… victorious army wins its victories before seeking battle; an army destined to defeat fights in hope of winning. – Sun Tsu,‘The Art of War’ EXITS
Know your exits first. No investor should ever enter into a real estate transaction without have a clear exit strategy first. If you are doing your deals “…in a hope of winning” you are destined to become an X-Real Estate investor.
If you want to avoid this glooming destiny, there are a few questions you should truthfully ask yourself before your pen hits the closing docs:
Are you planning to flip a property to another investor or are you thinking of fixing it up and selling it retail?
How long is your holding time?
What’s your daily holding cost?
How long do you think it will take you to sell?
Did you compare this projection with an average ‘Days On Market’ number in local MLS?
Are you budgeted for extra hold time?
What’s your rehab and marketing cost?
What’s your contingency plan if your contractor doesn’t show up for a few days? (and do you know where he lives? J)
Do you have prospective buyers lined up?
How will they finance the purchase?
It’s true that you MAKE your profit when you buy, but you BANK your profit only when you sell.
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Flipping properties. What is it? Investors who choose to buy foreclosed property buy real estate with intention to resell it for a profit. In many instances they sell them almost immediately. They act as both, principle and middleman, buying at one price and selling it at a higher price. The flipper does not need a license and benefits from low overhead and fewer work hours.
Types of flippers:
1. Birddogs – primarily function as information gathers. They find potential deals and sell the information to other investors. Fees for the information can vary depending on the price of the property and profit potential. In some cases it could be as low as $500 to $1000, in others a percentage of the profit for information that leads to a purchase of a property.
2. Dealer or wholesaler – just like birddogs they locate properties for other investors. They find bargain properties and sign purchase agreement with the seller. Wholesalers provide much more that just information; they control the property with the purchase agreement/contract. Also wholesaler might assume a certain degree of risk by putting up earnest money to secure the deal. Exit strategies are: assignment of the agreement to another investor; or, if margin allows, closing on the property and selling it outright. A word of caution! Not all states permit assignment of contract by unlicensed individuals. It’s highly advisable to do your own due diligence and check with your state’s regulatory board to make sure you are not violating any local laws or regulations by doing an assignment of contract (don’t always believe what you hear at you local REIA meetings, take an extra step to protect your business).
3. Retailer or Rehabber – the goal is to fix up the property and sell it at a retail price to an owner-occupant or a land lord. Compared to the previous two types, the retailer puts up the most money (own cash or borrowed), assumes the most risk and anticipates to make the biggest profit on each deal. Although it’s a lucrative venture, retailers are limited by financial resources and number of properties they can buy and rehab simultaneously.
Smart real estate investors recognize the need to adapt investment strategies to current market conditions in order to maximize investment returns. In a buyers’ market it could be a good idea to turn your focus to fixer-upper properties.With foreclosures on the rise and inventory at its all time high handyman specials could be the best the best bang for your buck.
Most of your competition is worried about buying investment properties while values are perceived to be dropping, and average investors will simply follow the crowd mentality rather than assess each property purchase on its own merit. Whether you are a wholesaler, rehabber or buy and hold type of investor, this is the time when you can find terrific values.
The only way you can make a profit in any type of investing, and real estate is not an exception, in when you ignore the general crowd and focus on developing your own investment strategies. Let me correct myself, think in the opposite direction of the ‘crowd’. If you are running away from the market like everyone else, you will miss out on great bargains. And if are planning to come back when ‘things will turn for better’, well at that time you’ll be bidding against the crowd.