Many investors are scared away from investing in real estate because of the sensational news stories that depict crying homeowners in front of their foreclosed homes and heated discussions about plummeting house prices, making it seem as though the real estate doomsday will never end. Although, yes, housing prices have declined, and yes, the number of foreclosures has risen, there are still opportunities in real estate to make money.

Signs indicate that the economy is stabilizing; unemployment is slowly starting to improve, and depending on what city you are in, fewer people are defaulting on loans than in 2008.  Although the economy is still slow and many people are still unemployed, growth is starting to pick up.  Slowly but steadily we are coming out of the recession, and there are ways to capitalize on this trend.

A great opportunity to sell a home in this market is through a lease- option contract.  This entails two separate contracts.  The first contract is the option contract which usually requires a non-refundable fee minimum of 3-5% of the purchase price of the property.  I usually require at least 5% of the purchase price of the home.  In my opinion, the more the resident can put down, the better. The option agreement allows the resident the exclusive right to purchase the property at a specified price within a specified time frame. The option fee is credited towards the purchase price of the home, but if the resident does not or cannot exercise their option within the specified time frame, the resident forfeits the option fee.

The second contract is a standard lease agreement for the same specified time frame as the option agreement.  The ability to exercise the option agreement is contingent upon the resident fulfilling all of the duties of the lease agreement- mainly paying rent on time and maintaining the property. Maintenance of the property is the responsibility of the resident and at their expense.

Any time during the option period, the resident has the exclusive right to purchase the home.  This approach allows the resident a specific time frame to clean up any issues preventing them from securing a bank loan, but still providing them the opportunity to secure the home they wish to purchase.

There are many nuances and variations of the lease-option approach. There are also potential pitfalls for both the resident and the investor that are beyond the scope of this post.  But if executed with specific metrics and standards in place, this strategy can provide a tremendous win-win for both parties involved.

This is a great approach for people who have tarnished credit due to job loss, bankruptcy, or a foreclosure who are now getting back on track and starting to show a positive history. This approach allows the resident to get into a home ownership position and provides the investor cash flow each month, with what I call, chunks of cash at the end.  A true win-win for both in my opinion.

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Based out of Indiana, Jay Redding is a real estate entrepreneur, consultant and educator with experience in residential and commercial investing.

After such a tumultuous few years in both the real estate community and the national economy as a whole, it is no simple task to predict the major upcoming trends in 2011.  Five minutes spent flipping through the news channels or a few different newspapers will readily reveal that the experts disagree; myriad opinions, explanations, observations, and predictions are all being applied to the same phenomena (so although it’s possible no one is right, someone must be wrong!).  While there is no way to be certain of what to expect this year, there are a few indicators that paint a picture of turning trends and rising values.

Although it is a relatively subjective figure, one of the most indicative parameters used to evaluate the real estate market is consumer confidence.  In general terms, administrative and financial affairs act more slowly than the human emotional response, and so determining the way people feel about real estate can be an effective way of evaluating what is immediately upcoming in the market.  For obvious reasons, consumer confidence has been in the grave for the last few years.  However, in the final quarter of 2010, numerous sources report confidence rising from 45.0% (Sep.) to 49.9% (Oct.) to 54.1% (Nov.), and a corresponding 5% increase in retail property sales during the period from November to December.  When the consumer feels good, business flourishes.  These trends indicate that 2011 will see a continued recovery of consumer confidence in the real estate market, and a subsequent strengthening of the market itself.

Although mortgage rates are already on the rise, the almost-free-interest ride is not over just yet.  Because the unemployment rate is still so high, the Federal Reserve cannot afford to dramatically increase mortgage and interest rates just yet.  By the end of 2011, rates will probably exceed 5%; but it will be a slow road getting there, and the real estate community should continue to take advantage of historically low rates.

Finally, 2011 may be the year that home prices finally begin to rise again.  Although many experts predict otherwise, it seems to be a primary priority of the federal government to reduce unemployment and allow people to return to their middle-class lifestyles of a decade ago.  Between the American Recovery and Reinvestment Act (APRA) and other lesser efforts, new jobs are pouring into the economy, putting money into the pockets of the formerly-unemployed.  More jobs and more money means more homeowners, which is just what this slumping real estate market needs to stimulate demand and restore prices to a reasonable value.  The end of low prices does not necessarily mean the end of investor opportunities; interest, mortgage, and financing rates remain incredibly low, and so the cost of investment, living, ownership, and transaction is still fundamentally affordable.  2011 will continue to be a good year for investors, but it will see the first signs of the restoration of the balance that characterizes better economic times.

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Finding success in the arena of real estate investment involves consistently making good judgment calls.  Learning to do this by habit requires the same foundation as any other skill: preparation and practice.  Unfortunately, the transaction process for a property involves too many decisions to cover in one short article—from acquiring customers, to selecting properties, to gathering funding, to negotiating contracts, to closing deals—and so only one aspect of purchasing property is discussed here: the “Go/No Go” decision.

Being a successful investor does not necessarily mean doing as many deals as possible; in real estate perhaps more than anywhere else, quality far outweighs quantity.  As many investors are ruined by closing deals that ultimately result in money lost, as are ruined by not doing enough deals to sustain a business.  The Go/No Go decision centers around knowing when a deal is not worth doing—even if you know you can close.  This is not one of those decisions that should be made on instinct alone; rather, knowing when to walk away from a bad deal is a function of thorough preparation.

Walking into any property or potential deal, a good investor already has all the numbers worked out: how much the property can earn, the cost required to alter the property as required, financing costs of purchase and ownership, etc.  The list of financial considerations could go on for a mile, and varies for each property.  The more of these considerations are made in advance, the more informed (and therefore prepared) the investor is to evaluate a contract or negotiating point.

After a thorough evaluation of both the financial matters and the property itself (by walk-through, reports, and professional inspection), it is essential that the investor enter negotiations with three numbers clearly in mind: the ideal price, the expected price, and the walk-away price.  The essence of the Go/No Go is adhering strictly to the pre-determined walk away price, which is the highest price the investor feels will still be profitable and a deal worth doing (or the lowest price, if selling).  If negotiations bring the price even one dollar beyond that value, a smart investor picks up and walks away.  There will never be an all-out shortage of properties available in any market, and so it is important that investors not adopt the attitude that this deal is their last opportunity to make a living.

Decision-making is the most prominent facet of real estate investment, and it follows that success is the result of good decisions.  The single most expensive bad decision an investor can make is to invest money in a lost cause, or a costly enterprise.  Without the proper experience or advice, and more importantly without proper and thorough preparation, this is a fatal error that is all-too-easy to commit.  Preparation is key: know the numbers, and set your limits.  Profitability is the result of remaining within the range determined in advance to be a safe investment.

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Based out of Indiana, Jay Redding is a real estate entrepreneur, consultant and educator with experience in residential and commercial investing.

Flipping properties, or turning them over quickly with or without renovations, appeals to investors who want to realize their profits without delay.  The concept of flipping is simple to understand at first glance:  get a property under contract or buy a property cheaper than you sell it, including the cost of renovations. It may sound easy and straightforward, but each of these steps can be complicated and there are key things you should know before you use this real estate technique.

If the property you are interested in is an REO (real estate owned), or in other words owned by a bank, then there are certain rules that may apply.  If the property is owned by Fannie Mae, Freddie Mac or HUD, there will most likely be deed restrictions, forbidding the property to be sold for greater than 10% of it’s purchased value within 90 days of it’s purchase date or a restriction of the deed being transferred within 90 days of purchase. Some of these rules may be changing, but as of this writing, that is how it stands.   Although there are still techniques to get around these restrictions, they are way beyond the scope of this post and not for beginning investors.  For the beginner, properties like these, although sometimes quite undervalued in a market, are not ideal for wholesaling.  In wholesaling, the objective is to pass the property off of your hands as quickly as possible before there are any ongoing costs to owning or controlling the property (like the mortgage).  With the 90-day restriction, the profits you can make from wholesaling REOs are very limited without using advanced techniques.

However, REO properties do make great candidates for rehabs.  Renovations generally take anywhere from four to eight  weeks, so by the time renovations are completed, the deed restrictions are very close to the end of their limitations. The only limit to the sale price then is what the buyer will pay.  In addition, you have demonstrated increased value by the renovations completed forcing the value of the property upward. When dealing with REO’s, make sure to get a reputable home inspector to inspect the home, chances are the former owners did not maintain the upkeep of the property.  Furthermore, if the house has been vacant for some time, many items may have fallen into disrepair.

Another key consideration when dealing with quick turnover is that your profits are VERY dependent on the initial price you pay for the house.  Before negotiating with a bank or other seller, work the numbers to determine the absolute amount you would spend to purchase.  During the negotiations, do not let the seller pressure you into spending more than that number.  It will eat into your profits and may make the ordeal not worth your time.  If you cannot get the house at a price that makes sense to you, walk away.  If you’ve accurately run your numbers, then the unfortunate investor to buy that house will not get an adequate profit out of it either. Keep those things in mind and flipping an REO will be a smoother and more pleasant process.

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Wholesaling investment properties entails a high degree of trust, more so than in other areas of real estate.  What accounts for this emphasis on trust?  The nature of wholesaling involves spotting a good deal before anybody else does, getting the deal under contract, and then assigning the contract to another investor.  The investor must trust in your abilities as a wholesaler to know what will sell and how much potential profit there is to be made with perhaps minor renovations.  If you pick out properties that make the investors’ profit, you will start to build a name for yourself.  However, if you take advantage of investors, word will spread and your reputation will be tarnished.  The real estate world can be very close knit and investors know to ask about wholesalers.  The most important thing you can do to promote long term wholesaling is to earn a great reputation of supplying good deals.

The investor believes in your foresight and responsible work-up of properties when he or she agrees to buy a property that you’ve found.  It is vitally important that you provide the evidence that the property you are selling to an investor will indeed make a profit.  Falsely leading an investor to the conclusion that a poor performing property is actually good is not only unethical, but will come back to bite you.  Of course, you do not have to be a magic genie: it is entirely understandable if your predictions do not come true, because after all, they are only predictions.  This is the assumed risk the investor takes in listening to your advice.  However, as a wholesaler, those predictions need to be based in evidence and not wishful thinking.

If you find yourself with a property that is not as profitable as you once believed, it is better to assume the loss yourself or back out of the contract than to pass it on to your investor.  If you sell a property to an investor that tanks, other investors are going to know what happened. Word travels on the street! Investors understand assessing future potential is risky, but they also know when a wholesaler takes advantage of a new and inexperienced investor.  Investors have access to the same data that you do, and if they come to the conclusion that your property work-up was negligent or misleading, you’re done.  They will no longer trust your judgments and no longer buy your properties, leaving you no choice but to go out of business. Before you go into wholesaling, make sure to understand the importance of reputation to owning a long-term business and don’t sell anything unethically.

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Based out of Indiana, Jay Redding is a real estate entrepreneur, consultant and educator with experience in residential and commercial investing.

Buying property and selling it soon after, known as real estate flipping or turning properties quickly, is a technique in real estate used to make money fast.  The key idea is that you buy the property cheaply and either sell it “as-is” or renovate it and then sell it for a price higher than your investment. In its simplest form, there are really only two kinds of flipping: wholesale or retail, each having their own unique characteristics and variations of accomplishing the same result. Some require closing on each step while others merely assign a contract.

A wholesale flip or wholesale quick turn is when the property purchased or placed under contract is sold or assigned to a new investor without any rehab work done. If this is accomplished through a double close process, the first close is when you, as the investor, buy the property from the seller, and the second close is when you sell the property to the new investor.  These two closes can be done anywhere from days apart to minutes apart if you already have a buyer lined up.  If it is through an assignment process, you as the investor, place the property under a purchase contract with the seller, then before closing on the deal yourself, you assign your purchase contract to a new buyer for a fee and the new buyer completes the purchase process as defined by the purchase contract.  Some reasons you would do a wholesale quick turn is if you found a property that is in a great location but valued well below the market, or if you found a property that needs rehab work and could make a big profit, but you do not want to rehab it.

A second way to turn a property quickly is to purchase it, rehab it, and sell it.   Make sure to get a contractor (or more) to visit the house before you buy it and have them estimate how much the renovations would cost.  It’s also imperative to get a home inspection so you are aware of major problems like leaks or infestations before you purchase the property.  Then, if the market value of the house is higher than the purchase price plus the cost of renovations, there is potential for profit.

Flipping has received bad press in the past because in high appreciation areas, where the prices of home were being artificially inflated, investors would place a property under contract and then assign the contract for a higher price multiple times or hold onto the house for a month or so, and then sell it at the new market value driven up by appreciation.  This speculation bubble eventually crashed, and flipping was to blame.  However, turning properties over quickly with renovations, or done once for a property, does not lead to the speculation bubble that has been seen in high appreciation areas.  If you are renovating the property, you add value to it, and therefore the higher price reflects this value.  If you wholesale a property, you are not adding value but you are using your skills at finding good deals to alert investors.  Subsequently, the investor generally adds the value with renovations.  The profit you make is reflective of your skills at finding undervalued properties.

Although flipping has gotten a bad name because the practice did cause speculation in areas with high rates of appreciation, not all flipping causes an artificial inflation of housing prices. It can be an honest and profitable way to make a living in real estate if used correctly.

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Professionals at every level of real estate investment and transactions in general are subjected to a tremendous amount of competition to earn their livelihood.  It comes as no surprise then, that so many successful real estate professionals are consumed by, even obsessed with, winning.  While it would be crazy to say that wanting to win is a bad thing, it would be wise to caution that being consumed by victory can be a dangerous character flaw when it comes to closing deals and earning profits.  Having the skill to win is great, but sometimes having the skills to compromise is even better.

Making compromises or concessions during real estate negotiations has two major benefits.  The first is obvious: more deals get done.  On all those deals that too-proud investors pass on because they are not getting exactly what they want, those willing to compromise leave the door open to the possibility of creating a perfectly acceptable (if not ideal) deal out of a not-so-great one—by making concessions.  Two perfect deals and four reasonable compromises, is a much better year than two perfect deals and four passes (clearly).

The second major advantage of a willingness to concede during negotiations, is the insight it provides into your opponents interests, priorities, and limits.  The issues that prevent that perfect deal from getting done, are those issues that are considered central or of vital importance by one side or the other.  Sometimes, just uncovering which facets of a contract are contentious (pricing, timing, companies used, individuals involved, etc.) is enough to gain an understanding of which of those facets are the most important to your opponent.  It’s amazing how often an otherwise-good deal gets held up by two sides arguing over two different issues—if both sides understood the needs of the other, they might realize their issues are mutually exclusive and each can be separately resolved for the deal to advance to fruition.  Maybe the important issues to them are irrelevant to you—what an opportunity for concessions!

It was Roger Sherman—brilliant creator of the 1787 Great Compromise that divided the congress into a bicameral House and Senate—who said that the mark of a good compromise is when both parties walk away unsatisfied (in more eloquent terms).  On those contentious issues where there is no simple, one-sided resolution as described above, investors and real estate professionals should look to Sherman for inspiration.  By definition, you cannot compromise and expect to get everything you want.  Be prepared to leave the negotiating table feeling a bit unsatisfied, but only if you’ve made your opponent equally or even more unsatisfied.  It sounds malicious, but its simply good business to not do a deal on which you get the short end of the stick.  Of course it follows that you probably should do the deal when your opponent is on the short-changed side of negotiations.  And that is the arena in which concession and compromise becomes the vehicle to get a deal out of a dead scenario.  Pay attention to what your opponent really wants, weigh it carefully against your own priorities, and try in earnest to provide it for your opponent without costing yourself something greater.

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Based out of Indiana, Jay Redding is a real estate entrepreneur, consultant and educator with experience in residential and commercial investing.

Perhaps the most prominently pronounced facet of real estate investment in the coming year will surround REO properties—specifically bank-owned, foreclosed homes.  Following the recent (and ongoing) housing and general economic crisis, there have never been more of these types of properties on banks’ books, and to those banks this surplus amounts to nothing more than dead inventory.  This, in turn, creates tremendous incentive for REO departments to unload their surplus—and that means investment opportunities and a general boom in real estate professionals’ activity associated with REO transactions.

It is important, therefore, to understand a few fundamental things about REO properties before betting your livelihood on the newest mini-bubble.  Most important of all, you must bear in mind that an REO property, though most likely a foreclosed home, will be thrust into a buyer’s market replete with myriad options for buyers.  For that reason, it is important that the “foreclosed” label you attach to the property in your mind vanish as soon as the bank assigns the property to a realtor; that is, the property must be made to appear as any other non-foreclosed home in the neighborhood.  Simple enough task, sometimes.

Start with two basic aspects of the property: the functional systems, and the curb appeal.  That means a professional inspection to determine the status and safety of the home’s major systems (heat, electric, plumbing, etc.).  Circumstances, money, and personal preference will determine what is done to repair or update these systems; but in all cases a thorough inspection must be done.  The curb appeal of the property is the first impression the home strikes as it is viewed from the street.  Curb appeal is relatively easy to improve, and it is one of the most effective ways to bring the property from the depths of foreclosure to the ranks of true market value.  The rule of thumb is for the property to appear at least par for the neighborhood (it doesn’t have to be the prettiest and most advanced, but it should certainly be better than most).  Common considerations include landscaping, roof, windows, doors, driveway, etc.  A small investment on aesthetics can go a long way in returns.

As in all real estate transactions (and really any major transaction), one of the most important elements of which to remind yourself is this: constant communication.  When a lot of money is at stake, all parties involved want to know exactly what every one else involved is doing and thinking.  While that can’t be accomplished by one party alone, a single party can in fact break the system of communication for the other parties.  So it is important to communicate regularly with other parties involved.  This normally goes without saying, but demands a special note in association with REO transactions, because these deals occur at the crossroads of organizational and personal business during tricky financial times.  In order for these deals to go through, banks need to feel constantly secured and reassured that their properties are in the right hands and moving in the right direction.  And it’s no wonder the banks are concerned; with the staggering number of REOs on the market, a lot of people stand to make (or lose) fortunes.

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Closing, which is the actual transfer of the deed from the buyer to the seller, can be a stressful time in your real estate deal if you haven’t taken the necessary steps to prepare yourself.   There are horror stories of buyers purchasing a new home only to find out a few months later the seller wrongfully obtained it, causing pain and anguish for both parties.  How can you avoid scenarios like this?  The most important step to ensure a fluid closing process is to hire a reputable title company.

A good title company will research the deed, looking for proof of ownership each time the title was bought and sold, thereby ensuring that the house is the seller’s rightful property. Unfortunate examples of what can happen with mistakes in deed transfers have been in the news recently, involving cases of wrongful foreclosure procedures initiated by Fannie Mae and Freddie Mac due to a variety of reasons involving negligence and irresponsible business operations.  The problem now is that the former owners rightfully still own these foreclosed homes that were bought by innocent buyers.  This puts the buyers in an unfair situation, and can force them to return the houses back to the previous owners.  Hiring a reputable title company can help you to avoid being caught in a situation like this.  It is worth spending money on a good title company that does thorough research to feel secure that your house is legally yours after closing.

In buying a REO, the bank may dictate which title company is to be used.  You should try to negotiate this issue if you have a different title company you feel more comfortable working with. Talk to your title company and explain the situation, and they may give you a discount for taking business away from a competitor title company.  If you include using your title company as part of your offer, the bank may be agreeable to switching companies.  Just because the bank states who they want to have the closing with doesn’t mean it is locked in stone.  They still want to move the property.  You may have to pay the difference between what their title company fees are compared to what your title company charges. But if you have more confidence and peace of mind with your company, it is worth spending a little extra money to have that peace of mind.

The last thing to remember with title companies is to make sure you provide adequate time for them to complete their work. You don’t want to rush everything at the last minute, because that is when mistakes happen.  If you find yourself in a rushed situation, you may have to reschedule the closing. Although that will irritate some people, it is better than overlooking important information.  Research good title companies and give them enough time to do their job, and you should be safe and secure in closing.

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Based out of Indiana, Jay Redding is a real estate entrepreneur, consultant and educator with experience in residential and commercial investing.

Finding a property and negotiating a fair price is only part of the work in real estate.  Closing the deal can be a whole separate ballgame.  In closing, anything can happen.  You can find out that the buyer doesn’t have the money and was wasting your time.   You can uncover a mistake in the transfer of the deed which means it’s not the seller’s to sell.  It is possible to uncover outrageously large liens on the property, negating the advantages of the deal or the buyer not be approved for financing.  Unexpected events can and do happen at closings, but there are ways to lower the chances of this disaster happening.

Perhaps the most annoying event that can happen at closing is when the buyer does not have proof of funds due to lack of bank approval for a loan or lack of cash if the deal is to be a cash deal.  If the deal is to be a cash deal, proof of funds should be demonstrated with the initial offer.  If not, you as the seller should request such proof before ever reviewing the offer.

If the deal requires bank financing, only deal with individuals who have been pre-approved by a bank for a loan.  Request that the buyer provide a “Proof of Loan Pre-Approval” letter on bank letter head that is signed by the loan officer with the offer.  This will help to reduce the risk of the buyer not performing when it comes to closing. You should also request as part of the negotiating process that funds be in escrow 24 hrs in advance of the closing. Unfortunately, this isn’t always the case and you may come to the closing table and no funds are at the title company or closing attorney’s office.  If the hold-up is the bank due to the loan not receiving final approval and you’re waiting for the money to be wired, then you can extend the purchase agreement and reschedule the closing.  However, if the hold up is a buyer’s excuse amounting to ‘the check is in the mail,’ the only thing you can do is walk away and try not to dwell on all the time wasted.

Situations like this can be avoided by ensuring that the buyer’s realtor is responsible and experienced.  Make sure that your realtor is experienced and is on top of the situation as well.  Remember, he/she is working for you and this is pay day for them.  If you are dealing directly with an individual, require proof of funds with the offer initially as previously discussed, but also require at least 5-10% of the purchase price be placed in escrow upon offer acceptance as earnest money.  If the buyer fails to perform, the buyer forfeits the earnest money to the seller for damages of not completing the deal.

Fortunately, non-performance is not the norm.  Working with a reputable title company, closing attorney and realtors will help to lower the chances of this ever happening.  By following a few of these simple guidelines, you can tilt the odds even further in your favor providing you greater peace of mind and smoother transactions.

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