You Make Your Real Estate Profit When You Buy
Ever investor wants to pay as little as possible for single
family rental homes. Have you ever stopped to think why you
should negotiate for the lowest possible purchase price? Yes, I
know every real estate guru talks about no money down or little
money down as the correct approach to investing. Yes, but why?
Let's say a home you are interested in buying has a true market
value of $100,000. If the owner was financially distressed you
might be able to buy that home for $80,000. The moment the deal
closed you would seem to have a free and clear equity in the
home of $20,000.
If course, you could not put that $20,000 in you pocket to spend
on something else. But you could turn around and sell the home
and be left with a portion of the $20,000. There would be
selling costs, so it all would not be profit.
Suppose you wanted to take your profit as soon as possible so
you put the home on the market, but it took six months to find a
buyer. Your six mortgage payments would eat up some of the
$20,000 along with other normal selling costs. Even so, chances
are you would still have a nice profit and all because you
negotiated a below market purchase price.
What if you decide to find a tenant and rent the home for a
couple of years? Oops! During those years the local economy
falters and real estate in your area actually goes down in value
by about 10%. That means your property is now worth about
$90,000. Since you paid $80,000 you are still in a comfortable
position... and all because you were smart enough to buy below
market.
What if you find a house you would like to own, but the seller
will only lower his asking price by a few thousand dollars. You
need a little better deal to have a profitable investment. As
part of your offer ask the seller to pay for your non-recurring
purchase cost. Those expenses would include pre-paid interest,
taxes, insurance impounds and so forth.
Lenders will allow 2% to 3% in seller-paid costs on a
conventional loan. That means that you would be paying less cash
out of pocket, or even no out of pocket costs if it were 100%
financing.
The seller would pay those costs out of the proceeds of the
sale. It's a painless expense for the seller since those
expenditures are all items on a closing statement and the seller
does not have to write a check for those costs.
This tactic is the same as getting a discount on the purchase
price. Remember, as an investor your goal is to buy below full
value and this is one little way to do that.
Now I must make a confession. For the last couple of years I've
been able to buy nice homes in nice areas for full value and
still make a fat profit. In my area prices had been climbing by
20% to 35% yearly. I could find a motivated seller, give them
$1,000 to cover moving costs and buy their home by taking over
the payments. Within 12 to 18 months I was able to sell that
home and cash out for a profit of from $30,000 to $90,000.
Yes, it was an exciting time, but very risky. By paying full
value there was no room for error. If values had plunged I would
have been in a tight spot. So... the best practice is to always
make your profit when you buy. You do that by buying 20% to 30%
below market value.