Find The Right Property & Buy At The Right Price

Real estate is a way to generate wealth and financial security.  The key is to strategically buy the right property at the right price.

There is risk and no guarantee in real estate investing.  You should protect against that risk. 

How much of a discount should  a buyer investor get?  What are the best ways to find good deals?  Is it better to buy a fixer-upper or a pristine, well cared for property?

Rule no. 1: Determine Your Minimum Investor Discount.

Buying a property at Minimum Investor Discount assumes that it is in mint condition and has no problems. Whether it is a house, office building, or a piece of vacant land, the minimum investor discount assumes that the investor will have no repair or improvement costs, no negative features, etc.  If any additional costs will be incurred, they should be considered for purchase price discounting. When you are ready to get into real estate, apply the appropriate Minimum Investor Discount while using the right investment strategy.

There are three real estate investor strategies:  (a) the Buy and Hold strategy, (b) the Buy and Lease/Purchase strategy, and (c) the Buy and Flip strategy.

The Buy and Hold Strategy:  This is generally about finding properties with good rental or appreciation potential.  Most investors who use this model buy houses, condominiums, multifamily properties (duplexes, triplexes, quads, apartment buildings), or commercial real estate (office buildings, strip centers).  Some Buy and Hold investors rely on discounts as small as 5 to 10 percent.

The Buy and Lease/Purchase Strategy:  This encompasses qualities of the Buy and Flip and the Buy and Hold strategies, while minimizing some negatives. 

With this strategy, investors can tap into the six different profit sources:

(1) gain access to the profits from buying at an minimum investor discount, (2) collect monthly rents, (3) realize property appreciation, (4) obtain income tax write-offs from being a landlord, (5) pay down the loan with the lease/purchaser's money, and (6) obtain option money, the fee the lessee/purchaser pays to enter into the lease/purchaser agreement.  

The rule of thumb to use for the maximum investor discount is 10 to 20 percent.

The Buy and Flip Strategy:  You buy a property at a discount, get it ready for marketing, and sell it for short-term gain.  This strategy requires buying low with minimum investor discounts of 20 percent.  

The next step is deciding how wide a net you want to cast for your target properties.  The higher the Minimum Investor Discount you require, the fewer properties you will probably be able to purchase, and the harder you will have to work to find them.

Investor rule 2: Know What Good Properties Look Like.

In real estate investing, success begins and ends with the properties you choose to buy. Don’t buy the wrong property and end up being stuck with real estate that no one wants.  You have many properties to choose from, so you should have a certain type of property in mind before you look.

Good property for one investor may be viewed as a bad property by another investor due to different investing strategies and Minimum Investor Discounts.  It comes down to following your investment strategy, which should be based on the amount of time, energy, money, and experience you have.

Rule 2 helps you sort through the multitude of property types. By doing so, you can focus on those that best fit your personal situation and have the potential to deliver the profits you desire.

Rule 3: Find Good Properties.   There are many ways to find good properties to buy. Most models differ on key variables such as amount of available cash required, level of inherent risk, degree of contact with distressed sellers, and the amount of time required by the investor. Ten common methods include preforeclosures, foreclosure sales, post-foreclosures, purchasing from distressed sellers, real estate auctions, tax liens and deeds, pounding the pavement, corporate relocations, estate sales, and bulk institutional buying.

If you don't want to deal with emotional homeowners who are reluctantly selling their property, you should avoid preforeclosure and distressed seller properties. Keep in mind, however, these sales can be some of the most profitable because the homeowners are trying to get rid of their properties quickly.

If you have a lot of time to spend looking for a property, pounding the pavement (making offers on many properties in your community) may be the best option.  If you make enough low ball offers, you might find a good bargain.  However, it could be like looking for a needle in a haystack. The key is selecting the methods that best fit your time, money, and personality.

Post-foreclosures offer a large pool of properties, and you'll deal with financial institutions rather than owner-occupants who are emotionally attached to their homes. Additionally, the post-foreclosure purchase process provides enough time to thoroughly examine properties and usually takes less time than other methods.

Rule 4: Calculate Maximum Purchase Prices.

Learn to systematically calculate the maximum price you should pay for a property to make it a good investment. It's the top price after any and all negotiations have been completed, and it's often referred to as the ceiling price. The Maximum Purchase Price provides an objective amount that guides you through negotiations and auction bids to purchase properties that will give you a healthy profit. Use the formula below with each property you consider.

Maximum Purchase Price - equals Fair Market Value, minus Repair & Improvement, minus Other Costs, minus Total Investor Discount.

Other Costs - equal Legal Costs, plus Finance Costs, plus Taxes and Insurance Costs, plus Mortgage Payment Costs, plus Utility Costs, plus Marketing Costs, plus Realtor & agent Costs, plus Miscellaneous Costs.

Total Investor Discount - equals Total Investor Discount Percentage times (x) Fair Market Value.

Total Investor Discount Percentage - equals Minimum Investor Discount Percentage, plus + Repairs and Improvement Hassle Percentage, plus Negative Property Attributes Percentage, plus Length of Time on the Market Percentage.

Finding your maximum purchase price is the easy part. The hard part is having the control not to pay more than your max when you are negotiating or bidding on a property with great potential.

Rule 5:  Make Solid Offers.

If you will be negotiating to buy a property, your initial offer should play a pivotal role in your becoming a successful investor.  Don't make the mistake of jumping into negotiations without making a solid offer. Your initial offer price should be below your Maximum Purchase Price to create some wiggle room.  However, if your offer is too low, the seller may reject it and have a negative and skeptical view of you. This can cause problems if you make another offer.  If the seller has multiple properties or is an institutional seller, the damage created by a lowball offer could impair a future source of business. 

Presenting a solid offer to the seller gets negotiations off to a good start and positions you to purchase the property at or below your Maximum Purchase Price.

Most real estate investment purchases take more than one round of negotiations. Negotiations can center on the price or on other components of the purchase contract, such as requested repairs prior to closing, repair contributions, contributions to closing costs, or financing.

Before you make an initial offer, understand the key terms of the purchase and how the components work together to affect the entire deal.  Make sure it passes the "red face test" and include a cover letter to walk the seller through your rationale for the offer, which is almost always less than they're asking for.

After you make an offer, you're no longer simply assessing and theoretically considering investing in the property. You're now putting your money on the line.

Rule 6: Negotiate Like a Master. Negotiating to buy real estate at a discount is like playing chess. Both are intellectual challenges that require strategy and focus. Both require you to anticipate the other side's next move before you make yours. Then you adapt appropriately when they make their move.  If you're successful, you win the rights to purchase a property at a discount.  However, unlike chess, you should make each move with the intention of completing the purchasing process with the seller and agent feeling like winners, too.  This is good business.  These people may be sources of future discount properties, such as banks selling post-foreclosures and real estate agents who maintain a large portfolio of bank foreclosures.

One way to negotiate for a successful purchase is to find the "bone" for each property.  This is any information a seller or agent can share to help you negotiate to a successful purchase of the property.  If a bank employee tells you they must reduce their foreclosure portfolio by the end of the month, you have found your bone and may be able to use that to negotiate a better purchase price.

The Golden Rule:  Always treat others the way you would like to be treated.  Do this and you be negotiate real estate deals and build relationships that will benefit you in the future.  You will feel good along the way.

Real estate is a good way to generate wealth when strategy is executed propertly. The key is buying the right property at the right price.

Let these rules key and shape your decisions about purchasing a property.

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The information contained herein is not the providing of legal services or services of an accountant.  If a person wants or needs such professional services, he or she must contact and retain counsel or a certified public accountant.  There are risks associated with the acquisition and ownership of real estate.