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Not all additions or remodeling projects add value to a house, but new plumbing, electrical service, roofs, kitchens, and bathrooms are big pluses.
It sounds like a great house, so why are you selling?
If you don’t sell the house, would you consider renting it? If the owner answers yes to this question, you may be able to buy it from him or her with a small down payment. The owner won’t get much down when he or she rents it.
Once you find a seller with a high motivation who owns a house that is desirable, stop looking and go buy the house!
You want to buy from a seller who needs to sell and who is trying hard to sell you his house as opposed to someone who is playing hard to get.
A seller who avoids answering questions and won’t make concessions is not ready to make you a good deal.
Seller’s Motivation Scale (10 is the highest motivation) 1 The seller wants to buy a new house when she sells. 2 The seller’s kids are starting school next year, and the family wants to move to another school district. 3 The seller is expecting twins and needs a bigger house. 4 The seller’s in-laws are moving in, and the family needs a bigger house. 5 The seller has bought a new house, and it closes in two weeks. 6 The seller has a new job in another town starting next week. 7 The seller’s spouse has a new job in another town starting next week. 8 The seller is
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Always test the seller to see if he is ready to sell you the property. The way to test is to ask questions and see how the seller responds.
Write down the most you are willing to pay for the house, the price you hope to buy it for, and the best price you can imagine buying it for. Write down the amount and terms of the financing you need to make the house a viable investment.
Like a chess player, a good negotiator thinks a move or two ahead. Like chess, your opponent sometimes surprises you, and when that happens, you need to step back and rethink your plan.
By researching recent sales of other properties in the immediate neighborhood that are comparable in quality and condition, you can learn what the property would sell for at a retail price.
Houses in the middle ranges sell for closest to retail. This makes them more of a challenge to buy at wholesale prices, but it makes them safer investments in the long run.
If there are a lot of willing buyers in your market, and lenders are willing to finance them, then a discount of 10 to 20 percent off the retail price is wholesale.
investing for the long run is a much more predictable way to make much more money with less risk.
Your paper may report that prices are going up or down, but every town has many markets. Every street has a market.
When credit is tight for potential homebuyers, many people who would like to buy a house can’t qualify for a loan. As credit becomes more available, more buyers will return to the market to compete for the existing housing inventory.
In a normal market, a buyer of an investment house might expect a net return from rents in the 4 to 6 percent range.
The rental market is often less volatile than the sales market. Rents will drop in a recession, but not as much as prices in hard-hit markets.
It’s much safer to buy when you know that you can find a good tenant than when you are uncertain about your ability to rent.
When the credit is freely available, prices will be higher than in a tight credit market.
A lot of long-term residents speaks well of a neighborhood. Neighborhoods can go downhill, even with long-term owners, but I prefer to own in a neighborhood where people want to stay, not in one where they want to get out.
In a “normal” market, a median-priced house will rent for enough to give an investor a 4 to 6 percent return. This is the return after expenses, but before income taxes.
Find a seller who thinks the market is still going down, and your chances of making a good deal go up.
My 10/10/10 rule for buying a house states that when you buy, you make no more than a 10 percent down payment, pay no more than 10 percent interest, and buy at least 10 percent under the market.
When you make a smaller down payment, your rate of return on your investment increases.
Never use potential appreciation to talk yourself into buying a property. Buy one that gives you an acceptable return on your investment without appreciation, and then the appreciation will make a good deal even better.
Ask the neighbors if they know of anyone who is selling. You will be surprised at how much the neighbors know and how much they will tell you.
Debt used to buy an investment that can repay that debt is valuable to a real estate investor.
70 percent loan ($160,000) on a $200,000 rental house is safer than a $10,000 credit card “loan.” The house, if managed well, should produce enough rental income to repay the loan. Things you buy with your credit card rarely produce any income.
Time is your friend as an investor. Plan to hold your investment properties until they double, and get a loan long enough to ensure that you can hold the property that long.
Buy conventional-looking houses in well-maintained neighborhoods, and if you have to sell in a hurry you will be able to command a higher price.
In more expensive markets, buying on creative terms or with a larger down payment may be necessary to avoid having negative cash flow.
Rules for Borrowing Safely 1. Buy properties that produce enough rent to pay the expenses and repay the loan. 2. Buy properties that are relatively easy to manage and easy to sell. 3. Avoid personal liability on any high-risk loan. 4. Borrow with the longest term possible—you can always pay it off early.
The secret to being able to buy property that will make you large profits is to learn how to borrow on terms that your tenants can repay with their monthly rent.
The safety comes from borrowing against property that generates enough income to repay the loan.
I have negotiated payments with seller financing starting in six months or longer after the closing date.
There are many passive investors who have their cash in a low-yielding bank account or who are unhappy with their returns in the stock market. Others may now own investment real estate but want to retire from active management. They are looking for an alternate and safe investment with a reasonable return. They have no interest in doing the work it takes to buy and manage a property but could be interested in investing with someone who would do all of the work.
There are four traits important in any potential investor: • Honesty • Intelligence • A long-term outlook • Enough money or credit to acquire a house
Instead, you should find a house that you would like to buy and make an offer on it “subject to” arranging financing that is acceptable to you.
Never make a guarantee of profits. Show the actual numbers today, and then plan on holding a property until it doubles in value.
You made $125,000 plus half of the cash flow with no money invested, but you used your time and skill to find a good deal, buy it, and manage the property and the tenants. The investor made $125,000 plus half of the cash flow in profit on his $50,000 investment, without ever talking to a seller, tenant, or a buyer.
holding title as tenants in common. This is not a partnership, and you should not call it a partnership, nor file a partnership tax return. Each owner actually owns an undivided half of the house. Each owns half the roof, half the lot, and so on.
Buying and selling is much higher risk than buying and renting.
RULES FOR INVESTING WITH OTHERS • Don’t buy properties that you don’t know how to manage. • Do buy at a price and on terms that will produce cash flow. • Don’t make projections. • Never invest with someone who has to borrow the money to invest. • Don’t overpromise. • Do write down your agreement in such a way that it cannot be misunderstood in years to come. • Protect your interest by taking title to half interest in the property to secure your interest. • Protect the investor’s interest by having him on title for half interest, plus give the
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“Those who don’t read have no advantage over those who can’t.” —Mark Twain
“The buyer has the right, at his expense, to inspect the house or to have the house inspected by a contractor or inspector; in the event that the buyer is not satisfied with the results, the buyer has the right to terminate this contract without further liability at any time before the closing.”
As a buyer, you would like the seller to be responsible if a problem, previously unknown to you, arises after the closing. Common warranties and promises that a seller would make that would survive the closing are: • Seller is conveying the property free of all mechanic’s liens and other claims • Seller warrants that information in the listing agreement, or otherwise provided, is correct to the best of his knowledge • Seller warrants that he has disclosed to the buyer all material latent defects that are known to him • Seller warrants that he has disclosed any
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When an offer is accepted by a seller in a hurry and he agreed to a price or terms favorable to you, have the seller write it down in its most basic form, to show that he understands the offer.
Negotiate patiently and don’t worry about losing the deal, but once you have an agreement, close quickly.
Filling out the contract is part of the negotiation process. Go slowly, one point at a time, and see how the seller reacts. You will learn a lot about how a seller negotiates. You can negotiate the points most important to you last, when you have a feel for how the seller negotiates.
