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 : )
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!
One of the messages I am constantly sharing with my students is the need to
get out there and do whatever it takes to get that first property under their belts.
It is scary and intimidating, but it is also a magical threshold.
Once you get that first deal done you will find a liberating courage that
will make you many times more effective in every aspect of your investing. It is
all based on the power of belief. After your first deal you will have a growing
sense of belief in your ability to put these deals together. Because of this belief
you will be more persuasive with both motivated sellers and hungry buyers.
I’d like to share with you the story of one of our coaches, Gary. It comes
from his first purchase option deal. As my students who work with Gary know,
he’s quite a sharp investor. But believe it or not he made lots of mistakes on his
first deals too! And because he survived them and went on to be quite successful,
you know that you can do the exact same thing.
Here, in Gary’s own words, is the story of his first deal:
“A while back Continental Airlines was moving its base out of the city I was
living in. This meant a lot of employees of the airline had to relocate.
I had a friend who worked for Continental at the time. He helped me get
flyers into all the flight attendant’s mailboxes. Basically all the flyer said was
that if they needed to sell their home I could help them do it quickly and easily.
One of the flight attendants who was being transferred to another base city
called me. She needed to sell her property. She had tried to get a property
management company to rent out the place but they were going to charge her 10
percent of the rents collected PLUS maintenance on top of that. Besides, do you
think some big property management company with hundreds of units to rent
out really cares about a single house?
By putting myself in the seller’s position I realized that she just wanted out.
She didn’t care about making a profit, only that she came out even. We went
back and forth for a little while and finally agreed on a price of $41,000 –
$4,000 BELOW the value of the home.
I also gave her $800 option money to lock in the right to buy the condo at
anytime over the next 6 years (this is called a “lease purchase”.) Now I know
better than paying any up-front option money if I can work it out that way. But I
learned so much from this deal that it was OK that I made that mistake.
I was renting the place from the seller for $550 a month and I got a $50 a
month credit. (That little $50 a month gave me an extra $1,800 at closing which
was a nice little treat.)
I found a tenant who also wanted to buy the property on a three- year
purchase option contract. He paid me $1,500 up-front option money (meaning
after I subtracted the $800 I paid up-front gave me an immediate $700 profit.)
He also agreed to buy the condo for $49,000. He paid $650 a month in rent.
That gave me a $100 a month positive cash flow on the property.
He moved out after a year (he decided they didn’t want the place) so I
found another tenant-buyer and collected another $1,500 option payment. Again
this person left after a year. So I found my third tenant-buyer and collected my
third $1,500 option payment, and this buyer ended up buying the place. (By this
time I was charging $725 a month in rent, which gave me a positive cash flow
of $175 a month.)
The bottom line was I made $12,000 from a tiny deal on a $45,000 property
over three years. The seller loved me. The buyer loved me (she actually cried at
closing! She thought she would never be able to own her own home.) And I
learned so many valuable lessons just by getting out there and doing my first
It only took me a few hours to sign the deal up, and several more to find a
tenant-buyer each year. I had to spend less then five minutes time keeping the
deal going each year after I had my tenant-buyers. I collected and deposited one
check each month from the tenant-buyer, and wrote out a separate check to the
seller each month. It was just so easy. That’s why I love purchase option real
estate so much.”
So get out there and do whatever it takes to get that first deal done. It will
give you the confidence and the skills to go on and make a ton more money.
I struggled to get my first few deals done so I can relate if you’re finding that
your real estate investing is taking you longer than you hoped to get started. Stick with it.
I hope this article helps.