Mistake #1: Not understanding Areas and Exit Strategies
This is absolutely critical for the success of a Real Estate investor.
Why is this important?
Take the investor who finds a “deal” in a low income area. His or her plan is to buy the house, fix it up and turn around and retail it to a homeowner for a nice profit right?
You see a homeowner that can get a loan does NOT want to live in the low income area!
The investor is inundated with people who want to RENT the house, not buy.
Out of necessity, the investor ends up renting out the house and then can’t deal with the bad tenants and late night phone calls and often times loses the house because the tenants don’t pay or worse, end up trashing the house.
The key is to understand Low Income, Working-Class, Middle Income and Upper-Income areas.
• Low income areas are characterized by a high percentage of vacant, boarded and severely distressed inventory. The percentage of owners vs. tenants is 80-90% tenants and the area is unstable.
• Working Class areas have about 50% owners and 50% tenants.
• Middle income areas have about 70% owners and 30% tenants.
• Upper income areas are the inverse of low income areas with 90% or more of the houses lived in by owner occupants. The upper income inventory is too expensive to rent, in other words, the market rent won’t cover the payments on the more expensive houses. The more expensive houses make excellent retail opportunities (buy, fix and sell).
• The problem with the upper income areas is that the deals are very hard to find because of the increased demand.
Make them Profit for YOU… Solution #1:
Focus on making offers on houses in working class and middle income areas. There areas provide the greatest number of exit strategies. You can wholesale them, retail (buy, fix and resell) them and also rent them (More on this later).
Working class areas make the best rentals as they provide good cash flow and the tenant profile becomes better (most can actually mail their rent checks in).
• You must KNOW what you plan to do with the property BEFORE you make the offer!
For instance, if the deal’s in a low income area, you should be thinking about wholesaling it to a “slumlord” investor who will rent it, or you can choose to rent the property out for a good cash flow (Just be prepared to plan on spending lots of time managing these “hands on” rentals).
Mistake #2: Not understanding WHERE to find DEALS.
• Having a Real Estate agent “keep their eyes peeled” for a good real estate deal is NOT the way to locate deals!
A Real Estate agent has an incentive to SELL YOU on a PROPERTY, one that brings them a commission whether or not it’s truly a good deal.
Most agents are used to listing and showing properties not buying and selling them.
And for those agents that actually do buy and sell, they usually scoop up those DEALS on the MLS themselves.
The MLS is also full of competition from other investors and listing agents trying to get the highest price for the sellers.
Hitting the list of FSBO’s (For Sale By Owners) is usually a road that leads to nowhere.
Most FSBO’s are sellers looking to save a real estate agent commission as they attempt to get top price for their house.
The Real Estate Auctions are also full of competition and require non-refundable deposits.
This area of deal finding can be fraught with danger as liens and other title problems can sink a beginning investor.
Make them Profit for YOU… Solution #2:
Focus on finding deals NOT on the MLS and deal with private sellers.
Finding motivated sellers that own vacant houses as well as owners that are behind on their payments can be a GOLD MINE.
Marketing your business through bandit signs, online ads and postcards to owners can yield big results.
Setting up an online presence through a website with search engine optimization will get motivated sellers FINDING YOU.
Mistake #3: Not communicating WHO you are, WHAT you do and WHY you do it… to the Seller.
When a seller is behind on their payments or has a vacant property that they need to sell, they often feel vulnerable and defensive.
This can make them less than receptive to your below market value cash offers or terms offers with creative financing.
Sellers behind on their payments are often bombarded by investors, real estate agents, bankruptcy attorneys and bill collectors.
Make them Profit for YOU… Solution #3:
When talking with a seller, you must be able to communicate who you are, what you do and why you do it.
When talking with a seller, it is very important that you let them know that you are an investor (WHO), and what you do is buy and resell houses (WHAT), and you do this to make a living and feed your family (WHY).
When you are able to be upfront with the seller and let them know that buying and selling houses is how you feed your family, it takes away the feeling of “This investor is trying to take advantage of me and steal my house”.
When you’re upfront with the seller, it is much easier for the seller to see where you’re coming from and build rapport.
It’s also important to get Sellers calling YOU.
Calling on sellers and getting sellers to call may sound similar, but they are VERY different.
By getting sellers calling you, you take away any unsolicited contact. You’re now in the driver’s seat as the seller is calling you looking for assistance or an offer.
See the difference?
If you will target working class and middle income areas, get sellers whose properties are not listed calling you…
Remember, it’s important to be able to communicate who you are, what you do and why you do it with the sellers!
Do This and YOU will be well on your way to Real Estate investing success!!
JAY “THE ALL-AMERICAN” HINES