Connect the Dot’s
five “F’s” for Real Estate & Paper Investors
children we’ve all played a fun game called
“connect the dot’s” where we draw a line linking
one dot to another dot until a clear picture comes into
focus as it is formed.
With Real Estate as an investment vehicle there
are many opportune ways to create profits. If you are
investing in Real Estate one quintessential strategy is
to “buy low, then sell high” properties to create
cash profits. Selling properties by offering owner
financing is one of the fastest ways to attract
potential buyers, obtain top dollar, and move a
property. If you’re a paper investor then assisting
Real Estate investors to complete this “sales
cycle” can generate a source of ongoing “paper”.
There are (5) five basic components to this cycle that one can follow so that the profit picture becomes complete at the end. The dots to connect or steps to follow I call the (5) Five F’s.
Let’s explore each of them:
Find the right property. Put the word out among your contacts, distribute flyers, runs ads, beat the bushes, and look at lots of so called “distress” property situations to find that proverbial “diamond in the rough”. You goal is to find a well located home that may have been “used and abused” in the past. Often this type of property can be acquired well below its true “fair market value” or value after it is put in pristine condition. The key is to find and deal with motivated and flexible owners who need to sell. It may take considerable time looking at various properties and making multiple offers before you find your “diamond in the rough” however do not despair as you only have to find a few of these deals per year.
the property. Often to obtain a below market deal you
must be able to express to the property seller that you
can close quickly and pay them cash. Make arrangements
to have mortgage money available, or a line of credit
set up. Another valuable relationship to establish is
with so called “Hard Money” lenders that are going
to make their loan decisions primarily on the
collateral and less on whether or not your deal is
conforming. These types of contacts work wonders in
allowing you to confidently make all cash offers to
sellers. Since your goal will be to resell the home
quickly after it is fixed and repaired you want to
limit any “prepayment penalty” that may exist in
Fixed the property. Typically for you to find the bargain properties, there is something wrong with the home or the seller is experiencing financial duress. For one reason or another they become motivated to sell their home and move on with their lives. There could be deferred maintenance items that were never taken care of but can be easily remedied, usually these are cosmetic improvements that are fairly easy to complete. Sometimes the problems are more emotional or financial in nature. If you not planning on doing the work yourself (I personally have two left thumbs), then you must have an experienced general contractor, or reliable and experienced sub contractors or trade persons that can work with you to make needed repairs in a timely and cost effective manner. Watching over these costs can often mean the difference between a nice profit and just breaking even.
Flip or resell the property. These properties that you are acquiring are not going to be held for long term cash flow, rental income, equity buildup, and tax benefits. This particular program is specifically a buy low and sell high fast strategy. In short, these are “Flipper not Keeper” properties. You have holding and fix up costs, your funds and your profit are tied up into the home and your objective is to get the property renovated and back out on the market as quickly as possible so that you can realize your profit. The type of buyer that your are targeting for your home is a so called “retail” buyer who is going to be purchasing the home to live in as their primary residence. This allows you to market the property to buyers who have the greatest opportunity to obtain financing and cash you out.
This phase of the cycle is where “Seller financing” comes into play. By exposing your properties for sale to the marketplace where you also are willing to finance potential buyers, you are able to also exert a tremendous amount of additional control over the entire sales and financing process. You willingness to finance the sale also allows you to more aggressively market the home to a much larger pool of potential buyers. The result, a faster sales process. Buyers who have income and debt ratio issues, self employment concerns, spotty past credit, or simply do not want to deal with a traditional mortgage lender are all drawn to and perceive the Seller financing as a way for them to get into a home. These types of buyers are more concerned with; How much down? and How much are the payments per month? than they are quibbling over the sales price, interest rates, points, etc. as negotiating issues. As a result you can also typically achieve a Top Dollar sales price.
Now many of you are saying to yourselves, wait a minute, if I finance the sale for the buyer then my money is still tied up in the home, I’m holding “paper”, I want cash, huh? It is through the proper set up and structure of the seller financing that allows you to sell and convert this “paper” into immediate cash. You can still achieve cash liquidity even though you are offering seller financing. This is an area where the Real Estate investor often misses out, they fail to “connect the dots” and become myopic, prone to waiting and waiting, often months to achieve a sale of their renovated properties to a “qualified” buyer who can obtain their own financing when such as sale could have happen much sooner had they been willing to finance the sale themselves and then also sell their “paper” off for cash. Note brokers and investors can benefit the type of Real Estate investor who wishes to become savvier and learn more about the benefits of seller financing. By helping them, you are creating a source of paper that they can sell to you and repeat business.
Forget the property. After the renovated home is sold, whether the buyer(s) obtained their own financing or you financed the sale for them and then also sold the “paper”, when the dust settles you are back to a cash position. You’ve earned a fast profit and you are now liquid and poised to take advantage of the next great opportunity that comes along. You can now repeat this process over again.
The final “F” to connect in this string of dots is one that really isn’t a formal part of the process but one that I like to include anyway. It stands for FUN. If you do something over and over again that’s profitable and you can have fun while you do it, it becomes far easier to motivate oneself to repeat the process.
Michael T. Morrongiello is operations manager of Sunvest Corp., a nationwide mortgage investment firm. Michael has 20 + years of experience in buying, fixing, managing, and selling real estate investment properties prior to entering mortgage lending with the formation of this Florida based mortgage lender in 1983. He has personally invested in, bought, and / or sold real estate properties in multiple states over the years. For much of the last 17 years he has placed his focused upon real estate “paper” as a niche market within the finance industry and is considered by many of his peers to be one of the premier “paper practitioners” involved in this unique aspect of real estate today. Michael has been involved over the years in the purchase of thousands of seller financed real estate loans in almost every state in the Union and knows what crucial skills must be mastered in order to succeed with discounted paper. He continues to invest in Real Estate even today. His expertise, candor, and ability to quickly size up and analyze financing options that surround existing and proposed transactions make his companies services invaluable to the Real Estate & Note community. You may contact Michael for more information at his Sunvest office; 745 Solano Ave, Sonoma, CA 95476 , Office #707-939-9450 or via e-mail to: MikeM@sunvestinc.com
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