Buy the “beater”!

You’ve watched the real estate market for a while and are ready to make the plunge. Now that you’ve decided to sell, what do you look for? It can be tempting to make an offer on the nicest house on the block. This is a mistake. If you buy the most expensive house on the block, you have no way to add equity through improvements. If the homes around you are selling for $300,000, you will never get much above this figure. A better approach is to buy the “beater” home in the area. This is the home with the horrific landscaping, peeling paint, cracks in the driveway and so on. Although it looks beat up, this fixer home is the root to a profitable investment. Why? Well, assume we are in our $300,000 neighborhood and this home is selling for $250,000. You can probably get it for $230,000. The key is the vast gains you can make with some relative inexpensive changes. Cosmetic problems are the easiest to fix.
With our beater, converting the landscaping into something nice is probably going to cost you $1,000 or less and a lot of sweat. Painting may set you back $5,000 to $10,000. Fixing the cracks in the driveway may run a couple thousand dollars. For a total of $10,000 to $15,000, you can improve the home to “average”, which means you’ve paid roughly $250,000 total for a $300,000 home. You’ve just made $50,000! Now, a word of caution has to be given. Buying the fixer on the block is only wise if the problems are cosmetic. If the home has fundamental problems that are going to cost a lot of money to fix, run for your life. Foundation problems or major termite problems can be a real nightmare. If it is easy to fix, buy it. If it isn’t, don’t! There is a final way to make money in real estate. The strategy is called buying when everyone else is afraid to. This is contrarian thinking. If the fundamentals of an area are good – low crime, good schools – then prices will ultimately bounce back. This is exactly the situation we see now, so you could really be looking at major bargains in the future.
When you get right down to it, buying a non-performing real estate note is like buying a boat; the two happiest days are the day you buy it, and the day you sell it! Investing in a non-performing note (NPN-NPL), and cashing out for a profit, are my two happiest days as a note investor. You have heard the old saying in real estate, the profit is made when you buy. How true that is, especially in the note world! We have found that you have to take into account all the costs you will run into from the day you buy it, until the day you sell it, and use that to make sure you are not overpaying. If not, you can lose money; sometimes a lot, sometimes all of it. While there are some warm and fuzzy feelings experienced when you own the boat, like taking it out on the water for the first time, you are going to have a lot of ongoing costs.
If you store it in the water, there are dock fees, maintenance fees, insurance, and if you financed it, monthly payments. If you store it at home or a parking facility, you will have to protect it from the elements, possibly pay rent, and you could destroy it in an accident towing it to, or putting it in the water. With NPN’s, finally making contact with a homeowner who wants to stay, despite doing his best to be invisible is equally as thrilling. This usually leads to either attempting to work out a payment plan to get them repaying, or settling for a lump sum to pay it off is a great feeling. Otherwise, it’s practically death by a thousand cuts. Sometimes I feel like we are being nickeled & dimed to death by a plethora of service providers; lawyers, note servicers, document custodians, rehabbers, lawn cutters, property preservationists, appraisers, photographers, house cleaners, city agencies, code enforcement, county tax collectors, Realtors, health inspectors, zoning ordinances, Home Owners Associations, utilities, forest divisions, trash haulers, flood areas, etc., that all want to extract as money from you as possible every time they move or type something. So the most important thing I do now is come up with as many costs as possible before we make an offer to buy a note, so we can factor that into our purchase price. One of the biggest we have found in working out over fifty notes is the expenses are usually higher, and it takes longer to exit in judicial foreclosure states. And now that we know something about rehabbing real estate, we have been equating possible home repair costs into our note buying bids now, so we know if we can still make a profit, or suffer a potential loss.