but I’m just not comfortable taking advantage of sellers who are in a desperate situation.”
This common misconception is believed to be true by beginning investors and also by much of the general public. How can you make money without “taking” money away from the seller of a home? One simple answer to this question comes to you through the magic of appreciation. Appreciation is where some of the biggest profits are made in real estate. By owning or controlling an asset like a nice home in a nice area, you get the benefit of any increase in value as the market moves up.
By using a lease with an option to gain an ownership interest in a nice piece of real estate, even if your purchase price is at today’s full market value you’ll be making a large chunk of money as real estate increases in value. Once you learn how simple it is to put together lease purchase deals and that sellers will actually thank you for helping them out, you’ll never worry about taking unfair advantage of sellers again. You really can help sellers out and make a bunch of money for your efforts.
For example, if you were to pick up five to ten properties over the next year using purchase option techniques like the lease purchase, you’d be in control of about a million dollars worth of real estate. If you structure your deals correctly, you won’t need much of your money and you can even get your tenant buyers to take care of the maintenance.
Once you control a million dollars of real estate, when the market for nice homes goes up just five percent in the next year – you’ve just made $50,000. If you need more than $50,000 to create a full time income then go out and use purchase option techniques to control five to ten more homes. You have now created a six figure income and also have the freedom to do whatever you want each day.
This is because you are creating passive investments which free you from the responsibilities of traditional real estate investing. Now you can enjoy more time with your family, go for a mountain bike ride, or drift lazily down a river on a raft if you want to.
Here’s how I learned a powerful secret and how you can use this idea too. A few weeks ago Darcy, our operations manager, said “Peter you really should smile more often, you have a beautiful smile and it’s a shame to keep it hidden away.” Oops! I know I should smile more. I thanked Darcy for her comment and then set a goal to beam a huge smile out to ten people before the day was over.
I discovered that people smile back! This was so much fun that I continued through the next weekend when I was out buying properties with several students. We had set up appointments non-stop all weekend long so I had a chance to beam a great big smile at close to a dozen sellers. I found that sellers were quickly warmed up by this newly re-discovered secret. Even the sellers that didn’t end up doing a deal with us were pleased to have met my students and intrigued to learn about the win – win purchase option offer we shared with them.
You can tap into the power of this simple little secret starting right now. Your objective is to get ten people to smile back at you in the next 24 hours. You can’t say anything to them. The only thing you can do is smile at them. You’ll discover as I did that anything you practice will soon become a habit. Practice enough and you’ll soon have sellers smiling back at you as they nod their head saying “yes” to your creative offer.
Little habits like this really do make a difference. Good Luck!