Real Estate Investing 101 – Back to Basics – 3 Great Old Options for Real Estate Investors

by benborden

With the current market real estate investors have to look at other “back to basics” ways to move investor properties. The three alternative options for investors below are not new but seem to be forgotten, great ways to rethink the marketing and selling of your properties and get your asking price and even more. First you can move your property very quickly. Second, you can name your selling price and most often it can be much higher than the general market will bear. Third, all of these strategies can actually increase your investment return exponentially more than just out right selling your property on the market.

Seller Held Seconds – This is a great option for those rehab investors to get their initial capital out of their property and move on to the next project and also opens the market to many more potential buyers. Let’s say you buy a property for $150,000 and spend $15,000 in renovations. Let’s say after renovations the property is worth $200,000.

The potential home buyer secures a conventional 1st deed loan at 80% of the value of the home and takes out a mortgage for $160,000. This pays your loan off and also you’re out of pocket expense renovating or updating the property. It’s essential, that there is a down payment from the buyer of at least 3% to 5 %. In this instance, you hold a second deed for $30,000.

You become the second deed of trust with all the rights of any 2nd trust deed holder. Most often the terms of the loan are higher rates and shorter balloon terms; let’s say a 36 month balloon (36 months is typically the shortest balloon term a first deed lender will accept) at 12% interest rate with an interest first payment option. So during the 36 months you’re receiving interest payments of 12% and by the end of 36 months the buyer needs to refinance the property to pay your loan off.

There are also many note buyers out there for those investors who do not want to service or hold the note. Most of the time they have certain requirements that you utilize their contract, have a minimum interest rate and a down payment from the buyer.

Rent to Own – This is a great alternative for investors that can be a little less complicated than the other alternatives. Rent can be higher which may allow you to cash flow the property when you otherwise would not have. Also, those renting to own the property they are much more apt to take care of the property because of the feeling of ownership.

PULL CREDIT! This part should be handled by your loan officer who should be assisting in “coaching” your buyers through the credit repair process. Your potential buyer / renter needs to have compelling reasons for past credit problems and be on a path to “credit recovery.” There are some inexpensive programs available such as Lexington Credit and Veracity Credit that help increase credit scores over time depending on the severity of credit issues this could take 12 to 18 months. There are also credit repair attorneys that are much more expensive initially but may require much less time.

Hire an Attorney to handle and write the agreement. Properly structuring a rent to own is the most important aspect of success or failure. It’s important that the seller get a down payment or also called an option payment. Five percent or more is ideal. This would be non refundable but credited to the purchase at close. Secondly, the monthly payment should be set 20% higher than average market rents, again non refundable, allowing this to be credited to the purchase price. Third the term is important as well; No longer than 36 months would be ideal.

Often you can play around with structuring higher or lower the down payment and rent for those that lack the initial upfront down payment. The bottom line is you want to get the renter / buyer to have as much skin in the game as possible for obvious reasons. Your goal should be to get a minimum of 5% out of their pocket and ideally 10%.

Seller Financing – Seller financing is the most preferred and most profitable way to sell. This is a great alternative, especially for those investors nearing retirement years as a source of income. Most investors nearing retirement will have low or no mortgage balances and high values that make selling or refinancing less of an option for tax reasons. (Please consult your CPA).

Offering seller financing sells your home faster, offers a very high interest rate and the loan is collateralized. There are many note servicers out there that help with collecting and allocating properly the mortgage payment. One would be Virgin Money, which used to be called Circle Lending one of the biggest in the industry.

You can structure this many ways. You can offer conventional terms like 30 years or short balloon terms for those that may have credit issues that are on track to credit repair.
Disclosure:
All of these options can be tremendous opportunities or complete failures. It’s very important when utilizing these strategies that you have a competent team in place that is knowledgeable about their specific industry. This would include but not limited to an Attorney, CPA, a CMPS or Certified Mortgage Planning Specialist, Realtor and Financial Advisor. These are not DIY opportunities and not for “accidental landlords” with no experience.

(Turtle Image Courtesy of jackol)

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