There are many good reasons why fixers are the perfect properties to begin a real estate investor career. However, leading the list is CASH FLOW. Fixer-houses by far offer the best opportunities for small-time investors, without much cash to spend, to acquire real estate with minimum down payments and still achieve cash flow quickly. No other real estate I know of will do that!
CASH FLOW QUICKLY
It is reasonable to expect – after paying an average of 10% down that one can create a positive cash flow property within a relatively short period of time after the purchase. Obviously, the time it takes will depend on many factors, such as how long does the fix-up take – how much market value is added to the property – and most certainly, the skills and aggressiveness of the fixer.
I have learned from experience – cash flow is much easier to achieve buying small multiple residential properties, such as 2 or 3 houses on a single lot, several duplexes with a house or two, or any combination of these cluster type properties. I own many properties from 5 to 8 living units each. They are excellent cash flow producers after a year or so my goal for a complete turn-around is 18 to 24 months. We’ll discuss this part and the reasons why later.
Anytime there are fewer buyers who want something and you are shopping that particular market, your odds for success are greatly increased. Competition is what drives up prices. Conversely, the lack of it holds them down. It’s difficult to purchase prime real estate at a discount or get any kind of a break on the terms. The reason: Too many buyers are willing to pay the asking price. Why would a seller need to discount?
There are basically only 2 methods to buy real estate at bargain prices!
Situations where you are the only potential buyer who knows about the deal (no competition) and, the seller is willing to accept your offer and terms without seeking outside bids (offers) from anyone else.
Where the public knows about a property that’s available but cannot visualize its potential value – like after it’s all fixed up. They are therefore not buyers – only lookers.
Most students who seek my advice are not yet sophisticated enough to be in the information loop where they can benefit from Method #1. I’ll show you several ways I make Method #1 work for me later on! However, two of the most common ways Method #1 is used is by licensed real estate agents who buy their own listings and by friends of probate attorneys who get a secret telephone call when an asset (real estate) needs to be disposed of quickly. In both cases, the public never knows about the deal. Private deals avoid competition – therefore, they don’t get bid-up in price!
Method #2 is how most of my students will buy real estate. We shall focus in a market where properties are for sale. They are even advertised and certainly known to many potential buyers. However, 95% of all the potential buyers (the competition) see ugly rundown houses as pure junk and not even worth the asking price. Most will not make and offer and those who do will totally alienate sellers by insulting them with “low-ball” offers. With 95% of the competition gone, the playing field is definitely tilted in our direction.
Motivated sellers get that way for many reasons! Here’s a list of the most common – All except one, which we’ll tackle later:
A. Property owner loses his regular 8 to 5 job.
B. Family problems – mostly divorce or death.
C. Poor health – can’t work on property any longer.
D. Change of investment goals. Found better mousetrap.
E. Moving from area. Job transfers most common.
F. Retirement time – Ready to hang it up and go fishing.
When you read your local newspaper classifieds, as you should, you’ll see all of the various reasons listed above over and over again! OWNER MUST MOVE, POOR HEALTH FORCES SALE, GROUND FLOOR OPPORTUNITY, OWNER RETIRING, DIVORCE SPELLS – MY LOSS, BUT YOUR GAIN. These are typical classified wordings in the real estate “For Sale” sections of any sizable daily newspaper you care to look at. Obviously, the ads are written to persuade buyers how motivated the owners are to sell! Some ads are true – most are baloney. It’s impossible to tell about motivation from an ad. Still it’s a starting point.
You will need to make offers and have direct discussions with the seller before you can really determine a motivation level. One way to cut to the chase is to offer 50% of the asking price! If the seller doesn’t throw you out of the room – perhaps he’s really serious about selling.
Let’s tackle that one exception I mentioned above! Don’t look for this reason listed in classified advertising or any other sales pitch for that matter. You won’t find it! Fact is, the seller will do his darndest to hide this particular motivation! He is motivated because he is a failure. Chances are good he’s losing his shirt on the property if you can discover motivation of this kind, and if you have the ability to fix the problem, thereby relieving the seller of the mess he’s in, you’re in an excellent position to be richly compensated for your efforts.
I had exactly the same situation when I purchased Hillside Cottage. The sellers were going under water for the third time. I was the only lifeline available to them, and of course, in the end I richly rewarded for my problem-solving abilities.