Investing in real estate has changed in many markets in
our country. If you are like me, you live in a real estate market that has
gone soft. There are still some areas in the country where homes are
appreciating nicely, but nothing like it was in 2000- 2005. There were a lot
of self-proclaimed real estate gurus that popped up during the boom times
telling you how to make HUGE PROFITS in real estate. Back then, during the
up cycle, investing in real estate was so easy. You could throw money at
almost any piece of real estate and be practically guaranteed to make a
profit. It seemed like anyone who had flipped a couple of houses and made a
profit was an “expert” investor.
Times are different now. Investing in real estate takes a
little more effort. Investors that haven’t weathered down cycles before are
struggling because all they know are massively appreciating markets. All too
many of those self-proclaimed gurus lost their shirts when the markets
changed. Those ads that go “I made $256 million in real estate in 4 weeks
with no money down” are a whole lot less believable. Okay, $256 million is
an exaggeration, but you know what I mean.
So the questions are now, “How do we still go about
investing in real estate and make profits?” Can it be done in these soft
markets?”
The answer to those questions is quite simple. I can say
that without question, without hesitation, the answer is: YES! ABSOLUTELY!
I have been investing in real estate for more than 20
years. I have seen up cycles and I have seen down cycles. I have made money
and been successful in both. I can tell you several things about down
markets that may surprise you. First, experienced real estate investors will
tell you that more money is made in down markets than in up markets. It’s
true, MORE MONEY is made in DOWN markets than in up markets! Second,
experienced investors PREFER to do the bulk of their investing in DOWN
markets. There are a number of reasons for this but the big ones are there
are more motivated sellers in down markets and the competition (other
investors) pursuing these motivated sellers is LOWER. It’s a double bonus.
Down markets produce more deals and less competition to get those deals.
One of the investing techniques I specialize in is Lease
Options. Lease Options are one of the absolute best techniques for investing
in real estate in down markets. I’ll say it again, if you are looking for
ways to get involved with real estate investing you need to know this,
Lease Options are one of the absolute best techniques for investing in real
estate in down markets.
Let’s take a look at why.
I’ve already said down markets produce high numbers of
motivated sellers. Right now in Michigan, it’s very common to see a house
listed on the market in two ways, both for sale and for rent. They are
listed this way because the sellers KNOW how bad it is and they want
someone, anyone, to cover their mortgage payment. These double listings
SCREAM Motivated Seller! Now, not every single one of these is going to be
an excellent Lease Option deal. But you know what? That’s okay, there are
plenty to choose from!
The critical part in selecting your Lease Option
candidates, in an up market or a down market, is creating WIN-WIN-WIN
situations. The seller must be satisfied with the deal, you must be
satisfied and the end buyer must be satisfied. When investing in real estate
this is what makes us successful. How does this work?
To create a WIN for someone we must meet their core need.
A motivated seller’s goal is to sell their house. Eventually they need that
mortgage paid off and the deed transferred out of their name. If they are
willing to rent the house as well as sell it, they are telling you that
having their mortgage paid each month is more important right now than
actually getting the house sold. If we can find a tenant buyer for them we
are satisfying their core need of paying the mortgage each month and
eventually selling the home. This is a WIN for the seller.
Our end buyer is looking for a home to own. Their current
situation prevents them from getting a mortgage immediately but they plan on
being able to get a mortgage soon. They want a home now. They don’t want to
wait to get their house. By allowing them to lease and then purchase the
house we are meeting their core need. This gives our buyer a WIN.
Before we talk about what makes a WIN for us as an
investor, let’s talk a little more about mortgages for our end buyer. There
has been a lot of news lately about sub-prime lending woes, how lenders with
riskier loans are facing high rates of foreclosure and may be going
bankrupt. As a result it is getting much harder for people with poor credit
to obtain a mortgage. It is also getting harder for ANYONE to obtain a
mortgage with 100% financing (i.e. no money out of the buyer’s pocket). This
may sound crazy, but this is actually a good thing for us when investing in
real estate.
When investing in real estate by doing Lease Options it is
harder for us to find quality tenant buyers when almost anyone who can fog a
mirror can get a mortgage. Not only that but because it was so easy to get
100% financing most buyers save nothing and are unable or unwilling to pay
much for an option fee. With the lending companies tightening their belts I
expect we will see a growing population of QUALITY tenant buyers who are
able to pay HIGHER option fees.
The flip side of this is that because lenders are
tightening their belts your tenant buyers will need to work harder to
restore their credit. It may take as much as 2 to 3 years for some tenant
buyers to be able to qualify for mortgages instead of just 1 year as we had
seen before.
The bottom line though is when investing in real estate by
using Lease Options the difficulties of the mortgage lenders are just
another reason why this down market is a GREAT time for us investors.
Now let’s look at the last part of our WIN-WIN-WIN
equation. The WIN for us, the investor. For us to WIN we need to make a
profit. The profit comes both from the equity spread between your option
price to the seller and the buyer’s option price to you as well as any
monthly cash flow in the rental payments. With Lease Options it pays to be
creative. You’ll find a lot more deals and be a lot more successful
investing in real estate if you practice creativity in your structuring.
The most common motivated seller we encounter is the one
who has little to no equity in his home. Too many real estate investors get
calls from sellers only care about, “What’s it worth?” and “What do you
owe?” If the numbers are too close together, they say, “Sorry, can’t help
you.” Click. They hang up the phone.
What if you pursue it a little further with a creative
mind? A good question to always ask is “What are your monthly payments?” If
the payments are lower than rental rates you may be able to make some
monthly cash flow.
Another good question to ask is, “How soon do you need to
sell the house?” You may want to ask this question a couple of times while
you are talking to them. You could be surprised to find that the number
grows longer each time you ask. There aren’t too many markets I can think of
that stay down forever. Eventually the house should start appreciating
again. If your option period to the seller is long enough you can capture
appreciation to make your profit.
What about this, “Are you willing to bring money to
closing to sell your house?” and if their monthly payment is higher than
what you can rent the house for, “Are you willing to pay the difference
between the rental amount and your monthly payment?” These two questions may
seem brazen, but ask yourself, what have you got to lose? If the seller is
fully leveraged on the house or their payment is higher than the rental rate
you have nothing to lose, because if they aren’t willing to make concessions
then you can’t help them! Certainly some of us feel awkward in asking these
questions, but trust me, if you ask this question 30 times, no matter how
embarrassed you might feel at the beginning, you will start to feel much
more comfortable by the end.
These are just a few creative questions you might come up
with to try to find terms that will allow you, as the investor, to make a
profit, a WIN for you. When you add all of three of these together, meeting
the seller’s need, meeting the buyer’s need and you making a profit, you
have created a WIN-WIN-WIN. This is what you MUST do to be successful when
investing in real estate with Lease Options.
Do you see how much BETTER it can be to find deals in down
markets? Motivated Sellers are EVERYWHERE and there are
FEWER investors competing with you. Combining these two
factors allows you to choose your deals with greater care. Always
“Cherry Pick” your deals in a soft market. This is why experienced
investors, who have been in both up markets and down markets, prefer the
down markets. Soft markets can provide some of the best deals when investing
in real estate.
© 2007 by Wendy Patton
Wendy Patton is widely
recognized as one of the most inspiring speakers on "Little or
No Money Down" real estate investing. Her real estate savvy and
great depth of experience and knowledge has helped her in
orchestrating the most complete and easy to follow, Lease/Option
Program in circulation.
Home Study Courses by
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