The short sale, like the subject-to purchase, is yet another way for a savvy investor to purchase a home with very little money.  While subject-to allows you to simply take over payments of the property’s existing financial structure (mortgages), short sales allow you to purchase a property well below market value without having to take out a mortgage at all.  Here is what happens: an owner cannot make the mortgage payments on his house, and the bank is facing the possibility of having to foreclose the property to collect their money; foreclosure means big fees for the bank and terrible credit for the owner, so both parties agree to sell the home, even though the proceeds from the sale may not cover the outstanding balance of the loan.  These short sales happen because the bank decides that the loss they will suffer by selling the house cheap will be less than the loss they would suffer during foreclosure—plus they get the money now.  A start-up investor with little principal (or any smart investor) will know how to find short sale opportunities and negotiate for the purchase of a property well below its market value.

If you are involved as an investor in a short sale (and if you’re involved, let’s hope that’s your role!), don’t be surprised if you are the only satisfied party walking away from the deal.  Both the bank and the homeowner are facing a difficult scenario, and the investor merely swoops in to capitalize on the situation.  From the owner’s perspective, he is losing his home, but mitigating the damage to his credit caused by owning a home and mortgage he can’t afford.  The bank minimizes its losses by avoiding foreclosure or continuing to not receive monthly payments, but they are still taking a major loss on the value of the property.  While neither party will be happy, both will consent because it is simply the most prudent economic choice.

Enter the investor, who provides the bank with some of the money they need to cover the cost of their defaulted mortgage, and who provides the home-owner with a way out of his sticky and expensive situation.  If you can time it right by finding a pre-foreclosed home, you can intervene to purchase the home at an enormous discount (even more than if you waited for the foreclosure auction).  The beauty of this is, while foreclosure auctions are highly competitive and therefore relatively expensive, the short sale market remains largely either undiscovered or unsolved.  If you can find pre-foreclosures, you will not face an overwhelming amount of competition standing in your way to buy.  Not to mention, the selling parties will be very motivated.  It all adds up to a huge discount for you, which you can turn into profit by renting, reselling, or whatever other means suits you.

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One of the most frustrating elements of being a real estate professional is reading between the lines to determine the nature of a person’s intentions.  This is true at every level of the game—you have to investigate 100 leads before you find one good one, you have to go through 20 deals before you close one, and you have to schedule 50 open house appointments before you find a qualified tenant.  Understanding one universal behavioral trend of people will save an enormous amount of time, money, and frustration when dealing with this last category: people only show up about half the time.

This means, for any given property and no matter how many appointments you set up to show that property, only about 50% of those appointments will actually be met.  While it is up to the owner how he wants to show the property, there are a few considerations which should be made in nearly all cases, with this trend in mind.

The first is, never hold an open house.  This is not to say you can’t invite 100 people to look at the house at the same time—just never call it a come-one, come-all “open house”.  No one shows up to an open house, because it is too impersonal, and potential buyers/renters fear the competition.  Invite every potential buyer/tenant by personal appointment, even if you end up inviting 20 people to the same time slot.  After all, the 50% rule states that only 10 people will show up anyway.

Never, never set an appointment time for just one person.  Half the time, no one will show up, and you will end up wasting your time and money waiting for nobody at an empty house that you already own.  There is nothing wrong with showing a property to five different parties simultaneously; if you get used to operating this way, then get used to having more free time and money because of it.

If you want to go one step further in saving time and money, consider using a lock box to show the home (only if the home is in a nice neighborhood where you feel comfortable with the population of potential buyers/renters).  Basically, a qualified tenant will inquire to see the property, you will provide the code to a lock box, and they will retrieve the house key from that lockbox to show themselves the property.  Obviously, this requires trust, but it bears the potential to close a deal without the owner having to show up at all.

These are just a few strategies for showing properties, among the myriad that are out there.  When choosing a strategy, remember to “look out for #1”; that is, don’t be the victim of a potential tenant’s indecisiveness or deceit.  Preserve your interests, schedule numerous appointments at the same time, and understand going into the process that only about half of the people you deal with will show up when they are supposed to.

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Short sales occur when home-owners default on their mortgage, and the bank and the owner consent to sell the home at a discounted price, even though the outstanding balance of the mortgage may exceed the proceeds of the sale.  Although the bank takes a loss and the owner is out of a home, the discounted sale is better for both parties than the financial ramifications of foreclosure.  Here are some reasons why every investor should at the very least know about, and probably should explore, short sale investing.

First of all, short sales are recession proof.  Actually, short sale opportunities are at their greatest when the economy is its worst, because so many people are unable to pay their mortgages and desperate to avoid foreclosure.

You can purchase a short sale home with very little cash and absolutely no credit, which means investors at every level of the game have an opportunity to get involved in short sales.  While the investor with no money can finance his investment with a mortgage, it is probably more prudent to find the short sale and line up a retail buyer to flip the home at its market value.  That way, you are just middle-manning with someone else’s money, and then taking a nice cut for yourself.

Additionally, short sale investing usually requires very little marketing (which should also appeal to the start-up investor).  In today’s economy, there is no shortage of people who are behind on their mortgage payments.  You are bound to know someone who knows someone who would be a good short sale candidate.  If you are having trouble spotting pre-foreclosures, just go to a realtor and ask your realtor to show you the active listings—pre-foreclosures account for quite a few of them these days.

As if you needed more reasons to invest in short sales, consider that everybody involved wins (you can’t say that about very many transactions involving debts and foreclosures).  While they may not be happy about it, the bank avoids the expensive foreclosure process, the debtor avoids having the foreclosure on his would-be crippled credit history, the realtors take a commission, and the investor—you—walks away with a discount and an opportunity to profit.  Everybody wins.

Although there is a lot of money to be made in short sale investing, you have to be careful in navigating your negotiations with both the seller and the bank.  They will probably not be on the same page, and you may very well find yourself negotiating back and forth between them.  It is important, especially for new investors, to find someone—an agent, a realtor, a mentor investor—who has experience with short sales.  Walking in educated but inexperienced often results in deals that take months to close, if they ever close at all.

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Wholesale in real estate usually refers to the cheap sale of “junker” homes to rehabbers looking to fix and flip those homes.  Pretty house wholesale is the same basic principle applied to much nicer properties.  Obviously, you cannot just go out in the market and buy a great property, and then turn around and sell it at a discount (you would be broke in your first day on the job).  However, the subject-to market does provide a way to do this without risking too much (if any) of your own money, and none of your own credit.

Purchasing a home subject to its existing financial structure is arguably the best way to buy any property.  As stated above, it requires very little money, and absolutely no credit (since the financing remains in the name of the original owner).  However, one thing a subject-to purchase must include in order to be profitable is equity for profit on the back end, and some monthly cash flow.  Often, an investor will get excited after having found a potential subject-to deal, but will then be disappointed to discover a lack of equity or cash flow attached to the property.  Most of the time, the investor will simply walk away.

Instead of dropping the deal altogether, consider pretty house wholesale for subject-to purchases which lack enough equity or cash flow.  This basically puts you in position as a middle-man.  You purchase the home from the defaulting owner, and then find a retailer purchaser who you can entice to buy the home using none of their own credit.  It is not easy to get a seller to come on board with this idea, because although they are probably desperate to be out of the home and away from the mortgage payments, wholesaling provides no guarantee that the new owner will continue to make mortgage payments (as opposed to subject-to purchases, where that condition is agreed upon).  Instead, you will probably have to convince the seller that the buyer you find will have been very carefully screened for credit and payment history, and you can personally guarantee that they will make the payments.

Once the seller agrees, you must quickly find a new buyer (which should not be difficult, considering they are purchasing a subject-to home, not as a business endeavor, but to live in).  This requires no credit on the part of the new buyer, and most likely it will require very little money down.  This is where the pretty house wholesaler (you) stands to make a profit: you are relieving a desperate home-owner from crippling debt (i.e. getting a nice home very cheap), and selling that nice home back at a great deal to a retail buyer of normal demand.  Somewhere in that process, the investor can work his own profit into the equation.  This profit, which can be enormous, will almost invariably be better than having passed on the original no-equity, subject-to purchase.

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These are both perfectly viable ways to purchase a house with no new loans and very little money down, but in today’s market, a sub-2 purchase is simply the better way to go.  Lease options are essentially rental agreements, where the renter purchases the option to buy the house at some future date at an agreed-upon price.  The seller is compensated for providing the option to buy, and he is bound to sell the home if the buyer chooses to exercise the option.  A sub-2, on the other hand, means the buyer assumes the mortgage payments of a motivated seller, which can be done with little or even no principal investment (if you find the right seller!).  Both strategies will result in your owning a house—one provides some flexibility at a cost; the other gets you a free mortgage.

Obviously, lease options should be reserved for buyers either who don’t currently have the money to buy a house, but plan to in the near future; or who are not yet sure whether or not they want to buy, as opposed to rent.  You are going to end up spending the market rent while you stay there, and paying extra for the looming option to eventually buy the home—it can end up being very expensive if not negotiated carefully.

As an alternative, the investor who has little capital (or any investor, for that matter) should always consider sub-2’s, which allow you to buy a house for little or no money down, without taking a new loan, and without affecting your credit in the slightest way.  As a buyer, you agree to take over the burden of paying the original owner’s mortgage (or other housing loan) payments, even though the financial structures remain in the original owner’s name and credit.  If you are a savvy investor, you’ll find a motivated enough seller under enough pressure from the bank, who will not charge an additional rate beyond the mortgage.  If he’s smart, he’ll want to stay on good terms with you, since his credit is in your hands.  The bottom line is, you own a house, you’ve spent nothing but a monthly mortgage payment, and your credit is untouched.

Most investors shy away from sub-2’s that they know will negative cash flow.  Smart move.  However, there are ways to navigate and correct small imbalances in cash flow, so that you don’t have to waste the opportunity to own a perfectly good house with very little money.  If you’re planning to rent the home, and you know that the market rental rate is $200 less than the monthly mortgage payment, rather than walking away you can simply charge the seller a monthly rate of $200 plus whatever monthly profit you want to earn from the property (say an additional $200).  How?  Simple.  Do the research in advance so that you know going into negotiations that this is what you need for the property to cash flow, and simply make the seller’s monthly payment directly to you a condition of the sub-2 purchase.  If you’re a reasonably good negotiator, you should be able to make a motivated seller realize that a $400 monthly check to you is better than a $2,000 monthly check to the bank.  That way, even in the worst case event that the seller stops paying your monthly checks, just let the house go to foreclosure under his credit (include that in the contract as well).

Although lease options provide the buyer some flexibility as to whether he wants to buy or rent a home, it can result in an even more expensive transaction than simply renting or buying the home outright.  Sub-2’s, on the other hand, give you ownership of the home (and all the benefits and tax deductions that go along with that), require no credit or loans, and take very little cash out of your pocket.

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Being a landlord is difficult—like all businesses where collecting money from people is part of the job description.  But, in order to be successful as a business, landlords need to cover their own costs and earn a profit every month.  This means, with perennially-increasing insurance, tax, and housing association rates, a landlord must periodically increase the rental rate to maintain the profit margin he has established (that’s business).  But how do you hike up the cost of living every year for your tenants without driving them off and having to search for more (absorbing the cost of rent in the meantime)?  Here is a simple strategy for doing just that.

First of all, it helps to have a history of being a friendly and reasonable landlord.  It should go without saying that this strategy is less likely to work if your tenants hate you from the onset.

The best way to approach a tenant is with sincerity and transparency (or at the very least, it should appear that way), in the form of a written letter.  If it’s not too far from the truth, be sure to express what a pleasure it is to have them as a tenant—how they are pleasant, pay on-time, etc.  While your letter doesn’t have to tell them everything about your business and its expenses/earning, it often makes the tenant feel included in the process if you share some of your struggles.  In your letter, which should be sent to your tenants a couple of months before the rental increase is to take effect, you should candidly explain that increasing costs have forced a corresponding increase in rental rates.

What’s stated above is an oversimplification.  Without lying, you want to overstate the increased expenses, while understating the increased rent.  In other words, make sure the letter includes whatever increases you face (sometimes it’s helpful to include things like the actual HOA dues, which may be $250/month, or the fact that insurance went up by 5%).  Then, mention to the tenant that the good news is the monthly rent will only be increasing by whatever amount you choose, say $40/month.  You can explain that the rental increase does not fully cover all of your new expenses, but you are willing to absorb the blow as a trade-off to maintain this particular tenant.  If your letter makes them feel as though they are wanted, and that you are working to keep them there as opposed to making a quick buck before driving them out, then your tenants will be much less likely to gripe about the hike in rental rates.

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One of the most stressful elements of property management is dealing with difficult tenants.  Between killing cash flow with late rental payments, and causing financial nightmares with damage—heaven forbid you have to go through an eviction—bad tenants can sink a small business.  What most people don’t realize is that the vast majority of tenant-related problems can be eliminated by simply avoiding bad tenants altogether with thorough screening.  Here are a few tips to improve your screening process.

Obviously, the most essential piece of the screening process is the application.  Provide a thorough application that includes all the pertinent information about the potential tenant.  Make sure that the application is completely filled out, and that you have a copy of the applicant’s valid driver’s license or other official identification, and check that the name and information on the ID matches that on the application.

Next, you’ll have to investigate the applicant’s financials.  Request the past three months’ pay stubs to be sure they can afford your rent—standard operating procedure.  Call the applicant’s employer to verify that they work there, that there are no problems related to the applicant, and that there’s no reason to believe the applicant will be unemployed in the near future.  Also, request their three most recent bank statements.  While this is not always required, the applicant should be willing to provide them; if not, then you have a pretty good reason to be wary.  It is also important to check the applicant’s credit and criminal history.  A credit score above 600 is usually considered reasonable for a tenant, and you want to steer clear of anyone with a history of evictions or criminal behavior.

On the application, make sure you include a space for the applicant to provide information about previous rental engagements.  Landlord contact information, rental amount, etc.  This is important so that you can call the previous landlords to inquire about the tenant.  Use caution when dealing with contacts, as many applicant’s just use their friends to pose as landlords and vouch for them.  One good method of weeding these applicants out is to ask the “landlord” about the rent, quoting a price other than that provided by the applicant.  If the person you are speaking to doesn’t correct you, then they were probably not the landlord.

If you adhere to these methods responsibly, selecting quality tenants for your properties should not be a problem. Simple things like providing a driver’s license alone can eliminate an enormous number of potential bad tenants.  Use common sense, and think about who you want living in your space.

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Here are four things to keep in mind when entering into business as a landlord.  If maintained conscientiously, these four tips will ensure that your relationships with tenants are healthy, that you receive payments on-time and in-full, and that you are protected legally and financially.

First, make sure you have a good written lease contract.  There is no shortage of sample leasing contracts on the internet, so there is no reason not to have a good and thorough one.  Having a written contract is essential for having both you and the tenant operating on the same page, for having documented evidence of the transaction, and for preventing minor misunderstandings from developing into major legal or financial hassles.  Lawsuits and other official proceedings are always, always made simpler by having a good, clear contract to refer to.

It goes hand-in-hand with having a good lease contract, but it is a separate process and skill set: know the law.  Research the state laws as they apply to you and tenancies in that state.  Although it may feel like a waste of time and energy to be familiar with the law when you pay an attorney to do just that, it only takes one scenario when your knowledge of the law keeps you out of trouble to make it worth your while.  No one wants to be in trouble with the law, but it is even worse to get yourself into trouble without realizing it.

Be firm.  Although it’s important to always be friendly and fair (how else would you attract and maintain tenants?), you can’t allow yourself to be overrun and taken advantage of by your tenants.  Demand on-time payments of the rent, and charge late fees if they don’t.  Make it very clear that failure to pay or mistreatment of property will result in immediate eviction.  That being said, don’t issue preferential treatment to anybody—give all your tenants the same treatment and living conditions.

Finally, be present, engaged, and visible.  This means not only calling or emailing to check in, but actually showing up in person to see how things are or to simply say hello.  Obviously, this becomes more of a challenge for landlords who manage several properties spread over a large geographic area, but make it a point to visit your properties and their tenants when you are nearby.  Your tenants will recognize your engagement and commitment with respect and gratitude, and this will result in healthier relationships moving forward and an excellent reputation for you as a landlord.

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There are countless people looking to launch a new career in real estate investment, and most of them don’t have the first clue as to how they need to start in order to be effective.  For those that intend to be serious career investors, and not those looking to just get rich quick, there are three basic elements which must be addressed before any actual investments can or should be made: education, infrastructure, and marketing.

Education is a simple, but time-intensive step every new investor needs to take.  Read every book you can find about real estate investment, every article on the internet (written by legitimate authors with proven investment records), and consider purchasing a course if you can afford it.  Whatever your approach, remember that you cannot possibly research too much before getting involved in real estate; the more you know about a given market, the better you can maximize your opportunity to profit from that market.  Further, don’t make the mistake made by so many new investors of reading two books and thinking you know everything about investing; always be receptive to new lessons from reliable sources—you never know which tip could earn you $100,000 in profits.  Do the research, pick the specific market you’re interested in, and never stop reading.

After you’ve educated yourself some on the industry, and have determined that this is still the career for you, start working on your new investment business’ infrastructure.  This means forming a limited liability corporation (LLC), creating a website, acquiring a business phone line, and ordering business cards.  If you set these facilities up in advance, they will prove very valuable when it comes time to cultivate relationships and find good deals.

Finally, the most important preparatory step will also become the most important part of your business to sustain moving forward: marketing.  Marketing is buying ad space, acquiring mailing lists, making endless phone calls and emails, putting up bandit signs, etc.  Marketing is a never-ending task, and the more you do it, the more potential deals you will have coming in to evaluate.  With the education behind you and the infrastructure of your business in place, now you can focus 100% on marketing your investment business, and wait for the deals to roll in.

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Since the same basic principles of cash flow apply to nearly every facet of real estate investment, it can sometimes be difficult for investors to select a market.  Many investors assume that the big money is in the big, expensive homes; in fact, long-term reliable cash flow is much easier to generate from low-end houses, for a number of reasons.

First of all, “low-end” does not mean you need to go out into the slums of the nearest major city and buy the cheapest, most dilapidated property you can find.  You are still going to be the owner of this property, so you’ll need to select something reasonable, marketable, inexpensive, and in a good neighborhood.  In other words, you need to find a buyer’s market, like a housing association neighborhood with good-but-inexpensive start-up homes for young families.  It’s called suburbia, people, and there’s no shortage of it.

The biggest advantage of low-end houses is that they are very common—every town and city in every state has plenty.  More importantly, because there are just so many homes out there, there is also no shortage of home-owners in financial distress (be it due to liens, mortgages, back-taxes, etc.)—especially during a recession.  The sheer numbers suggest that the savvy investor should not have much of a problem finding at least a few good discounted deals on low-end homes at any given time.  What’s more, the relatively inexpensive nature of these investments means you can begin work on a portfolio, collecting homes to generate multiple revenue streams.

For the investor who has a bit of capital to work with, these start-up houses provide a unique opportunity to make huge profits off the sale of the home.  This is based on the notion that you purchase a home in a buyer’s market, which either means high demand and competitive offers on your home, or the opportunity to sell the home on payment contract (which will earn you even more profit).  If you can afford to float the home loans to the buyer you line up, then you can sell the home at a 10-15% premium based on a structured payment contract over the course of however many years you decide.  For those who can afford the principal investment, this is a great way to go.

Another major advantage is that these homes can often be purchased at deep discounts due to the owner’s aforementioned financial stress.  Whether through short sale, foreclosure auction, or some other means of acquiring homes below the market value, these low-end homes can typically be purchased between $5,000-$40,000 (if negotiated skillfully); they can then be resold at the market rate, or rented for $400-$600/month for an excellent return of monthly cash flow and yearly profits.

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