The Truth Behind Real Estate Investing

Real Estate industry reminds me a lot with the California Gold Rush where the only people who made real money were those who sold the shovels. True some got rich  but majority were chasing a dream based on what very few have accomplished. Real Estate Investing is no difference. For many years now we have been bombarded with books, courses, and seminars promising quick riches. One particular method that tend to bring in many new students and wanna be Investors the "Zero Down" promise. Being able to buy Real Estate with non of your own Money.

In this article, and hopefully few that follow, I want to provide some real world education as to what to expect based on general Real Estate Investing expectations and some specific techniques. By no means is my goal to scare you, but I do want you to understand what you are getting into. All my articles are draft articles, not scripted or rewritten so frankly I am not sure how far I will get. Feel free however to contact me if you have questions. I turned off the comments due to spam but there is the forum area to ask.

So lets get started…

Real Estate Investing Niching

For those of you new to the game, there are few Real Estate Investing techniques. Some Real Estate coaches tend to teach one or two techniques. Some specialize in teaching Short Sales, Sub-2, Rehab, Wholesaling, bird Dogging, Landlording, and Lease-Options. It is important to understand that coaches do not teach specific topic because it is how they are making their money. But in the education and coaching realm, just like in any other business, money is made in niches. The more specialized you are, the higher the price you can charge.

The reality is, with few exceptions of course, most of them make their money doing other things than what they teach. For example, and without naming anyone, those who specialize in teaching Lease-Options and Short Sales use these techniques as last resort and not as their main strategy. They usually opt for Sub-2 investing or wholesaling then fall back on Short Sale or Lease Option.

What I have noticed in the various forums (online and offline) I take part of is that new Investors tend to want to specialize in something specific and they lose sight of the big picture. Making money. That does not mean you should be jack of all trades, but you should not base your investment strategy on the teaching of one person and rather try to figure out all your options. At some point, you will discover your calling and the method that fits your life style and goals.

Always remember, you do not need to use single technique. Keep your options open. As we go through some of the truth behind investing and some of the techniques, you will see that you can combine various methods to make money.

First, lets Demystify the "behind No Money Down" empty promises

 If these is one technique or promise that I despise, it is the "No Money Down". Not because it is not doable or not real, but because it is a loaded promise that coaches use to bring in new students then leave them high and dry after spending lots of money on education. Whatever you are going to do, it is going to cost you money.

If you are a bird dog, wholesaler, or Investor, you are going to spend money trying to find deals. There is no escape from it. Marketing and Advertising costs money. If you think you will spend $100 and make $10,000, then you are day dreaming. While it may work once, it will not work every time and it is not something to build a business around.

My advise would be to learn how to best spend that $100 to increase your chances of success and use the profit to increase your marketing and covering the cost of the deals. I will go into that in few.

The other aspect of "No Money Down" is using other people's money (OPM). The idea is that you can borrow from other people the money to pay for the investments and pay them high interest in return. The challenge with that is that unless you have a good career and know people with good income, chances are you won't be able to borrow the money. Not to mention that most new Investors afraid of asking for money. This does not mean it is not doable, just means very few actually accomplish it.

Real Estate Bird Dogging

Real Estate Bird Dogging is the simplest form of Real Estate Investing. It involves finding potential properties for other investors where the Real Estate Bird Dog locates a property that might be in distress and notifies a Real Estate Investor who in turn will attempt to turn it into a deal. Good investors pay Real Estate Bird Dogs per lead plus a commission if it turns out to be a good deal. Other Real Estate Investors, and the most common approach, pay flat fee per deal.

The Promise

New Real Estate Investors get into Real Estate Bird Dogging because it requires little education, no money, and promise good pay. The idea is that a good Real Estate Bird Dog can make $500 per solid lead and if one can find one good lead a week, that is $2,000 profit a month without taking any risk or paying anything out of pocket.

The Reality

The reality is completely different of course. Finding a good deal is extremely challenging. If you have been in this business or trying to get into this business for a while you will quickly realize that finding good deals is where 90% of the challenge is and the career span of a bird dog is about 3 months. Meaning that most quit being Bird Dogs after 3 months.

Finding deals costs money. Be it in the form of gas and driving around, buying bandit signs, or marketing/advertising. If finding deals was that easy, Real Estate Investors would not hire Real Estate Bird Dogs. Not unless they are extremely successful and truly have no time to look for deals.

What really happens is that both newbies and experienced Real Estate Investors market and hire Real Estate Bird Dogs to find them deals in the hope that one out of 10 could bring them a good deal. These Real Estate Investors are always recruiting new Real Estate Bird Dogs because Real Estate Bird Dogs tend to quit after not realizing any money.

If you want to hire Real Estate Bird Dogs, you should:

1. Always be hiring (of course no payment unless a deal is found) because the turn over is very high
2. Set the expectations in details as to
   • The price range you are looking for
   • The area you are willing to invest in
   • The house configuration, minimum bedrooms, bathrooms, size
   • The conditions as to when and how you would pay
3. Do not set expectations on property owners since Bird Dogs do not tend to have exposure to that. Keep it limited to the property
4. Reward the Bird Dog for finding a deal that fits your criteria even if you do not close the deal. You are looking for the big picture and good working bird dogs should get paid or they would quit. Try to give them $10 to $50 per lead that fits your criteria
5. TEACH THEM Real Estate Investing. They are in it to become investors, so do everyone a favor and teach them what you know. They are not competitors and won't be trust me

You can find Real Estate Bird Dogs by placing bandit signs, running an ad in the paper, or talking to post office employees, sanitation workers, public workers, UPS and FedEx delivery trucks, as well as, YES you read that right,  Real Estate Agents.

If you are a Real Estate Bird Dog, you should:

1. Pre-screen the Real Estate Investor to make sure he is legit. You don't want to spend your time and money finding deals to someone who cannot close the deal
2. Make sure to find out exactly what the Real Estate Investor wants so that you bring them a good deal and win them over
3. Always stay in touch to find out if they are still in the business or too busy
4. If they do not give you specific criteria, pass on them or make them pay per lead plus commission
5. The investor is willing to teach you investing

Always remember, just because you need money, doesn't mean the investor must pay you for any lead. I have had a Real Estate Bird Dog call me on two properties that did not meet any of my criteria due to configuration, but kept hassling me to do them so he can get paid. I explained to him over and over that i do not buy 600 sqft properties but he needed cash and apparently that means I have to do bad investments for his sake. Our relationship ended there.

Conclusion

Real Estate Bird Dogging is not a profitable steady income business. It better be your stepping stone approach to understand the market.

Regardless of your Real Estate Investing level, you should always keep Real Estate Bird Dogging as an investment option though. What I do is that any deal I do not want to do, I try to bird dog it. Making $500 is better than making zero. What I do is I have a system where I broadcast my dead deals to those interested. Real Estate Agents, and Real Estate investors alike. I make money from both. $500 is not a lot of money, but it pays for my marketing. I have also paid other investors for deals they did not want and I ended up picking up. Remember, not everyone has the same investment requirements and what does not work for one, will work for another.

Real Estate Wholesaling

Real Estate Wholesaling is a step up from being a Bird Dog. A Real Estate wholesaler is someone who finds a good deal and puts it under contract and then sells/assigns the contract to another investor. Many new Real Estate Investors love Real Estate Wholesaling because it has become customary, on an average, to make $5,000 to $10,000 a deal.

The Promise

Like bird dogging, the promise is that you can easily find deals, place them under contract, and sell the contract for $5,000. If you do one deal a week, that is $20,000 a month. By the way, there seem to be an obsession with the $20,000 a month figure.

The Reality

Being a wholesaler is like being a bird dog with the exception that you are doing your own negotiation and placing the property under contract. The challenge like always is in finding good deals. Majority of wholesalers learn to find distressed properties to wholesale to rehabbers. While this is ok, it provides major constraints on the wholesaler since such properties are not as common as people think. In reality, very few pure wholesalers last in the business because finding deals is the most difficult part. But the higher reward could make it feasible. I know a wholesaler who made $90,000 wholesale fee. But this is highly uncommon and should never be set as a goal.

A more realistic goal would be to land 4 to 6 deals a year for the average Real Estate Wholesaler.

If you are a wholesaler, you should:

1. If you are looking for distressed properties then you should look
   • Older neighborhoods since they have higher chances of requiring repairs
   • People with older mortgages. Newer mortgages would have had to pass inspection so they have lower chance of requiring high maintenance, not to mention they would not have enough equity to take a steep discount
   • Plan on buying at 60% minus rehab costs minus your fees. Yes, that can end up being 30-40% of the market value of the house. Like I said, it is not as easy as people make it seem
2. Do consider distressed sellers not just distressed properties. With the right marketing, you can find distressed sellers who has a house in good shape.
   • That means you can make much better offer to them and still make money. Offering them 70% of their market value has higher chance of acceptance than offering 30-40%
   • If the house is in good shape, you can place it under sub-2 contract. This opens more doors for you because now you can offer more. Your investor buyer may not need to get Hard Money loan so the 60-65% HML rule does not apply and closing costs are at minimum and since there are no repair costs, the investor can put in small amount to cover your fees and the repairs and selling costs
   • They are easier to find and in better sides of town, so finding buyers is easier
3. Get creative in structuring your fees. Road 2 Success out of Houston probably has the best coaching techniques when it comes to structuring fees and turning low profit into high profit. I don't want to get into too much details because it would take long time to cover, but basically:
4. Always, and I mean ALWAYS, make sure you are dealing with solid Real Estate Investor who can close on the deal or you will be losing money on lost deals
5. Don't set a 15 days closing on your contracts. I don't know why most wholesalers do. Set the closing date as far out as possible. This gives you time to find Investors, gives them time to close on the deal, and if the deal falls apart, try to take it back and give it to another Real Estate Investor
6. Always collect non-refundable fee up front that goes towards your fees at closing. The amount depends on your relationship with the investor. $1000 to 50% of the wholesale fees is acceptable
7. Always refund the Real Estate Investor if the seller backs away! I cannot emphasize this enough. A good Real Estate Investor is worth more than a $1000. If the seller backs away, try to keep a good relationship with the Investor and refund him the money. This way he can buy other contracts from you. You could always negotiate with him to keep some of the fee to cover your marketing and expenses fees. good investors should be ok with that since it is out of your control as well. Again, it goes down to the relationship
8. Build solid relationship with good Real Estate Investors. Attend local association meetings, call on ads and schedule meetings with Real Estate Investors to get to know them, and of course pre-screen them. Always remember most ads are by newbie Real Estate Investors
9. Establish a good relationship with a Title Company and make sure they do not frown upon Real Estate Contract Assignments otherwise you may lose the deal. Your Real Estate Investor Buyer may have a Title Company they work with as well

Conclusion

Wholesaling is a good profitable business, but again, finding deals is where the money is made. If the numbers are good, you can always find a buyer by running small ad in the paper. Try to build solid relationship with good investors to know what they look for and concentrate your budget and effort within the common criteria. You should become so good at it that it becomes ok to give up some cash to keep good relationships going. If you can only do 1 to 5 deals a year, chances are you will burn many bridges trying to make money out of all the effort you have done.

You should always consider wholesaling even if you are experienced Real Estate Investor. If you have a deal you do not want to do, try to wholesale it. If you cannot wholesale it, then try to bird dog it.

Real Estate Lease Options

Real Estate Lease Option technique deal with placing a property under a Lease with an Option to buy, then selling on a Lease with Option to sell. It is also called sandwich lease. I won't get into too much investing technique details since it is a large subject, but I will point out the pitfalls to watch out for.

The Promise

The promise is very simple. You convince the seller to lease you the property at same amount as their mortgage payment (or less with them covering the loss/difference) with the option to buy at the loan balance of at the time of the closing (lease payments will bring principle balance down). You then turn around and Lease Option the property to someone else and pocket the $3,000 to $5,000 option fee and they make the payments.

This is popular technique that is taught by coaches, some specialize in this subject alone

The Reality

What those coaches sometimes fail to mention is that they use Real Estate Lease Options as last resort and not as their main strategy. But again, and to be fair, you are an adult and should formulate your own investment strategy. What I have beef with however is that they tend to sugar coat it and not really say how it really is.

What you need to understand that the option fee you are going to collect from your Real Estate Lease Option Buyer needs to cover:

1. The cost of marketing and expenses you spent trying to find the deal
2. The cost of any repairs you must make before you can Lease Option it, and let me say, very few houses may not need some repair. Some will argue that you should option in it out in its as-is condition. While this may be true, you need to make sure it is feasible based on the house condition, the area, and possible buyers
3. The mortgage/Lease payments you have to make till you find someone to Lease Option to. If you end up making two lease payments of $1,000, $3,000 in repairs, and $1,000 in marketing and fees, how much money can you recover when you lease option it out?
4. Any repairs or damages that take place during the sub-leasing period that the buyer did not or cannot cover

You MUST keep in mind that:

1. Most those who you will sub-lease to will not be able to execute their option and buy the property from you. Where you make your money is by sub-leasing it again and again and again. So you need to consider the possibility of having to do the repairs all over again, marketing to find new buyers, and paying empty house payments until new buyer is found. Coaches makes it sound like a great thing when someone moves out because you can option it again for another $3,000 to $5,000 but that hardly is the case
2. Your sub-leaser may default on his/her lease payments. While you can evict them and take the property back, you may have to make your side of lease payments until you recover the property and go through the cycle all over again
3. SOME STATES HAVE LAWS against Lease Options. Texas is one of them. If you live in Texas, do NOT do lease options before discussing it with Real Estate Lawyer. Frankly, don't even do them at all. If you are in a different state, do check your state laws or discuss it with experienced investors
4. Structure the deal so you can walk away from it if you must

 Real Estate Land Lording

Becoming a Real Estate Land Lord is about long term investment, not immediate income. While some do rely at it as main source of income, it takes many properties (or doors) to make enough cash flow to live on. Some are verify successful at it, but majority do it as a side income and long term investment. The money is made by having the tenant pay down the principle on the mortgage and years down the road, you can either sell and cash in the equity or end up with free and clear house.

The Promise

The main promise behind land lording is that if you buy 10 houses now, then in 30 years you will end up with $1,000,000 in free and clear assets. This assumes average house value of $100,000. I have listened to who shall remain anonymous coach who also sells Land Lording software make the sales pitch that if you buy 10 houses, then you are worth a $1,000,000 and only in Real Estate can you mass a $1,000,000 so fast. I felt such a huge urge to stand up and explain to him and everyone else that No, what that means is that you got yourself into a $1,000,000 DEBT not NET WORTH. But, I didn't for the sake of the organization he was speaking for/to its members.

The Reality

The reality is little harsh. I say that because it is harsher than any other investment technique compared to the promise. When you are a Real Estate Landlord, you have unrecoverable expenses:

1. The cost of marketing and expenses to find the deal
2. The cost of fixing up the house to bring it up to living/rentable condition
3. The cost of finding tenants
4. The cost of repairs while the tenants live in the house
5. The cost of vacancies since tenants will leave
6. The cost of property management if you do not do it yourself and their fees

All these are costs out of your pocket that you will not recover when renting. It is best to consider it as a long term investment so you are putting your money on hold into the property. But that means you should have the money up front, not the Zero Down promise. Always assume you will have 1 to 2 months vacancy a year, and you will have monthly calls for repairs. Always assume someone will default on the payments.

To make money or break even, the rent must be few hundred dollars above the mortgage payment and expenses to cover vacancy and repairs.

Conclusion

Again, I am aware some make living money out of Real Estate Landlording. However, they tend to fix the toilets and fix the houses themselves. This is totally up to you. If you have full time job, you need to think about your expenses up front. Real Estate Land Lording, or buying and holding is where the money is long term. But you must do your homework as to the costs. 

 Real Estate Subject-To

Real Estate Subject-To, or Sub2 for short, is about buying a property subject to existing mortgage. It is really a buying/financing technique more so than investment technique but Real Estate coaches promote it as an investment technique which causes some to lose sight of money potential.

The Promise

You can buy properties with Zero Down and no having to get a loan from the bank by taking over payments. You can then turn around and sell the property at 105-120% of its market value with a 2-3 year balloon and $8,000-$20,000 down payment which is your up front profit.

The Reality

Sub2 investing is financing technique and should be considered in any form of Real Estate Investing. You avoid the expensive closing costs, and having to qualify for a loan from the bank. You can buy via Sub2 then do a lease option, rent, rehab and sell, or re-sell. So do not think you buy and sell on Sub2 alone.

Things to keep in mind:

1. Some sellers will need to have some moving money, so usually you should expect to pay $500-$5000 up front.
2. Some sellers will sell for what they owe, and not take any more, but you should make sure you don't push it and lose the deal specially if you know they will take $2000 for example
3. If they have lots of equity, you can always give them little up front and promissory note when your buyer refinance or get their own loan

Things to watch out for:

1. Most houses will need some repairs to be done on them, so even if you get it with no closing costs and no down payment to the seller, you may have repair costs. Some do sell the house as is, but if you do, you won't get good down payment
2. Houses don't really sell for 105-120% above market value. While this was possible during the boom and the crazy appreciation, it is no longer the case so try to buy low
3. People don't have big down payments. When buying, assume around $5,000 down payment and keep your up front costs low in case you cannot get bigger down payment and have to take less down payment. This way you keep your options open and you don't leave money in the deal
4. It will take some marketing to find buyers, so you will have marketing to sell and marketing to buy expenses
5. You will have to make payments on an empty house until you find a buyer, so don't let the low cost of buying fool you
6. Like Lease Option, and depending on your selling strategy, you will most likely get the house back over and over and over before someone do close on the house and cash you out so expect the house to come back to you. If selling on owner financing, this could mean having to make payments while people are in default.
7. SOME STATES HAVE LAWS against Sub2 dealings. Texas is one of them. Talk to Real Estate Attorney first, or check your state laws

Conclusion

Real Estate Subject-To investing is more of a financing technique that allows you to buy without taking a loan and avoid expensive closing costs. Once you buy, you can rent it out, lease option it, rehab it and sell it, sell on owner financing and so forth. But whatever your investment strategy is, do expect to encore some costs so buy right and minimize your up front costs.

 Always understand your exit strategy (what do you plan to do with the property) before buying, and always make sure if things go wrong, you can still get out of it without losing money. You will get this property back if selling or lease optioning, so plan accordingly.

Real Estate Rehabbing

Real Estate Rehabbing is when a Real Estate Investor buys a distressed property, fixes it up, then sells it for profit. The strategy is straight forward, but there are things to watch out for.

The Promise

The promise made by coaches, and expected by new Investors is that you buy the property, fix it up, then turn around and sell it making $20,000 profit. $20,000 comes in the picture again as the magic number for some reason. The idea is sold to many new Real Estate Investors is that you can rehab one or two houses a year and make more than you would working for someone all year long.

The Reality

There are way too many things to consider when rehabbing a house such as:

1. Contractors finishing the job on time and not causing more cost than planned.
2. Unforeseen expenses due to problems you run into after you start the project
3. Lenders requiring title seasoning of 3 to 6 months, meaning you must hold the property for 3 to 6 months before you can sell. That means mortgage payments on empty house
4. The cost of selling is overlooked by many investors and they do not calculate the cost of selling closing costs, commission to the Real Estate Agents, and empty house mortgage payments
5. Regular lenders won't lend on a rehab project, so you need to get Hard Money Loan or Private Loan. These loans tend to have high interest rate and balloon payments. Make sure the term is at minimum 1 year, and can be extended not to find yourself cornered. And yes, some will take that long to fix and sell not the 1 to 2 months fix and sell promise as seen on TV

After everything said and done, the $20,000 profit margin could be a loss. Make sure you understand that out of the spread between your loan and your selling price that you will pay:

1. High Interest on the loan so the monthly payments are a cost and the longer it takes to sell, the less money you make
2. You will have to pay Taxes on the profit you make, that comes out of your $20,000
3. Any overrun or unforeseen expenses comes out of your profit
4. Cost of selling comes out of your profit, this can be up to 13% of the sale price
5. Market may turn while you are in the middle of the rehab

Conclusion

Real Estate Rehabbing is good strategy for faster income, but it is not as lucrative as new Real Estate Investors think. Coaches talk about Gross Profit, which is the difference between buying and selling but not all the overall costs. The Net Profit is much less than they disclose because people may be discouraged to get into it

 

 

 

 

 

 

 

 

 

 

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© 2009 Fadi Zeidan's Articles.