| As you move forward into the business of buying and | | | | your name to a big bank loan in the process of buying. |
| selling houses, you'll need to start looking at how | | | | Even if you could get an $800,000 house for $500,000 |
| successful investors make offers. Let's say you | | | | all-cash, you don't violate those rules. Not that it's out of |
| already have your marketing in place. You're getting | | | | the question that this can turn out to your benefit, but |
| leads, and you know how to pre-screen those leads | | | | it's rare-it'll happen maybe once or twice in your entire |
| by asking three questions: | | | | career as a real estate investor, if at all. As a rule, it's a |
| 1. Is the house pristine or neglected (pretty or ugly)? | | | | safer bet to take an option on a pretty house rather |
| 2. Can you buy the house with immediate equity built in | | | | than risk your cash. |
| the day you buy it, or can you create equity? | | | | So we're going to focus on the all-cash strategy in this |
| 3. What is the degree of the seller's motivation? The | | | | example.Since we've determined that it's an ugly |
| way you can answer that is by looking at the | | | | house, we have to consider that it will need repairs. |
| WWOW: | | | | You don't have to be absolutely accurate about what |
| W: What is the property WORTH (value)? | | | | that estimate will be. In fact, you can underestimate |
| W: How much do they WANT (asking price)? | | | | and still not get hurt badly because when you're using |
| O: How much do they OWE (the loan balance, if any)? | | | | the all-cash formula, you'll be guaranteed to turn a |
| W: WHY are they selling (their motivation)? | | | | profit. Based on what the owner says the house |
| Let's say a lead comes in on a property estimated to | | | | needs-new paint, carpets, minor upgrades as such-we |
| be worth $100,000 (after the house is fixed-up) by a | | | | can make a ballpark estimate that repairs will cost |
| certified appraiser, but the seller is asking for $75,000. | | | | about $10,000. So what can you offer based on this |
| They owe nothing on the house, and the reason | | | | scenario? |
| they're selling it is because it was inherited. | | | | The maximum offer for an all cash purchase is 65% |
| You've now got clues to answer all three of the | | | | of the ARV (After-Repair Value) of the house. |
| questions above. To the seller, that house is little more | | | | That leaves a 35% profit, hedge factor, cushion, |
| than a free pile of money gifted to them from a | | | | whatever you want to call it. For this example, let's say |
| relative. Not only are they not emotionally attached to | | | | the ARV, based on legitimate comps, confirms that the |
| it, but they are telling you by their asking price that they | | | | house is indeed worth $100,000. Multiply that by .65, |
| are willing to give up $25,000 worth of equity. That | | | | then subtract the$10,000 in repairs, and your maximum |
| immediately answers questions two and three. You | | | | offer would be $55,000. |
| know you've got them leaning in the right direction. | | | | The reason why we buy at 65% is because we leave |
| Their motivations are in your favor. | | | | open one of our selling strategies-wholesaling. When |
| By looking at the average house price in the market of | | | | you wholesale the house to someone, you're typically |
| the lead, you can tell whether it's a pretty house or an | | | | selling it to an investor who is going to buy it in cash |
| ugly house. In this case, let's say the market average in | | | | from you, then rehab it and sell it again. When you buy |
| that area is $200,000. With this house being below | | | | at 65%, you can typically sell it fairly quickly to an |
| market average (because it's only worth 100k) we | | | | investor at 70%, turning a 5% wholesale profit. |
| would lean toward this probably being an ugly house, | | | | This formula only changes when you write a check |
| most likely needing some degree of repairs. Now there | | | | and pay cash for a house when you current real |
| are really only two buying strategies when it comes to | | | | estate market conditions declining in value. In such |
| buying ugly houses-either All-Cash or Split-Fund! | | | | cases, you may want to lower your buying all-cash |
| The other four buying strategies are for pretty houses | | | | formula factor down from .65 to .50. Before you make |
| only because your exit strategy for getting rid of a | | | | the offer, make sure you have reliable comps on the |
| property that you get a deed on, for example, is to | | | | house and include a repair estimate, a ballpark number |
| owner finance or lease option that property when you | | | | that's reasonably considered. Also, when making an |
| sell it. You're taking over someone else's mortgage | | | | offer, you don't want to come out of the gate making |
| and then you're going to create financing with your | | | | your MAO (maximum allowable offer). You might want |
| buyer that wraps around the mortgage that you took | | | | to start out around $48,000 in this case, or wherever |
| over. You are only going to do that with pretty houses | | | | you'd like, but you know that the most you will offer is |
| because you'll be selling to a higher-end buyer-they're | | | | your MAO of $55,000. |
| usually more responsible and can pay bigger down | | | | If we're writing a check for anything, we're either |
| payments. | | | | getting it at a great discount or we're not doing it. As |
| Even if you can get a super deal on a house buying | | | | long as the ARV is correct and you factor in repairs |
| all-cash, you never do it on a pretty house because | | | | somewhat accurately, you will never get hurt using this |
| there are only two ways to lose money in real | | | | formula. |
| estate-writing a big check to buy a house or signing | | | | |