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Real Estate Investing - The Magic Rule
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Real Estate Investing - Getting Rich Quickly
If you are going to get rich, you may have to give up everything you ever learned in school and from your parents and start from scratch. Now that's not a definite by any means. You may not have to start over. If someone along the line taught you, for instance that it doesn't actually take money to make money, then you may already be on the right track.
That's right. Robert Kiyosaki, au... Read real estate article
Real Estate Deal
Every real estate investment consists of eight parts: generating leads, initial examination, decision making, negotiating, professional inspection, closing the deal, improving the value, and re-selling.
1: Finding potential deals
Finding suitable properties is the first part of the real estate investment process. During this phase you look for potential deals, employing whate... Read real estate article
Real Estate Investing - The Magic Rule
If you've spent much time around people who invest in Real Estate you know they all have their favorite rules. In Investment Club meetings, online chat rooms, even at the corner coffee shop, you catch snippets of conversations including phrases like,
"Location, location, location,"
"Buy low, sell high,"
"Invest in what you know,"
and many others.
While these are all important, in my experience (and that of many other seasoned investors) there is one rule that, if followed consistently, will save you from almost all of the potential pitfalls investors commonly encounter. What is this pearl of wisdom?
Simply this: YOU MAKE YOUR MONEY WHEN YOU BUY.
"What's that," you say? "Everybody knows you make your money when you sell."
"Not so fast," I reply.
Think very carefully through what I'm about to say. Etch it into your mind and heart. Follow it faithfully and you will come close to guaranteeing your investing success. Forget it at your peril.
YOU MAKE YOUR MONEY WHEN YOU BUY. Very simply, this means that your profit is literally created at the time you purchase a property, through the price you choose to pay and the terms you negotiate in your purchase offer. There is no other time in the life cycle of an investment when you will exercise such tremendous control over your potential profit.
There is no other time when you can come so close to guaranteeing your success, and also no time when you can virtually guarantee your failure.
Buy right, for the right price and terms, and you will be able to weather virtually any unforeseen or unknown defect in the property. Sure, some of your profit may be eaten up correcting the problems, but there will still be something left for you- something to allow you to move on to your next project.
Buy wrong, spending too much on the property, and even if you do everything else right you will be hard-pressed to make money.
This Rule Almost Makes The Others Obsolete
Even if you've broken most or all of the other so-called "rules" of Real Estate investing, if you follow this one magic rule, you can emerge victorious, a little wiser but unscathed by crippling losses. Let me illustrate.
Recently I purchased a single family home, and in so doing I broke many of my own rules. I bought a house nearly an hour from my home, I bought a house for the wrong reasons (I really, really liked it), and I bought a high end house in a low end neighborhood (a classic no-no). I also bought it without having a clearly defined exit strategy (another classic blunder). I just knew I could do something with this house.
Additionally the house had one of the most investor-unfriendly features I have ever had the misery to run across- an indoor swimming pool. When I wasn't busy finding and repairing leaks in the liner, I was struggling to refill the pool using the property's seriously overtaxed well, which I had to keep waiting for to recover. I still have nightmares about it.
This house took me three times longer to sell than I first imagined, and holding costs were eating me alive.
But... I owned this house right because I had bought it for the right price. I had foreseen that this house, with all it's beauty and features, could also be a very difficult house to rehab, hold, and sell. Based on that, I structured my offer with plenty of room, which is a good thing, because much of that "room" was eaten up before I was finally able to sell.
Much, but not all.
Why was I able to withstand all of those expensive problems and still walk away with a tidy profit, and some hard-won wisdom? Because I recognized and applied the first and most important rule of Real Estate investing- YOU MAKE YOUR MONEY WHEN YOU BUY.
I believe that if you will etch this principle forever in your mind, and think of it always when making your offers, you will safeguard yourself from almost all potential investing disasters (acts of God excluded).
Two Things You Must Know
To put this principle into practice, you absolutely must acquire knowledge in two key areas- market values and repair costs. While each of these is worth an article on it's own, I will cover them briefly here.
First, market values. You must thoroughly understand the market values in the neighborhood where the property is located, so that you can project an accurate After Repair Market Value (ARMV). In other words, how much will this property sell for after all needed repairs and upgrades have been completed. While it is beyond the scope of this article to cover market value in-depth, I will simply note that the one best way to determine the ARMV of a residential property is to compare similar properties in the neighborhood which have sold recently (called comparables or "comps").
If you don't know the values in the neighborhood, STOP! Don't invest there until you have come to understand the values by looking at lots and lots of properties, and talking with Realtors and others who know the neighborhood. Then you can proceed from a position of strength, certain that you know what you are doing.
Second, repair costs.
Once you know the ARMV, you need to be able to work backwards to arrive at an offer that makes sense. To do this, you must know what any needed repairs and upgrades will cost you. You don't need to know to the penny, but you must come reasonably close, and you can only learn to do this with experience. If you don't have this experience, and you're not an expert, hire one.
You will need to befriend a contractor you trust, or partner with one on a few deals. Either way, let someone who knows this stuff bring you up to speed. Get a contractor on your team.
It shouldn't take you more than a few deals before you can walk into a home in a neighborhood you're familiar with and, after spending no more than 10 minutes or so, know what it will cost to repair and what it will sell for after you repair it. Knowing you can do that equates to freedom and power.
How To Structure Your Offers
Armed with that kind of specialized knowledge, you will be able to confidently structure offers that others can't, because they just don't know what you know. Once I have this knowledge (ARMV and repair costs) I use a very simple formula to structure almost all of my offers on residential rehabs. Feel free to use this formula for your offers.
ARMV - Repair Costs - 30% = My Offer
Here's an illustration. I recently looked at a single family, split level foreclosure in a middle class neighborhood I am very familiar with. Knowing the values for similar homes in that neighborhood were around $90,000, I next walked through the house and estimated repair costs to be about $12000. Here's how I structured my offer:
ARMV ($90,000) - Repair Costs ($12,000) = $78,000
$78,000 - 30% ($23,400) = My Offer ($54,600)
Did it matter to me that the asking price of the house was $84,000? Not in the least. My offer (and therefore my profit) has absolutely nothing to do with how much the sellers are asking, or how much someone else might offer. My offers are based on my specialized knowledge of market values and repair costs.
If someone else wants to offer more, that's fine by me. Their circumstances might be much different than mine. Perhaps they are going to live in the house while they repair it. Maybe they are ignorant of market values or repair costs, or both. It doesn't matter. I won't let their mistakes become mine, and you shouldn't either. There are plenty of houses out there.
You'll get plenty of offers accepted, because you know what most others don't. You know that- YOU MAKE YOUR MONEY WHEN YOU BUY.
Now, go make more offers!
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Before You Sell Your Home - Know the Law
There's more to selling a home than putting up a "For Sale" sign and waiting for people to make offers. If want to sell your home, you need to be aware of the many local and state laws and various regulations attached to selling property. You have be knowledgeable about real estate contracts and know every step involved with regards to inspection, financial considerations, and legal paperwork.
For a real estate contract between two parties to be legal, for example, it must have the following elements:
At least TWO parties of sound mind in agreement of the contract - the buyer and the seller Legal identification to verify legal signatures on all paperwork The correct address of the property for sale All agreements with regards to the sale and promises of payment made in writing and signed Unqualified understanding between the buyer and seller so each is aware of payment schedules and other considerations Coming to an understanding with a potential home buyer is one thing. When you consider going the For Sale By Owner route, you also need to be aware of the many laws attached to selling a house. Local and county laws may vary according to where you live, but there are at least twelve worth researching before you put up your sign:
Seller Disclosure Laws - By law, you are required to inform any potential buyers of damage or other problems with the home that may impact its value in the future. If the house will be in need of a new roof in a year, or if there are cracks in the foundation that need repair, you are obliged to let buyers know.
Lead Base Paint Disclosure - Similar to the Seller Disclosure, if lead-based paint has been used in your home, you are required to inform all potential buyers of this.
Federal Fair Housing Laws - In accordance with Title VIII of the Civil Rights Act, it is illegal to discriminate against a potential home buyer based upon race or color, gender, creed, nationality or handicap. These laws prevent refusal of a sale or price adjustment of a home based upon these factors.
State and Local Housing Laws - Your particular region may have specific laws relating to the sale of homes in the area. It is highly recommend to research any possible regulations that may affect your ability to sell on your own.
Advertising and Marketing Laws - If you plan to take on the advertising of your home sale by yourself, you may need to be aware of certain regulations applicable to your area. If you are placing a newspaper or magazine ad, you may be required to disclose specific information about your home. Do your homework!
Real Estate Contract Law - Is the contract you have with your potential buyer valid? Are there any hidden clauses that may come back to haunt you later? Know what your sale contract says and means before it is signed.
Zoning and Local Ordinance Laws - The sale of your home may be subject to various zoning laws and ordinances in your area. For example, a buyer may want your house for a home-based business or for charity purposes, but the laws in your town may not permit that. Research what regulations are applicable to your property before you sell.
Occupancy Laws - Is your home subject to occupancy laws? Can you legally sell your house to more than one family unit? Before you put your house up for sale, make sure you research any occupancy limits and restrictions.
Building Code Laws - Is your home "up to code"? In other words, is the house compliant to all safety and health codes? Have any repairs and remodeling work been done to the house, and if so were they done with the required materials? It is not legal to sell an unsafe home, so make sure any construction done before the sale is completed safely and correctly.
Environmental Rules and Regulations - Is there anything in your home that poses a potential environmental hazard? Is the construction of your home sound and free of asbestos and other harmful elements? Make sure you know what is considered toxic in your area, and that it's not in your home!
Stigmatized Property Laws - Was your home the scene of a murder or other disastrous crime? Is your home a local legend in that people believe it's haunted or cursed? It may sound amusing, but sometimes it can be difficult to sell property that has been "stigmatized" by gossip and legend. If your house has such a legacy, it is best to research any disclosure laws that apply to the sale. If somebody was murdered in your home, for example, you may have to disclose that to a buyer.
Governmental Rights and Real Property Laws - Each state has its own laws with regards to the definition of "real property." It is suggested all potential sellers know how their states interpret what is real property as opposed to "personal property." This may affect certain appliances in the house to convey with the sale, or property lines. Governmental rights laws may be put into effect if the government is interested in acquiring property for various purposes (i.e. you own a parcel of land where an interstate is to be built). Read up on these laws before you sell.
Selling a home can be a daunting process, made all the more difficult if you are not aware of the many laws in your area that bind you to certain obligations. So before you hang that sign, make certain you are knowledgeable about the implications behind it. Having the law on your side will make for a smoother sell.
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