It can be quite enticing to get swept up in the incredible profit potential that the world of real estate investing can offer. Real estate has arguably made more people millionaires that any other money generating medium. It has also lured in many by its alleged promise of charm and fortune, only to suck the unknowing, under educated investor into a vortex of frustration, time consumption and financial loss.
There are two typical scenarios for most real estate investors. The first is to buy a property and rent it out. The challenge associated with this is twofold. Number one; holding properties can eat your time if you are property managing and your bottom line is affected by vacancies and repairs. Secondly, there are a finite number of properties you can own before Mr. Bank says they won’t lend you more money because your debt ratio is too high.
The second scenario is to buy, fix it and “flip” it. This can be a time consuming, expensive experience if you are not continually checking in with your contractor and crew, not to mention unforeseen repairs which are often uncovered during the renovation process.
The downfall with the previous two examples is: your precious time is involved, your hard earned money is involved, and because you signed on the dotted line for these properties….you have full LIABILITY!
The key to major success as an investor is to create a steady flow of deals that don’t require huge amounts of time, little to no money and zero liability.
Becoming an educated investor in a sea of non educated investors can give you a distinct advantage, both as a source for deals and a place to send your deals.
Find the need
To create a successful business, we must understand what the “need” is. It is then easier to fulfill that need and create a customer base that is looking for what you have to offer.
If we can find great deals for the types of investors mentioned above that want rental properties, buy and flips or rent to own properties (not mentioned here but a great strategy for another time), we can find those and get paid for being their “supplier.”
Create a buyer’s list
We can develop a buyer’s list by placing ads on Craig’s list, kijiji or through print ads describing the fact that we get properties discounted significantly under market value. Investors and some end buyers will call. You must then screen them by asking what type of property they are looking for, where they are looking, their affordability and their timeline, meaning how quickly they can pull the trigger if you have a property available. You then categorize these people into those who want rentals, flips etc.
Create a bird dog list
Concurrently you must be gathering a list of people who find you deals outside of your own sources who are rewarded as a result. These people are professionals in and outside of the real estate business. (I have a number of articles on creating a birddog network)
Finding the deal
Find a property from either an owner directly (we show you how to advertize for this), your bird dog network or MLS (last resort) in a situation where they need to get out of their property. For example, a defaulted mortgage, death in the family, divorce etc. These properties must however make sense (by crunching the numbers) for a fix and flip, a rent to own, a long term hold or a number of other powerful strategies that will be ideal for the typical investor mentioned above. You must know what the exit strategy will be and “sell it” to the investor or end buyer as such.
Get property under contract
Utilizing a Purchase and Sale contract, you essentially negotiate price, terms, key clauses and a due diligence period allowing you to show the property to other potential investors or end buyers to see if they would like to buy that property. If they decide they want to become the end buyer, you, through a series of documents, are able to “assign” that property to the end investor/buyer, allowing them to close on the property instead of you.
The key clauses
Negotiate this property as you would any investment property, getting the best price, terms or both. Try to use a small deposit amount.
Aim to get the longest due diligence/conditional period you can. Don’t be influenced by the standard 5 day period. (when you are dealing with the owner, things are different than if there is a realtor involved)
The “assignment clause” enables you to transfer the contract (including the negotiated terms and price) to another buyer that will purchase the property in place of you. It also removes you from the deal with no liability or future repercussions.
A “right to show” clause allows you to show the property with 24 hours notice to the owner. This is where your buyer list comes in. (We cover other clauses and the exact wording of these clauses in our training programs)
Making a profit
Of course, you don’t do this for nothing. For the hard work you have done in locating and negotiating this property, you can charge an amount which should be in keeping with the ultimate price that the end buyer is paying. Make sure the amount they pay you, coupled with their purchase price remains a very good deal for them.
Cautions
There are a number of assignment clauses that are used by different professionals such as builders and realtors which are designed to protect their interests and not yours. These clauses can also leave you in a liability position even after the deal is done. Be sure to use iron clad clauses that protect your interests and liability.
In conclusion
You have now successfully “flipped” a property you have never owned, never taken a mortgage on, and have no liability in. Nobody has pulled your credit, asked for a job letter, employment verification, or anything of the sort. The question now is…how many deals can you do?
I encourage anyone that is exploring the world of real estate investing to get educated by professionals that are investors first and know how the game is played.
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