Some of The Methods To Buy Real Estate
If you missed the previous post, we discussed Getting Started. We touched on shows on HGTV, single family, multifamily, and a few other topics. Now, onto some methods.
There are many methods to buy real estate. However, not all methods work for the investor. For example, buying a home with traditional bank financing usually isn't recommended, because for one, you're putting your personal credit on the line, and it's generally advisable to use other methods. This blog post will cover some of the ways and places to buy Real Estate. Note that links to external sites are not endorsements. Rather, they are just one site with information on the subject matter, provided for educational usage. We do not suggest following their techniques, unless you know what you're doing, or have someone to help walk you through it. Note that we will focus directly on buying real estate, and not methods such as real estate investment trusts.
Buying Real Estate At Auction.
Should one buy real estate at auction? The initial appeal of looking at real estate at auctions like Auction.com, and others, are that they're cheap. BUT, you generally must put up deposit money, which can be a few hundred, or thousand, to bid. If you're just getting started, this may not be the best method to go. Depending on the site, some deposits may be refundable, and others may not. In addition, if you win, but don't meet the reserve figure, then you don't get the deal. Finally, remember that you're competing against everyone else who is at the auction, or looking at the auction site. They people who are auctioning the property are looking for the highest bid. In the case of bank auctions, especially, they're going to announce it on every platform available to them, to increase the chances for a high bid. Finally, it can be very difficult, if you're not the end buyer. For the same reason that you can't assign the contract of an REO, you can't assign a won auction...indeed, if you read the above, you'll possibly need a few thousand, just to bid. Then, you'll need to be able to close at the auction, or within a set time, sometimes within 24 hours. You can use transaction funding (there will be a post about this, later) to buy that, but you'll need to have your end buyer in place. Of course, if you have your end buyer lined up, or make some sort of arrangement with them, you can always buy the house in the name of an LLC, with yourself as “manager.” Then, if you win the house, you “assign” your ownership in the LLC to the end buyer, who comes to closing as the “owner” of the LLC. Make sure you follow your jurisdictions regulations for buying and selling a business. For more about auctions, read this article on Investopedia.
Buying REO, AKA, Real Estate Owned: Houses Owned By
Generally, after the auction, a house that doesn't sell at the auction becomes REO. The bank owns it. Bigger, national banks—Bank of America, Chase Manhattan, Wells Fargo, etc.--have their own departments that handle these properties, and are placed with a realtor to sell. Often, they will try to sell the house at market value, to make up for their losses. These can sometimes be good deals, but just like there are a lot of people trying to get a good deal at an auction, there are a lot of people looking to buy REO. You'll need to run the numbers, to see if it's a deal. If it's close to retail or market value, you won't be able to wholesale it. You may be able to flip it, or buy it for a rental, of course. However, as mentioned in the auction section, wholesaling it is another matter. Also, as mentioned, you can use transactional funding, or “assign your LLC.”
Smaller, local banks, credit unions, or regional banks may or may not have the same resources for dealing with REO. Likewise, since they're smaller, they may not have as many, or any, REO to buy. These can also be difficult, because unless you know who to talk to, and how, you'll beat your head against a wall of gate keepers. Even if you reach out to “disposal managers,” finding the right people can be difficult for the new investor. Here is a little bit more on REOs. One other article I'll point you to, regarding REOs, is about “shadow inventory.”
Buying Real Estate Subject To.
In short, Subject To means that you are agreeing to buy a house, subject to the existing mortgage(s), along with any taxes or other encumbrances. This should not be confused with assuming the loan, which is the more “formal version.” The owner deeds the property to you, and you take over making the payments to the lending institution. For more on this, and some tips for due diligence, read this article.
The Lease Option.
There are a lot more methods, but the last I'll touch upon is the Lease Option. Unlike a lot of other methods of REI, the Lease Option tends to focus on the “pretty homes,” or those that may need cosmetics, small updates, and “light repairs.” The Lease Option can be used in conjunction with, or independent of, rent to owns. They usually do involve seller financing of some type.
Have you ever leased a car? If you have, then you already know what a lease option is. When you lease a car, you do so with the option to buy it at the end of the lease period. If you don't wish to buy it, you can give it back and buy or lease another car. Substitute house for car and you’ve got the idea!
A lease option is exactly what it says it is. It means leasing the house with the option to buy the house within a certain time frame at a predetermined price. This process may also be referred to as lease purchase or rent-to-own. Many people think that this procedure entails taking a security deposit plus the first month’s rent, putting the tenant in the property and waiting for the tenant to call at some point and say: I’d like to buy the house now. That is a lease with the hope that the tenant will buy! How we lease option a home is not even in the same universe. All the conditions of both the sale and lease will be spelled out in advance and a specific time line will be adhered to.
Why Do Lease Options work?
Lease options work because there is a huge market for them.
This market is made up of buyers who have some sort of problem that will not allow them to qualify for a mortgage. The problem could be bad credit or lack of the full down payment. A lease option affords these people the opportunity to purchase a home that they otherwise could not acquire.
On the other side of the coin, a lease option helps a homeowner to sell a home that for whatever reason (job transfer, divorce, retirement, location of house, etc.) could not get sold quickly enough or in a conventional manner.
The lease option process is not very complicated. Lease options work because both parties need each other. I find these people and put them together.
What Are the Lease Option Benefits to Tenant/Buyers?
Price locked in up front.
Low down payment.
No loan qualification needed.
Time to obtain good financing.
No taxes to pay.
Time to repair credit.
Time to save additional down payment.
Time to check out the house and neighborhood.
And some others.
What Are the Lease Option Benefits to Landlord/Sellers?
Huge market of buyers all the time.
No management headaches.
No realtor commissions.
Higher quality of tenant.
Seller [may] retain tax shelter [check with accountant for specifics].
In the next post, we'll get into some terms, and what you'll need to learn, regarding wholesaling, and investing SFH.