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Locating
Lucrative Investment Property Requires Finding Motivated Sellers
By
Rick Sharga, Vice President of Marketing for RealtyTrac
With
real estate outperforming most other investment vehicles, it’s not
surprising that an increasing number of buyers are pursuing investment
properties.
With
the rapid appreciation in many real estate markets, investors can
realize a quick profit in the short term by reselling a property. Even
if a particular real estate market is not red-hot, investors can profit
over the long term by initially using the property as a revenue
generator—leasing the property while allowing equity to build.
That
doesn’t mean it’s always easy to find investment properties. But with
the right strategy for pinpointing investment opportunities, investors
can realize sizeable profits even in an overheated real estate market,
according to T.J. Marrs, a real estate investment trainer and author
based in Vancouver, Wash.
“In
general, if you can trade a 20 to 30 percent spread between your costs
and your resale price, you can be fairly safe that you’re going to make
a profit no matter what, even in a bubble market,” he said, adding that
costs include not just the purchase price but other fees and expenses
involved in buying a property.
Locating
investment properties
The
ideal investment purchase involves a motivated seller who has built a
solid amount of property equity but doesn’t have the time, money or
other resources to sell the property at its full market value.
“There
are literally dozens of ways to find properties. But the key is to find
a property where there is a motivated seller involved,” Marrs said,
noting that one of the best ways to find motivated sellers is to search
pre-foreclosure properties.
Although
the hidden market of foreclosures and pre-foreclosures has previously
been available only to industry insiders willing to sift through public
records at the local county courthouse, services like RealtyTrac have
made this information easily available online. Visit www.realtytrac.com to search pre-foreclosure, auction
and bank-owned properties nationwide.
A
property enters the foreclosure process when an owner defaults on
monthly loan payments, and the property is scheduled for public
auction. The owner can stop the auction during a pre-foreclosure period
by paying off the amount in default or by selling the property for a
price that covers the balance of the loan.
Many
real estate investors contact the owner during pre-foreclosure and
offer to buy the property at a bargain price. If a deal is worked out,
the owner avoids having a foreclosure on his or her credit history and
usually walks away with some cash in his pocket.
“The
reason they’re willing to sell is that they are very motivated sellers.
And they’re going to lose the property if they don’t sell,” said Marrs.
When
contacting the owner, investors need to be aggressive marketers because
they are often contacting the owner before the owner has made the final
decision to sell the property.
“With
any kind of marketing campaign, you need to get a penetration beyond
first impact,” Marrs said. “One letter is pretty much useless. Three
letters is about five times more effective than one letter to the same
lead.”
If
the owner doesn’t sell or pay off the amount owed during
pre-foreclosure, investors can bid for the property at the public
auction. Auctions often represent great bargain-buying opportunities,
but they also represent more risk and more competition from other
bidders, according to Marrs, who usually buys before the auction.
The
foreclosing bank sometimes bids on the property at the public auction.
If the bank is the winning bidder, it takes ownership of the property.
Banks are usually motivated sellers since they consider foreclosed
properties nonperforming assets and often want to unload them quickly.
Many banks are willing to sell foreclosed property below market price
as long as they break even.
Judging
profit potential
A
good investment property is bought below market price and appreciates
in value after the purchase. This requires a motivated seller, but it
also requires the numbers to work for both the buyer and the seller. A
real estate investor should crunch the numbers on any potential
investment property to determine if it meets the criteria of a good
investment while still meeting the needs of the seller.
The
total amount of any debts secured by the property should be
significantly below the property’s market value. Investors can research
all the debts owed at the county recorder’s office or online using
RealtyTrac’s Legal
and Vesting Report
or Transaction
History Report.
RealtyTrac
provides estimated market value information for each pre-foreclosure
and foreclosure property posted in its database, and investors can
order a Comparable
Sales Report for a
detailed list of comparable sales. If the total amount of debts owed is
20-30 percent below the market value, the investor should continue to
pursue the property. If not, the investor should probably move on to
another property.
The
amount of bargain an investor is happy with can vary depending on the
structuring of the purchase agreement. If he can take over the current
loan on a property, Marrs is willing to buy it for up to 90 percent of
its market value. But if he has to secure a new loan to buy the
property, he wants his purchase costs to be at most 75 percent of the
market value.
“If
I can avoid using my credit or my money, then I’m gaining leverage. The
more leverage I can use, the lower risk it is for me,” he said.
In
addition to evaluating the potential bargain, investors should consider
how to generate a profit after buying the property. Investors should
weigh whether reselling or leasing provides a better return on their
investment.
If
interest rates are low and property values are increasing rapidly, it
may be better to resell the property after making any needed repairs
and improvements. The cash profit can then be re-invested in more real
estate.
Leasing
may be a better option if rental property is in high demand. Marrs uses
lease options or installment land contracts to sell the property on an
installment basis. This allows him to obtain a higher purchase for the
property in the long run and maintain a monthly cash flow in the
process.
“I
look at my exit strategy and entrance strategy at the same time to
determine what makes up a good deal,” he said. “It’s not just about the
price of the property. It’s about how I can structure financing to make
the most amount of profit with the least amount of risk.”
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