Prosper Newsletter: September 2007 > Real Estate

You understand that the following information is educational in nature and is not intended to be legal, accounting, or tax advice. You are responsible for your own financial decisions and should consult your own legal, accounting, and tax advisors before making your financial decisions.

Screening Properties

When screening properties, you are looking for motivated, flexible sellers who have property that meets your predetermined criteria. There are several ways to make money in real estate investing and your strategy will depend on what you are looking for in a real estate property. Keep in mind that you don't find deals; you create deals by finding motivated and flexible sellers, and by making effective offers.

Motivated Sellers

A motivated seller is someone who is desperate. They have a specific need to sell a property whether it is a recent divorce, a job transfer, or the loss of a job. The key is that the seller needs to sell the property very quickly.

With that, make it a habit of interviewing the seller. Once you think you have found a motivated seller, interview them to find out if you can help out with the situation they are facing. Take the time to find out exactly what situation the seller is facing. If you can't help the seller, let them know and look for another lead.

For example, a woman was selling some property that she had used for years as a rental to raise the money to bail her son out of jail. She needed a total of $4,000 for his bail. Several investors made fairly decent offers on the property, but they were only going to give the woman $1,000 or $2,000 down. She refused the offers. Another investor took the time to find out what was going on in the life of this woman. The investor offered her $4,000 down and set it up as earnest money. The offer was $10,000 less than the rest of the investors. Yet, since the woman was getting the $4,000 immediately, she accepted the offer.

This woman was a motivated seller. She needed money to bail her son out of jail. Once the investor took the time to help her out with her situation, she let him have her house for much less than other investors offered.

Finding Motivated Sellers

Now that you know what a motivated seller is, you are ready to go find them. There are many ways to look for motivated sellers. When you find advertising for real estate, there are keywords you can look for that may signal a motivated seller. Oftentimes, the following words in ads, signal motivated sellers:

While there are many other keywords, these are just a few of the most common to look for when searching the classifieds. Once you find ads that may signal a motivated seller, you can make contact. A good question to ask is what they will do if they don't sell the house. Some sellers may have a backup plan, while others might tell you that the bank will take the house if they can't sell. Pursue both, but put a higher priority on the one without a backup plan. In situations like this, you have a higher chance of getting the property for less money more quickly.

Consider Your Plans For the Property

If you want to rent out the property for a specific period of time, you will want to choose a home in an area that isn't too pricey or too inexpensive. If you pick a home that is in an expensive neighborhood, you will end up having to charge a large amount for monthly rent just to keep up with expenses. In that scenario, it would be a better choice to resell that property than renting it. If you decide to rent a home in a lower income neighborhood, you might end up with tenants who are unable to pay rent on time, or even pay at all. You might also get a higher turnaround of tenants. Therefore, the best places to rent would be middle-income neighborhoods. Places where you can rent a home on the corner of a street in a neighborhood where most people own their own home is ideal.

That said, look for a house in the neighborhood that is different than all the others. You want the two-bedroom, one-bath home surrounded by three-bedroom, two-bath homes. Then, after you complete your renovation and your house is now a three-bedroom, two-bath home, its value will rise to match the worth of the homes that surround it rather than being the most expensive house on the block.

Screening Properties

You are now ready to look for properties that fit into your investment strategy. There are three factors that help you screen properties. These factors include the following:

These three factors are important to remember when looking to invest in properties. We recently talked about learning the market in a previous newsletter. Once you understand the market that you are working in, you will be better able to determine the types of properties that you will want to look into and research.

Typically, you will want to focus on properties that are in high demand. This will vary between states and regions, but is important to know. After you have done your market research, you should make a list of the types of properties that are in high demand so that you can focus on these particular properties. As a general rule, you will have success if you find:

When you find a property that you think may be worth pursuing, start by asking questions about the house. You want to ask questions about when it was built, size of the lot, the number of bathrooms it has, or the size of the garage. By doing this, you are encouraging the seller to open up to you, and it allows you to begin asking the more important questions. This also reveals any areas that you may want to avoid. For example, oftentimes A-frame houses are not customary in many areas. Therefore, you may not want to deal with them as they could take longer to sell.

Once you have a list of properties you will be able to get an idea of how much a house is worth in a given area. You will then be able to know what a good price is for a given property.

Again, your plans for the property will likely determine the amount that you will want to offer. If you are flipping or wholesaling a property, the offer you make may be less than if you are planning on purchasing the property as a rental.

When talking to the seller, ask questions about how they came up with the price for their home, what repairs are needed, and the best price they could offer if you could have cash in two weeks. The focus of these questions is to find out if they are motivated and flexible.

With that, you will want them to drop their price by $10,000 or more (depending on your area). If they do not come down this far, ask if they are sure that is their best price. If that is still the lowest they will go, this tells you that they are probably not very flexible on price and that the house may not be worth pursuing.

If they are flexible on price and terms, they may be worth pursuing. If they are flexible, ask about financing. What is their mortgage balance, the monthly payment, do they have more than one mortgage, and are they current on their payments? This is important information to know. If they are delinquent on payment, you want to know their reinstatement amount. This is the amount required by the lender to reinstate the loan. You will also want to ask if they are near foreclosure, as this will require you to move more quickly.

The seller may ask why you need to know this information. If they do ask, simply tell them your lender needs to know so that they can tell you all the loan programs and financing options. The information will then help you buy quickly and give the seller what they need out of the sale. If they still resist, you may find that they may not be a very motivated seller and consider investigating another property.

The third factor to consider is location. This will also vary depending on the market you are investing in and what you plan to do with the property. If you plan on flipping or wholesaling a property, it is usually best to look for properties in lower income areas. If you are looking for a property to use as a rental, generally you will find better tenants if you purchase middle-class homes.

Testimonial

"We have purchased our first property to flip and it feels great. My wife Vicki and I have been very interested in Real Estate investing for quite some time now. We have read books listened to seminars and looked at properties but had never taken it any farther because we were worried about the risk. After attending the wealth expo in Toronto we decided to sign up for a personal coach with The Learning Annex. Our coach is fantastic. He has given us the confidence to go out and really begin Real Estate investing. He has really simplified things for us and given us the added knowledge that we needed as well as reinforced the important things that we already understood. With his guidance we were able to learn how to easily find and target strong areas in our market for resale and rentals, evaluate properties, build a strong power team around us, understand the offer process and understand the purchase agreements and safety nets that we can use, as well as many options that we can use to make our property profitable even if something happens (such as if the market drops and we didn't foresee it).

We are in a very aggressive market where property is selling well above the asking prices and the average days on the market are under 18. With coaching we have found our first property which we have purchased for $92,000. We will be adding a detached garage, finishing the basement, cleaning the upstairs and the floors and re-doing the kitchen for a cost of $25,000. We are confident that we will be able to sell the property for $150,000 plus, for an expected profit of $20,000. We will be doing very minimal work ourselves as we are now seeing deals pop up all over and we want to spend our time finding creative ways to get some more deals under contract. With our new knowledge and the support from our coach and The Learning Annex resource line we plan on flipping one property per month over the next year as well as adding six rental properties to our portfolio. We are expecting our first child at the end of August and we are very excited at where are lives are heading. Thank you very much from both of us for all your help, motivation and guidance."

Sincerely,

Darren & Vicki P.
Beausejour, CAN


Tip of the Month

Utilizing real estate agents effectively

While you may not need a real estate agent for every deal, they should be a valuable part of your team. Be prepared, and do your homework, before you contact a real estate agent you are considering including as part of your team. Demonstrate to them that you have put some thought into your business and are fully dedicated to being a successful investor. Think about various strategies you are interested in, consider different market areas you are thinking about targeting, and research into your financing alternatives. Showing an agent that you are serious about investing will increase their desire to work for you and do a good job. Your agent will not get paid until you close a deal, so the closer you are to making offers and doing deals the more excited an agent will be to begin work. Do not sign an exclusivity agreement with any one agent, but rather work with a few different agents. The most valuable service an agent can perform for an investor is finding deals and the more agents you have looking for deals for you the better.

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