There are two basic types of investors in real estate:
- Investors who buy and hold, which is buying a property, becoming a landlord and leasing the property to a tenant;
- Investors who flip properties, meaning they identify a property for wholesale, rehab the property, then sell the property to an end buyer.
I am specifically going to concentrate on the flipping-property part. To be successful when you invest in real estate, you have to have a lot of moving parts. Sometimes it can be intimidating, and rookie investors can lose a lot of money if they don’t minimize as many risks as possible.
When you flip the property, you use private money like a self-directed IRA, funds from family and friends, or maybe a hard-money loan. Banks are very difficult to work with because nowadays they don’t seem to be in the business of lending money.
Most investors will concentrate on the property. I always concentrated on the end buyer – the buyer who will buy the property when your property is fixed up. Traditionally, you would buy the property, blindly renovate the property on what you believe the property would need, then hire a real estate agent and wait for the property to sell. In that interim time, interest is accruing on what you have to pay out to whoever loaned you the money.
Then someone may like your property and, depending on your market, they may negotiate for a price lower than your asking price. Depending on your situation, you can lose a lot of potential money.
I believe in creating a win-win situation and service the most underserved market in the real estate world – the borrower who has credit challenges or the career renter who wants to buy a home. You will need a team, a very aggressive mortgage company, and a top-notch credit restoration company that does more than just blindly dispute negatives on the client’s credit report. You need a company that actually doesn’t just move super slowly for a client to keep paying a monthly fee; they will actually go directly to the creditors if need be. Most important, you need a willing buyer who will follow directions.
The safest way is to control your exit strategy by doing your real estate deal backwards. I have found that the first-time buyer will gladly pay the asking price in exchange for a seller assist, and terms such as allowing them to rent the property while their credit is improving. This is much different than rent to own. If you have the right credit partner, it should be a conversion under 120 days before you are turning your buyer over to the mortgage company.
Once you get your buyer pre-qualified just on income, then you look for wholesale properties that match the end buyer’s price range and area. They will know where the after-repair value price is going to put their future mortgage payment. Then the buyer can decide on color scheme and within reason how the property will be rehabbed within a budget.
Then give a non-refundable option fee of 3.5 to 7 percent and, depending on your state’s laws, they would either rent with option or do owner financing until their credit is strong enough to qualify for their own mortgage.
Now you know what your profit is going to be on inception of your purchase, and you have a solid exit strategy.
Mario Henry, a former National Football League player, is a financial services professional with 18 years of experience in the industry and author of "How to Hire Your House," an innovative guide on how to create a tax-free pension and sustain sufficient income through retirement. Mario also is a licensed insurance broker and a national motivational speaker. He was a wide receiver with the NFL’s New England Patriots and a scholarship football player at Rutgers University.
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