I was on the phone with a friend a week ago who knew that I was a real estate investor but didn't really understand what it is I actually do. The simplest way for me to explain what it is that I do is that I buy and sell homes. The full picture though, is a little more nuanced.
I'm A Problem Solver
I actually don't view real estate investing as buying and selling homes. Just like any other business selling a product or service, I view my job as solving problems. In this case, the problems are property related. Sometimes the solution to the problem is me purchasing a property for cash. Sometimes, it's finding a tenant. Sometimes the solution is restructuring the mortgage for the existing owners. Sometimes, the solution is something vastly more complicated but customized to the situation.Active Listening
When I'm talking with sellers, I am listening to their story to understand their situation. I also make sure the owners know and consider their options because many times they don't always know everything that's available to them. To be clear, most of the options I discuss with them have nothing to do with me and everything to do with helping them to solve their situation. The other reason I like to listen and discuss alternatives is because it helps me to better know what they may or may not be open to.Options As An Investor
I work to create a customized solution to the seller/owner's problems based on what they tell me. The solutions I offer sellers fall into three main categories- Purchasing the property for cash
- Placing a tenant buyer in the property
- A structured transaction
- Consulting for the seller/owner
- Referring to a Real Estate Agent
Buying For Cash
Buying properties for cash is pretty straight forward but it really only works under a certain set of circumstances. The biggest obstacle is that you need to be able to purchase the property for a low enough price to make a reasonable profit. This means your price has to be low enough such that after you pay for repairs, holding costs, closing costs, commissions, etc. you will still be able to make a reasonable profit on the transaction. For the properties I purchase for cash, I usually sell the contract to my investor partners. While they make a lot more money on the transactions than I do they also have to deal with the time and stress involved of managing contractors and dealing with repairs. Wholesaling (i.e. selling your contract to another investor) is a pretty common exit strategy for real estate investors.
Placing Tenant Buyers In The Property
Sometimes the owners are unable to sell the property for a cash price that makes sense. This is usually either due to existing financing (mortgages, home loans), no strong desire to actually sell, or material differences in value perception (i.e. the owner believes their property is worth substantially more than it actually is worth). When faced with this situation, if the home is in a nice neighborhood and is in good condition, I will usually present the owner with a lease purchase offer. Under a lease purchase (a.k.a. "Rent-To-Own ), we agree to give the buyer their asking price but in a few years time. In the interim, they will receive monthly rent which is usually enough to cover their principal, interest, taxes and insurance ("PITI"). We make the tenant responsible for all maintenance and repairs and the owner basically collects a check every month. As an investor, I make money on the transaction by selling the tenant buyer my agreement to purchase the property at a set price for a period of time.
A Structured Transaction
Structured transactions are perhaps my favorite form of deals. These deals usually involve special types of agreements, seller/owner financing, cash and/or other tactics to make the deals work and solve the specific set of problems for the seller. For example, a seller may want a higher price for a property than we can pay and expect to make a reasonable profit. Instead of paying them 100% cash at closing, we can use seller financing so that they receive payments over a number of years. There are also tax benefits of this specific structure as it allows the seller to spread out their gains over time.
Consulting For the Seller
Consulting for a Seller, while not always the most profitable course of action, is sometimes the best thing I can do for them. I typically consult for sellers when they just need to renegotiate their financing. For example, a lot of homeowners are significantly underwater meaning the principal balance on their mortgage(s) are substantially higher than the property is worth. Furthermore, the families are in duress and can't continue to make the monthly payments. Under this set of circumstances, I will work with the owners and the lenders to renegotiate the terms of their financing. This helps to mitigate losses for the financial institutions and help the owners stay in the home under payments that are more feasible for them.
Marketing To Buyers
An additional way I make money on transactions and that I consider "Consulting" is marketing the property to other buyers. This is done when the seller/owner and I can't agree on price but the property still may be considered a deal to someone else. Under this scenario, I will market the property to my buyer's list and charge a fee for this service. This helps the seller to get their property in front of motivated buyers and many times, can help the sellers with price discovery (i.e. helping them understand where they might be able to sell their property at when they don't believe the comparables sold).
Referring To A Real Estate Agent
I work hand in hand with several great real estate agents. I will usually refer these sellers/owners to real estate agents when my offers and options don't work. The main scenario under which I refer people to real estate agents is when they want to capture the full retail value of their home and they are not time sensitive. While I don't make direct money on these transactions (because I'm not a real estate agent) I feel I get paid back in karma and by building stronger relationships with the agents with whom I work.
Creating Win/Win Situations
So as you can see, I don't just buy and sell homes. This means I am able to provide sellers with more options to solve their problems. It's my job to recommend the best option to them for their situation. Only after I have done this do I figure out a way to make money on the transaction.
Always Listen To The Seller
My one piece of advice is make sure you listen to the seller and understand their situation. Even if you don't know the technical name for a structure or type of arrangement, where there's a will, there is a way. You don't have to give the seller the options right then and there as you are sitting with them. You can always go back to them later with suggestions or recommendations.
Thoughts? Comments? Suggestions?
Let me know in the comments below.
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