Guide To Real Estate Investing

Guide To

REAL ESTATE

INVESTING

GUIDE

REAL ESTATE

INVESTING

GUIDE

REAL ESTATE

INVESTING

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GUIDE TO REAL ESTATE INVESTING

Table Of Contents

GUIDE TO REAL ESTATE INVESTING

introduction:

Investing In Your Future .........................................................1

The Major Beneﬁts Of Real Estate ..........................................2

A Market Full Of Opportunities .............................................5

chapter 1:

The Circle Of Wealth .....................................................................11

Many Property Types and Business Strategies .........................12

The Circle Of Wealth And Multiple Income Streams ................13

Types Of Earned Streams Of Income ....................................14

Types Of Passive Streams Of Income ....................................14

Types Of Portfolio Streams Of Income In Real Estate ................16

An Introduction To Some Key Areas Of Real Estate Investment ...17

Making The Right Income Stream Choices .............................18

Wholesale Buying ............................................................20

Lease Options ..................................................................22

Foreclosures ....................................................................23

It’s A Learning Process .......................................................24

chapter 2:

Understanding Market Analysis & Evaluation ............................ 27

History Is A Great Teacher - And Predictor Of The Future ..........27

How Does That Relate To Today’s Markets .............................30

If Educated Investors Don’t Buy Emotionally, How Do They Buy? 30

You’ve Got to Know When to Hold—and When to Fold!.........32

What This Means To You ..................................................33

chapter 3:

Getting To Know Your Market ............................................ 37

True Market Value .............................................................38

Deﬁning The Area You Will Invest In .....................................38

Segmenting Your Area .......................................................39

Deciding What Area You Want To Focus On .........................41

Determining Property Values Using Comps .............................41

What The Comparables Will Tell You ...................................42

chapter 4:

Selecting A Power Team .................................................... 47

Finding The Right Real Estate Professional ..............................47

Choosing The Right Real Estate Professional ...........................48

Not Too Big, Not Too Small, Just Right!!! ..............................49

Real Estate Professional Interview Script ................................50

Finding The Right Mortgage Broker ......................................52

Mortgage Broker Interview ................................................53

Community Banker ..........................................................54

Contractor Handyman .......................................................55

Tax Professional ................................................................56

Appraiser ........................................................................56

Lawyer ...........................................................................56

Title Company .................................................................56

Home Inspection Professional ..............................................57

Surveyor .........................................................................57

Termite Inspectors .............................................................57

Insurance Agent ...............................................................57

Property Manager ............................................................58

Mentor ...........................................................................58

Government Grant and Loan Specialists................................58

Networking Contacts ........................................................58

chapter 5:

Finding Motivated Sellers .................................................. 63

What Is A Motivated Seller? ...............................................63

How Do We Find Them? ...................................................64

Niche Marketing ..............................................................77

Networking Resources .......................................................81

chapter 6:

Making Quick Cash: Wholesales ........................................ 91

Where To Find Wholesale Deals .........................................92

Driving For Dollars ............................................................93

Assignment Of Contract And Double Closing .........................96

Contingencies ..................................................................97

Title Companies or Closing Attorneys ...................................99

Building A Database Of Buyers .........................................100

Advertise To Find Your Buyer .............................................104

What To Offer ...............................................................105

Negotiating With The Seller .............................................107

Contracts ......................................................................108

Why Wholesaling? ........................................................110

Exit Strategies ................................................................112

chapter 7:

Securing The Financing ................................................... 117

Getting Creative.............................................................117

Working With Mortgage Brokers ......................................118

Calling Mortgage Brokers ................................................119

Pre-Qualiﬁed Vs. Pre-Approved..........................................120

Questions To Ask Mortgage Brokers ...................................121

Seller Financing .............................................................126

Other Low Or No Money Down Techniques ........................130

GUIDE TO REAL ESTATE INVESTING

Table Of Contents

chapter 8:

Proﬁting By Controlling Property: Lease Options ............... 149

Elements Of A Standard Option Contract ............................150

What Is A Lease Option ..................................................151

Beneﬁts Of A Lease Option ..............................................152

Buying And Selling With A Lease Option ............................155

Who And What We Are Looking For? ...............................157

Working With The Motivated Seller ...................................162

Things To Agree On With The Seller ..................................168

Sample Contracts and Documents To Use As The Buyer .........169

Bulletproof Your Option With The Seller ..............................171

Bulletproof Your Option With Your Tenant/Buyer ..................173

Finding Tenant/Buyers For The Deal ...................................175

Meeting With Your Potential Tenant/Buyer ..........................178

How Do I Qualify Them? .................................................179

Sample Contracts and Documents Used by The Seller ...........180

13 Steps To Being Successful In Lease Options ....................188

How To Do A Lease Option..............................................191

Points To Consider ..........................................................193

Sample Car Magnet Ads .................................................194

Sample Newspaper Ads .................................................195

Sample Signs And Flyers ..................................................197

Sample Postcards ...........................................................198

Sample Property Information Sheet .....................................199

Sample Authorization To Release Information Form ................200

Sample Letter Of Instructions To Lender ................................201

Sample Residential Lease With Option ...............................202

GUIDE TO REAL ESTATE INVESTING

Table Of Contents

chapter 9:

Becoming A Problem Solver: Foreclosures ......................... 207

What Is Foreclosure? ......................................................208

The Three Phases Of Foreclosure .......................................211

The System For Buying Pre-Foreclosures ...............................216

Sample Authorization To Release Information .......................259

Sample Bill Of Sale ........................................................260

Sample Affadavit And Memorandum Of Agreement ..............261

Sample Car Magnet Ad ..................................................262

Sample Newspaper Ad ...................................................262

Sample Letter And Flyer ...................................................263

chapter 10:

Negotiating With Conﬁdence .......................................... 269

Practice Talking To Get Over Fears ....................................269

Listen To The Seller ..........................................................270

Communication And Salesmanship ....................................270

The Anatomy Of A Presentation .........................................272

chapter 11:

Making An Offer: The Contract ........................................ 279

The Offer Vs. The Contract ...............................................280

Basic Requirements Of A Contract .....................................281

Sample Contract For Purchase And Sale .............................283

Glossary: .................................................................. 309

GUIDE TO REAL ESTATE INVESTING

Introduction

hrough real estate investing,

many individuals just like you

have been able to increase their net

worth substantially, obtain the things

they always wanted to have, reached

their ﬁnancial goals faster than they

thought possible, and preserved their

wealth for their retirement and/or their

families. And many have done so

without much money to start with, or

without any money to start with at all.

The fact is, real estate investing is

a powerful tool for building and

preserving wealth no matter where you

live and no matter who you are. And

unlike some investment opportunities,

real estate investing has “staying

power.”

Demand for real estate in most areas is

constant although there are economic

factors that inﬂuence the market and

its demands. The good news is that

when the economy is in a slump,

there are tremendous opportunities for

good real estate deals because the

number of buyers decreases along

with tougher economic times. Now

is just such a time and that makes

investing in real estate more lucrative

than ever. The key to building wealth

through real estate is having the

knowledge to understand the market

swings and pressures and then being

able to capitalize on the opportunities

as you ﬁnd them. There will always

be a never-ending supply of buyers

INTRODUCTION

Investing In

Your Future

This appreciation rate generally takes

place as part of natural market growth,

essentially, without you doing anything.

To illustrate, consider homeowners who

purchased their homes 20 years ago

and now ﬁnd themselves with $150,000

in equity in their homes, something they

never thought about at the time they

purchased the home. Beyond that, you

can create situations where you “force”

appreciation, such as through renovations

or cosmetic improvements to a home (we

call this rehabbing properties). This is

where the work you put into a property

makes it instantly more valuable than the

price you paid for it.

• GENERATE POSITIVE CASH FLOW

YOU CAN USE – Some investors will

purchase property in order to rent it out

and create positive monthly cash ﬂow.

Property can sometimes be rented for

more than the total expenses (principal

and interest, taxes and insurance), so

you can make money from the rental,

while someone else is building equity in

your property. Another way to buy and

hold property is to lease it to someone

else with an option for them to purchase

it in the future. This technique creates

excellent positive monthly cash ﬂow since

looking for everything from their ﬁrst home to

their retirement home—and you will be the

investor who has exactly what these buyers

need.

Before we go into greater detail in

this manual about proﬁting with real estate,

locating and negotiating deals, evaluating

properties, and making the most out of some

of real estate’s best opportunities, let’s take

a brief look at the real estate investment

market in general to see why it provides so

many avenues for building wealth.

THE MAJOR BENEFITS

OF REAL ESTATE

The beneﬁts of investing in real estate are

many, from creating situations where your

proﬁt potential is up to you, to building a

lifestyle some people only dream of. With

real estate, you can:

• OWN YOUR OWN BUSINESS

Work part-time or full-time, be your own

boss, and time things according to your

schedule and goals.

• TAKE ADVANTAGE OF APPRECIATION

Real estate typically appreciates around

four to ﬁve percent annually.

GUIDE TO REAL ESTATE INVESTING

Introduction

these tenants are willing to pay more than the average renter will

pay.

• CREATE A HEDGE AGAINST INFLATION – Even in times of

inﬂation, opportunities abound with real estate. That’s because

inﬂation tends to force higher real estate prices and because the

underlying asset (your property) can be counted on to be there

through inﬂation (while some other investments may not survive

economic downturns).

• MAKE MONEY WITH LOW RISK AND LOW STARTUP

COSTS – The market for potential customers is huge and you

can start your business in real estate investing with little or even

no capital of your own. There are always private investors in the

marketplace who have the money to invest but do not know how

(or don’t care to do the work) to do the deals themselves.

• PROFIT FROM EQUITY BUILDUP – You build equity at the

same time as the property is naturally increasing in value due to

market conditions and demand. And you can tap that equity in a

property to ﬁnance additional investments.

• ENJOY MULTIPLE CHANNELS FOR PROFIT – There are many

ways to invest in real estate and there is something for everyone,

from the casual or ﬁrst-time investor to the more experienced or

full-time investor. Once you understand the variety of opportunities

available, you can choose the deals that help you reach your

individual goals faster.

many easy ways to ﬁnd the opportunities

that will help you succeed.

• MARKET YOUR BUSINESS EASILY

Marketing real estate is not complicated.

Everything from a For Sale sign in the front

yard of a home you have renovated to

an ad or direct mail campaign can bring

in customers. Some investors have netted

thousands of dollars in proﬁt on deals

simply because someone called them

from a car magnet ad on the side of their

vehicle or from a ﬂyer they posted on a

community bulletin board at an apartment

complex.

• BUILD A POWER TEAM TO HELP

YOU INCREASE AND EXPEDITE YOUR

PROFITS – To succeed with real estate

investing, you will want to establish solid

relationships throughout your community

and in the business… relationships with

people who can help you build your

business, partner with you in investments,

or be available to buy your properties.

A winning team of contacts would

include people like a good real estate

lawyer, real estate agents or brokers, an

accountant or tax expert, a mortgage

broker, a professional home inspector,

mentors or coaches who can guide

• BENEFIT FROM REAL ESTATE’S

REPEATABILITY – Once you learn the

basics, learning advanced skills is even

easier than you might realize. You can

use the knowledge you build about real

estate investing to repeat the process

over and over again, on multiple types

of properties, increasing your proﬁts

considerably without working harder to

do so.

• BENEFIT FROM TAX BREAKS – When

you invest in real estate, consult with a

tax professional about the opportunities

that may be available to you through

depreciation, in writing off certain business

expenses, and through tax breaks (for

example, deducting the interest portion of

mortgage payments).

• FIND INVESTMENT PROPERTIES

AND OPPORTUNITIES EASILY – With

real estate investing, opportunities are

all around you. You can make a simple

effort, like driving through neighborhoods

looking for For Sale By Owner signs, or

you can do everything from establishing

relationships with real estate professionals

to placing your own ads to generate leads.

What’s nice to know is that regardless of

the time you have available, there are

GUIDE TO REAL ESTATE INVESTING

Introduction

you through transactions and help motivate you, and qualiﬁed

contractors, builders, and other professionals who can assist you

in rehabbing your properties.

• HELP OTHERS – One great aspect of real estate investing

is you can help others in need. Consider someone who has a

distressed property because they live in another state and they’re

trying to manage it long distance. You could help alleviate that

burden. Or consider someone who is struggling with debt and

now the bank is going to foreclose on their home. You could

help them save their credit. The possibilities for helping others are

endless.

A MARKET FULL OF OPPORTUNITIES

There are not only many beneﬁts associated with real estate, but

also many opportunities for success regardless of your ﬁnancial

goals, location, or ﬁnancial situation.

SHORT-TERM AND LONG-TERM STRATEGIES

With real estate, there are both short-term and long-term investment

strategies available to you, giving you the ﬂexibility to make

investment choices that ﬁt your schedule and needs.

As an example, you may wish to hold properties only for the

short-term, so you might purchase a property below fair market

value, ﬁx it up with minor repairs and cosmetic improvements (such

as painting and landscaping), and then turn around and sell it

quickly for proﬁt.

OPPORTUNITIES IN ALL AREAS

You can make money with real estate

regardless of the area you live or invest in.

This book will begin helping you to become

knowledgeable about how to analyze and

identify proﬁt potential in real estate markets.

Your future training will take you to the next

level and to those who are committed, the

potential for wealth accumulation will be

unlimited.

Just a few examples of ways to build

wealth follow and illustrate this point. For

example, in low-income areas, you can ﬁnd

several great opportunities for rehabbing or

wholesaling properties. These opportunities

allow the owner/landlord to provide

affordable, clean housing for low-income

families, while generating positive cash ﬂow

through highly proﬁtable weekly or monthly

rentals. When you act as the intermediary

investor, they provide a way to generate

income through either quick turns after

the rehab or fast cash through wholesale

techniques.

In moderate-income areas, you can

proﬁt from excellent resale values and work

with a large market of ﬁrst-time homebuyers

who may need special ﬁnancing options

to purchase their home. Moderate-income

areas can also provide good rental income

opportunities.

You can even purchase or contract for a

distressed property at well below fair market

value, and sell either the property or the right

to buy the property, immediately to another

investor who will do all the work improving

the property. This short-term strategy is known

as “quick-turning” or wholesaling properties.

Individuals have made fast proﬁts of thousands

of dollars on just one deal in wholesaling

a property and you can too! Additionally,

investors have used wholesaling strategies to

make quick cash to pay down their debts,

generate extra income in addition to a full-

time job, start their own business slowly and

with limited risk, and create capital for future

investments.

A long-term strategy might be to buy

a home below fair market value and then

rent it out for any number of years or lease

it to someone else giving them an option to

purchase it in the future. In situations like these,

when you have tenants, they are building

your equity because with every payment they

make to you, you are taking that payment

and decreasing your existing mortgage.

GUIDE TO REAL ESTATE INVESTING

Introduction

In just above median home value areas there are currently

great prospects for two techniques: either offering lease options

to potential homebuyers, or buying at substantial discounts due to

distressed seller situations and then holding the properties for short-

term for proﬁts at the time of sale.

And ﬁnally, there is tremendous opportunity in some of the best

neighborhoods and school districts in the cities across the U. S. due

to the distress of the sellers who must get out of a property quickly.

While not for the beginning investor, these types of deals can give

experienced investors the opportunity to invest when tax shelters are

the priority.

EVALUATING BUY & HOLD PROPERTIES

If you intend to buy and hold property for cash ﬂow, it is important

that you choose properties that will cash ﬂow—and the United States

has an abundance of properties available that will meet your needs!

Having said that, if you are considering rental housing consider

carefully the beneﬁts of buying houses that have more than one

stream of income coming in each month. For example, if you are

buying a single family house to rent out, if it is vacant for a month,

you are making the entire mortgage payment. However, if instead

of buying single family houses to rent out you focus on duplexes,

triplexes, and quads, if one of the units is empty, you still have the

other(s) to help cover your expenses. That is part of the beauty of

real estate—various tweaks on your buying decisions can make

big differences in the outcome of the deal. And in this scenario, the

price of a duplex is seldom anywhere close to double the price of

the single family. Yet, the rents from each unit are not half as much as

the single family’s rental income price. For that reason, it is unusual

for us to recommend you buy and rent out single family homes in

working class neighborhoods. Go for the duplex!

On the other

• SELLER FINANCING – You can take

advantage of seller ﬁnancing, lease

options, etc., to allow you to purchase

properties with little or no money down.

• SOURCES FOR SEED MONEY

(CAPITAL) TO FINANCE YOUR

INVESTMENT – Even people with poor

credit have still been able to achieve

success in real estate investing; you just

have to know how to look for the creative

ﬁnancing opportunities. Some examples

include seller ﬁnancing, wraparound

mortgages, equity ﬁnancing, partnering

with other investors, etc.

So, for many reasons, real estate provides

people with opportunities to proﬁt and

earn income in ways they never would

have dreamed possible. The more you

learn and the more prepared you are

to take on new opportunities, the better

you’ll succeed in generating amazing

proﬁts and changing your life forever. We

are dedicated to helping you get there.

So let’s get started!

hand, in the upper income neighborhoods,

lease options work beautifully on single

family homes because you will be dealing

with future buyers of the property from the

beginning. Knowing what to buy, where to

buy, and how to hold will move you to your

ﬁnancial dreams more quickly than you can

imagine—the opportunities are endless!

MULTIPLE FINANCING OPTIONS

Real estate investing can be done virtually

anywhere by anyone—the key is knowledge.

It provides a way for any individual to

get involved and reach their ﬁnancial

goals, regardless of their current ﬁnancial

situation. That’s because there are many

creative ﬁnancing and buying approaches

available. You just have to know where and

how to look for them. For example, you can

ﬁnd opportunities through:

• GOVERNMENT PROGRAMS – There

are many ways to purchase homes

well below fair market value through

government-sponsored programs, and

there are ways to use government

programs to ﬁnd opportunities you could

not ﬁnd anywhere else.

CHAPTER

ONE

PORTFOLIO

2-3 Streams

EARNED

3-4 Streams

PASSIVE

3-4 Streams

GUIDE TO REAL ESTATE INVESTING

The Circle Of Wealth

CREATING YOUR PERSONAL

BUSINESS ROAD MAP

f you were going to travel from

New York City to San Francisco,

there are such good road signs and

highways systems across the United

States that you could probably ﬁnd

your way without having a detailed

road map that outlined your journey.

But doing so wouldn’t make much

sense, would it? You would end up

taking a few wrong turns, you’d have

trouble getting started, and ultimately,

you would be sure to get lost a few

times along the way.

The same is true for choosing

to invest in business. Having a clear

idea of the beneﬁts and advantages

of different types of real estate deals,

clearly evaluating where you are in

terms of resources, and moving in the

right direction with the least amount

of wasted time will be a tremendous

asset to you. That is the purpose of

this chapter—to help you begin to

get more clear about where you are,

where you want to go, and the best

way to get there.

One of the ﬁrst things you should

do is a personal ﬁnancial evaluation

of where you are at this moment in

time.

Do you have strong or weak

THE CIRCLE OF

WEALTH Multiple

Streams Of Income In

Real Estate Investing

TECHNIQUE/

CIRCUMSTANCE

Wholesale buying

& contract sales

Lease Option

Foreclosure

Rehabbing

Mobile Homes

Tax Liens & Deeds

Property

Management

(Managing other

investors’ property)

BENEFIT

Quick cash

return/low cash

investment

Cash ﬂow,

appreciation/

can be structured

with a low cash

investment

Quick cash

(short-term), needs

some cash to do

Quick cash,

cash ﬂow/needs

cash or credit

investment

Cash ﬂow/low

cash investment

Portfolio income

from interest/

higher cash

investment/little

leverage

Cash ﬂow/

very low cash

investment

needed to begin

credit? Do you have access to money

lending sources? Are they public (lenders,

banks, mortgage brokers) or private

(personal contacts who might be willing to

help you to get started)? Once you have

clearly delineated your current position you

are better able to begin choosing the right

types of deals to move you towards ﬁnancial

freedom. For example, if you have few

ﬁnancial or credit resources, you will want

to choose types of real estate deals (at least

in the early stages of your career) that do

not rely on either credit or funding. One of

these types of deals is called “wholesaling.”

So, let’s begin this chapter by outlining the

various ways to make money—and the type

of money it takes to do that kind of deal.

MANY PROPERTY TYPES AND

INVESTMENT STRATEGIES

Real estate investing is attractive because

there are many property types to invest in,

as well as many strategies for what to do

with those properties. And each comes with

its own rewards. The following are some of

the main types of investment opportunities,

with their primary beneﬁts listed.

GUIDE TO REAL ESTATE INVESTING

The Circle Of Wealth

Investors consider different options based on the outcome they

want to achieve, the amount of cash they want to invest in the

project, and/or their level of experience with different strategies.

 For example, an investor may want to consider quick cash

investment strategies for a variety of reasons, among them being

high consumer debt (generating quick cash to pay down that debt)

or lack of seed capital to work with (using wholesale opportunities

to quickly build more money for future investments).

 Of course, with multiple income streams and opportunities

comes the need to obtain the proper knowledge to specialize

in different areas. Because wholesaling, foreclosures, and lease

options are some of the more popular ones in real estate investing,

we have included chapters focused speciﬁcally on those strategies

in this manual. This book also introduces you to several other streams

of income in real estate investment and deﬁnes the types of income

those strategies can produce. As you grow your business and ﬁnd

the real estate investment areas and strategies that interest you most,

you can discuss with us more opportunities for advanced training in

those areas so you can maximize your proﬁt potential.

THE CIRCLE OF WEALTH AND

MULTIPLE INCOME STREAMS

You might be wondering how to choose your streams of income

and what factors should inﬂuence your decision, so before we go

any deeper into this book, let’s take some time to deﬁne the various

types of income and the beneﬁts of choosing one over the other.

deals, you collect the rent (or your property

manager collects it for you) every single

month. Another real estate related ﬁeld of

income that would be considered passive

is when you become a property manager,

have a property management company,

and investors hire you to collect the rents for

them and pay you a fee to do it!

TYPES OF PASSIVE STREAMS

OF INCOME IN REAL ESTATE:

• RENTALS— houses, apartments,

mobile homes, etc.

• LEASES— lease option properties

• PROPERTY MANAGEMENT—

mentioned above

• RECREATIONAL PARKS— where you

rent out spaces

• MOBILE HOME PARKS— where you

rent out lots and others own the

mobile homes

• APARTMENT HOUSES— which bring

you in multiple payments every month

TYPES OF EARNED STREAMS

OF INCOME IN REAL ESTATE:

• Wholesaling

• Foreclosures, Pre-foreclosures, and

Real Estate Owned Properties (Post-

foreclosures)

• Rehabbing

• Probate

• Discount Note Selling

• Remodeling

• Land Development

Basically, anything that you are going to

contract and sell quickly would fall into the

Earned Income category.

PASSIVE INCOME: Passive income is

money that comes to you week after week

or month after month without you going

out and doing another deal. This type of

income is also sometimes called “recurring

income.” In real estate, these would be

your buy and hold properties—your rentals

and leases.

Once you have closed on these

GUIDE TO REAL ESTATE INVESTING

The Circle Of Wealth

• COMMERCIAL SPACES— ofﬁces, retail establishments,

storage unit facilities, industrial buildings, etc.

Buy and hold properties are where you build long-term wealth and

begin to beneﬁt from appreciation and tax advantages. So, earned

income streams help you generate the cash to move towards buy

and hold long term wealth! The two work hand in hand to help you

achieve your goals.

PORTFOLIO INCOME: Portfolio income is when your money begins

to make money for you—typically through interest. Let’s say you

have $30,000 to invest in some type of real estate related deal but

you do not want to have to do any work or invest any time once

you have made your purchase. In this situation, you might choose to

invest that money in tax liens that earn a return of 18% per year. You

attend the tax lien auction, purchase liens that take the $30,000

investment amount, and then you sit back and wait for them to be

redeemed! Your money begins earning interest at the rate of 18%

per year the day you pay for the liens and the county property tax

ofﬁce employee does all the monitoring and paperwork! That sure

beats investing in a CD at 1% or 2% interest, doesn’t it?

There are several other ways for you to generate portfolio

income that is real estate related, as well. Most of these streams of

income relate to the investor earning interest on his or her money.

While this book will not go into depth on these techniques, it is

important for you to at least understand the potential and deﬁnition

of these income streams.

 New investors who have a limited

amount of money begin by becoming

knowledgeable in a few earned income

streams such as wholesale, foreclosure, and

rehabbing. Now they have more control

over their ability to generate large amounts of

cash in a short period of time. They then take

that money and begin to invest in buy and

hold properties such as lease option houses.

They have now learned to invest safely, and

once we learn to do it safely, we can do

it quickly!

As the passive income grows or the lease

option properties begin to sell (usually three

years later), the investor has two choices:

either buy another buy and hold property or

invest in a portfolio stream (such as tax liens,

deﬁned above).

Begin to train your mind to

think in terms of The Circle of

Wealth and always ask

yourself what your short

and long term goals are

at any given moment.

Yes, we get rich in buy

and hold situations, so

that is your ultimate goal,

but if you are beginning with

limited resources and need to

generate some cash so you can build a

substantial portfolio in a fairly modest number

of years, earned income can help you do that.

TYPES OF PORTFOLIO STREAMS

OF INCOME IN REAL ESTATE:

• Tax Lien Auction Investments

• Discount Note Buying

• Seller Financing

• Hard Money Lending

• Venture Capital

In real estate, you will often hear others refer

to “The Circle of Wealth.” Real estate can

allow investors to create wealth through a

very systematic process that builds

upon itself. Here’s how it looks

and how it works:

While everyone is

different, with different

goals and demands on

their time, professional

real estate investors will

typically want to have

three to ﬁve streams (and

accompanying knowledge

bases) of earned income, three to ﬁve

streams of passive income, and two to three

streams of portfolio income.

PORTFOLIO

2-3 Streams

EARNED

3-4 Streams

PASSIVE

3-4 Streams

GUIDE TO REAL ESTATE INVESTING

The Circle Of Wealth

AN IMPORTANT CONSIDERATION: As investors, it is crucial for

us to “begin with the end in mind.” Now, I realize that you might

be starting on a shoestring and you probably have immediate

needs that you want real estate to assist you in fulﬁlling. However,

this business can be one of the best ways for you to become a

millionaire or a multi-millionaire—and on some level you understand

that or you wouldn’t be reading this book. So, set aside your fear

and discouragement from yesterday and ask yourself, “If I could

retire in ten years and own and control 350 apartments in a good

neighborhood that produced $25,000 a month in positive cash

ﬂow, would I feel safe and secure about my ﬁnancial future and

my golden years?” I believe that most of you would answer this

question with a resounding, “Yes!”

So, let’s begin your investing business with that level of

commitment to your future. The Circle of Wealth can help you

achieve those goals. Consider it carefully and ask yourself what it

could mean to your current lifestyle (and checkbook balance) if you

had 7-10 streams of income and could generate both short and long

term cash ﬂow. Then, commit to your future, to your accumulation of

knowledge, and to having a mentor to guide you along the way.

AN INTRODUCTION TO SOME KEY AREAS OF

REAL ESTATE INVESTMENT COVERED IN THIS BOOK

Before we delve deeper into these subjects, let’s take a moment to

discuss some of the key property and investment types in overview

form to familiarize you with some of your options and prepare you

for what you are about to learn from this material.

As professional investors, we weigh each

deal against the ideal and then consider the

beneﬁts of that type of deal versus another

opportunity. We do not always hit each one

of these characteristics—particularly in the

beginning of our investment careers—but we

always evaluate and make informed choices.

When considering a distressed property,

we are looking for the following advantages:

• There is often less competition for

them since the average individual wants

properties in good condition.

• Most market areas offer numerous

distressed properties to choose from.

• You can often purchase distressed

properties under ﬂexible, easy terms

and for prices substantially below

market value, making for a nice proﬁt

margin on a resale or good cash ﬂow

on a rental.

• You have the ability to instantly

increase your property’s value through

minor improvements and rehab

work (forced appreciation).

MAKING THE RIGHT

INCOME STREAM CHOICES

DISTRESSED PROPERTIES VS. DISTRESSED

OR MOTIVATED SELLERS

There is an old maxim when it comes to real

estate investing: “There are only two types of

deals out there—either distressed properties

or distressed sellers.” Regardless of your

investment strategy or targeted property type,

you will ﬁnd that some properties provide

more ideal investment opportunities than

others. When we refer to a property as

“ideal,” we do so for a reason. The word is

also an acronym for the following:

I = Income (Produces Cash Flow)

D =Depreciable (Offers Tax Advantages)

E =Equity (Equity Build-up Increase Net

Worth)

A =Appreciation (Increases in Value)

L =Leverage (Increases Return on

Investment)

GUIDE TO REAL ESTATE INVESTING

The Circle Of Wealth

Some things to think about with distressed properties include:

• Most real estate markets have a sizable number of investors

looking for these types of properties, so your marketing efforts

need to be active, well planned, and effective to ﬁnd good

deals. It would be wise to investigate different marketing

strategies that have worked well for other real estate

investors, and to ﬁnd others in the business that are willing to

teach you where to look for opportunities and provide tips

on how to bring opportunities to you.

• To avoid costly mistakes, you’ll need to know how to

effectively evaluate the property and its neighborhood.

• Thorough inspections and repair estimates should be

performed prior to a purchase.

• If the property is in a lower income and/or older

neighborhood, the comparable sales in that area will

not go over a certain amount of money, no matter how much

improvement is made. Repairs are often costly—so in order

to maximize proﬁtability in the older, lower income areas, it

is typically safer to combine a distressed property with a

distressed seller and maximize the proﬁt potential on

each aspect.

• You must know what put the seller in the

situation they are currently in and ﬁgure

out the best way to help them get out

of it. In order to understand their

problem and solve it, you will need to

develop good listening and negotiating

skills.

• Some distressed sellers present

compelling reasons why they want to

stay in their properties and the

tendency is to want to accommodate

this. If their challenge is for ﬁnancial

reasons, this can be risky. It is important

to keep your emotions out of it.

WHOLESALE BUYING

Distressed properties make for great

wholesaling candidates. And wholesaling is

an excellent opportunity because it requires

little expertise and typiﬁes the quick cash

type of deal that many beginning investors

are looking for.

Wholesale deals may be one of the

ﬁrst types of deals you will make in real

estate investing because it’s easy to identify

distressed properties and there is such great

potential for quick cash.

Advantages of working with distressed

sellers include:

• There is seller distress in every price

range.

• You can sometimes purchase

properties under ﬂexible and easy

terms. The seller needs help and, in

many cases, just needs a way out,

but does not know what to do. You

can provide the solution.

• Seller distress is often caused by

property distress, so the chances

of being able to increase property

value through cosmetic improvements

or rehabbing when you can match

a distressed seller with a distressed

property are excellent.

Things to think about with distressed sellers

include:

• Seller distress must be handled

delicately. These sellers are going

through rough personal, professional,

or ﬁnancial times and they can be

experiencing all kinds of emotions.

GUIDE TO REAL ESTATE INVESTING

The Circle Of Wealth

To truly be successful with wholesaling, some of the things you

will need to learn include how to: properly segment your market;

develop a database of potential properties, investors, and buyers;

understand the multiple ways to target and market for wholesale

deals; locate absentee owners; build a network with other investors;

and develop key strategies that will help you close deals.

In addition, you should master several basic aspects of the

wholesaling business, including:

PRESCREENING PROSPECTS – Since distressed properties should

be your primary target, you should learn how to both identify and

evaluate distressed properties. You should also understand that a

distressed property does not necessarily mean a deal is good, but

that it is a good start. So you need to master the techniques to

know when a deal is too good to be true, when it’s time to move

forward, and when the deal needs to be left on the table. It will

also help to know how to identify a motivated seller, because the

combination of a motivated seller and a distressed property will

make this opportunity far more advantageous.

DETERMINING MARKET VALUE – You need to understand the

importance of determining fair market value after repairs to be a

successful wholesaler. The real estate professionals on your power

team will be key assets for getting this information. Also, using

comparable sales of homes in the same market area will help you

determine fair market value.

ESTIMATING REPAIRS – This won’t be a successful venture if you

do not estimate repairs correctly. Learn how to analyze deals to

ensure you make an offer that will result in the most proﬁt. There are

LEASE OPTIONS

Lease options represent one of the most

attractive real estate investment opportunities

for both new and experienced investors

particularly because they can generate

multiple streams of income within a single

deal. The following offers a few general

points about using lease options to invest in

real estate:

If you buy property with a lease option, you

can:

• Gain control of a property without

taking ownership of the property –

You have no obligation to buy, but

you have established the right to buy.

• Work with distressed sellers, not

with distressed properties – Seller

circumstances create the deal. What

you need to do is ﬁnd the problem

owners.

• Live in or control nice homes in

nice areas – In these cases, the seller

needs to get out and investors want

to get in (an excellent match!).

Desirable neighborhoods create

demand.

also strategies you can learn that will save

you money on rehab projects and maximize

your proﬁts.

KING OFFERS AND COUNTER-

OFFERS – You need to become familiar with

good negotiating and communication skills,

learn how to make offers and counteroffers

effectively without compromising your goals,

and learn how to work with contracts.

Knowing how to properly evaluate properties

will be critical to determining not only what to

offer, but if you should make an offer at all.

LINING UP BUYERS – Wholesaling is actually

only partially complete if you can ﬁnd and

negotiate deals, but you have nobody lined

up to readily assign contracts to. Building a

sizable investor database to tap regardless

of the type of deal you are working on will

help you move things forward quickly and

preserve your proﬁt margins.

CLOSING EFFECTIVELY – You need to

learn the strategies necessary to close

without cash, including how to do contract

assignments and simultaneous closings.

GUIDE TO REAL ESTATE INVESTING

The Circle Of Wealth

• HELP SOMEONE ELSE IN MANY CASES – The determining

factor in lease options is often debt relief. You are usually

working with people who may not necessarily want to

sell their property, but who must sell it because of ﬁnancial

problems. You can help someone else reach a solution

quickly. Meanwhile, you can do it with little or no money out-

of-pocket.

If you sell property with a lease option, you can:

• Beneﬁt from a large market of motivated buyers – Lease

options can be very attractive to people who are just starting

out or who are starting over. And lease options may be the

only option available to some people based on their credit

circumstances.

• Find multiple proﬁt centers through lease options – You can

create positive monthly cash ﬂow for yourself, collect a non-

refundable option consideration, and proﬁt from the

difference between what you paid for the property and what

price you set for your tenant/buyer.

FORECLOSURES

The foreclosure market can also provide a great avenue for proﬁt

for the beginning to experienced investor. Foreclosures, while

unfortunate, are an everyday occurrence, and this can be your

opportunity to not only make a wise investment, but also to help

someone in need.

and opportunities that will afford you the

most proﬁt. You can learn how to line up

investors before you buy properties to limit

your risk and how to line up potential buyers

before you move forward on deals. You can

become adept at ﬁnding motivated sellers

simply by knowing what to look for in their

ads and more successful with your sales

simply by knowing what to write in yours.

You can learn how to rehab properties to

maximize proﬁts with minimal investment,

including what to look for and what to

avoid, as well as how to make money by

wholesaling properties without ever having

to ﬁx them up. And you can master the

negotiating strategies necessary to get the

best deal or know when to walk away from

the table.

Remember that foreclosures can happen

for any number of reasons, and this is an

area where you can really create a win-win

situation and do something that beneﬁts both

you and the person who might be in trouble.

Investors must be able to effectively negotiate

with both lenders and homeowners to

optimize proﬁts on these deals.

IT’S A LEARNING PROCESS

With so many strategies to employ and ways

to make money in real estate, knowledge

will be key to your success.

By investigating the opportunities

available in real estate investing, you have

taken your ﬁrst important step towards

obtaining ﬁnancial independence. Now,

it’s time to move on to the next level with the

guidance and knowledge you can receive

through our program and this manual. Every

part of this program has been designed

to help you achieve increasing levels of

knowledge and success as a real estate

investor.

You’ll soon see that with the material

presented here, you can easily learn how to

spot distressed properties, motivated sellers,

CHAPTER

TWO

nvesting Is About Supply and

Demand: One of the most

important things you can learn when

it comes to real estate investing is

market analysis—having the ability to

evaluate a market, whether your own

or one in another part of the United

States, and determine if the values are

going up, going down, or are ﬂat.

This is where amateur investors fall

short in their knowledge and this lack

of understanding creates problems for

them when they buy, hold, and sell.

HISTORY IS A GREAT

TEACHER—AND

PREDICTOR OF THE FUTURE:

A little bit of history from the past ten

years will illustrate our points as we

begin to increase our understanding

of market analysis. In 2000, the stock

market was in a self-correction process

and investors who typically put their

money in stock were worried about

their earnings and proﬁt potential in

the short term. In any investment there

will be periodic self-corrections in a

market, whether it is real estate, stock,

or even in gold. Prices and values go

UNDERSTANDING

MARKET ANALYSIS

& EVALUATION

GUIDE TO REAL ESTATE INVESTING

Understanding Market Analysis & Evaluation

So, with the stock market in a state of

stagnation or self-correction, average home

interest rates lower than they had been in

over thirty years, and lending guidelines more

lenient than we had seen in decades, people

began to take their accessible investment

money and purchase homes and land.

In essence, we had a “blue light

special” or buying frenzy kick into full gear

and real estate became the investment

strategy of choice for many people who had

never owned real estate, at all! Adding to

that, investors who were disillusioned with

the performance of the stock market began

pulling available revenue from this type of

investing and move it to real estate.

On top of the stimulus of low interest rates

and extremely relaxed lending qualiﬁcations,

the ﬁrst waves of baby-boomers were within

a few years of retiring. As they saw the

opportunity to invest (and also saw the

non-performance of their stock portfolios),

they began visiting retirement states and

purchasing their homes or condominiums

earlier than they had planned. This was

typically a wise move on their part—but it

created an increased demand on real estate

that was unexpected.

When opportunities to make money

abound, builders will rise to the occasion.

up, they hit a peak, they stabilize, and if

they are not in line with what the market

will bear, they will go back down until they

reach the point that buyers will once again

make purchases.

To add to the situation with stock

investments, in late 2001 we experienced

the trauma of September 11th and there

was more emotional fear generated by this

event than our population has seen on a

collective level in our entire lifetimes. The

natural reaction of people in the grips of

uncertainty is to do nothing—to “batten

down the hatches” until the storm is over.

The problem with this reaction is the paper

currency that we operate on in the United

States. The way our economy ﬂourishes is

for the paper to keep moving. When the

ﬂow of money stops, the economy stalls.

To encourage the American people to

buy/spend their money and keep the paper

moving, the Federal Reserve dropped

interest rates—which allowed people to buy

property with far less interest expense than

historic levels had demanded. Additionally,

loan programs were rolled out with much

more lenient lending guidelines so many

more people were able to qualify for loans

than historic guidelines in the past had

provided.

GUIDE TO REAL ESTATE INVESTING

Understanding Market Analysis & Evaluation

Since there were not enough houses available to purchase,

pre-construction plans became the norm. The mantra across the

United States became, “Pay a 20% non-refundable deposit, contract

for us to build a home or condo at a pre-agreed upon price, and

when construction is complete, you can close.” That accomplished

two different things: people were working (construction picked up

dramatically, jobs were in abundance, and building materials were

ﬂying off the shelves), and paper was moving! For the potential

investor, a feeling of “locking in a price” was of utmost importance.

If the investor was “buying” in a 20% appreciation rate market, and

if the condo was going to take two years to complete, life seemed

golden! The condo would theoretically be worth 40% more upon

completion (and closing) that the contract price! Talk about getting

rich quick—it sure felt as if the goose was laying a golden basket

of eggs!

However, depending upon where an investor was in the

market cycle of self-correction, was there going to be a buyer

for the property to do a quick turn? In 2002, the answer was

a resounding, “You Betcha’!” However, by 2005 and 2006, the

buyers had exhausted their buying ability (run out of money) and the

markets began to stall.

Since real estate revolves around supply and demand, if there

are not buyers that match sellers, the market will stall—which is what

happened. What a concept—ultimately, there must be someone to

live in a house or condo once it is built.

else is afraid, be greedy.” In essence, the

professional investor will typically do the

opposite of what the general population of

amateur investors is doing.

IF EDUCATED INVESTORS

DON’T BUY EMOTIONALLY,

HOW DO THEY KNOW

WHEN (AND WHERE) TO BUY?

Several factors in real estate drive real

estate prices. For example (and this is

simply common sense), if a market has high

unemployment rates, the local economic

conditions are dismal, and interest rates are

high, the real estate market will stall along

with sales of other goods and services

Let’

s take a moment and list the factors

that inﬂuence and drive the real estate

market and prices:

HOW DOES THAT RELATE

TO TODAY’S MARKETS?

The following diagram provides a graphic

view of what happened, where we are right

now, and what to expect based upon historical

data, in the future. The solid diagonal line

(A) indicates where we should have been

in terms of appreciation. The vertical line

(B) in 2002-05 shows what happens when

demand skyrockets. The declining line (C)

illustrates what is happening across much of

the country as prices self-correct to get back

to the markets’ “normal” line of appreciation.

Do you notice that when we have an

upward self-correction, the prices will tend

to rise too high and too fast for the market

to bear (for a period of time) and then

come down too much and too fast on the

downward side? That is due to the tendency

for people to live and make decisions

based upon recency bias! If everyone else

is buying, they hear about it, jump on the

band wagon, and they buy! If everyone

else is afraid to buy, they jump on the

band wagon, and they are afraid to buy!

Warren Buffet has a saying that comes to

mind in these situations, and to paraphrase

him, it comes down to, “When everyone

else is greedy, be afraid. When everyone

GUIDE TO REAL ESTATE INVESTING

Understanding Market Analysis & Evaluation

• Interest rates & inﬂation

• Lending qualiﬁcations

• Availability of housing

• Tourism

• Job growth and stability

• Industry & Manufacturing

• Population growth

• Demographic changes

Every city has historic numbers for appreciation rates—how much per

year, on a fairly long-term basis, the value of real estate increased,

on average.

In most areas of the country, real estate goes up approximately

4-5% per year. Now, some years there may be little change in

prices, and then in other years there will be a jump to correct the

lack of growth in previous years—but when we take a 25 year

average of the median home prices, we see what the city’s average

growth has been in percentage points. That percentage tells us

what to expect for an area’s overall growth rate, prior to factoring

in anomalies such as a new factory moving into the area that brings

in thousands of new jobs.

So now we have an annual average and can base our decisions

and projections for appreciation on numbers, rather than feelings.

This is a key point!

Human beings who are not knowledgeable

changes. What should they have done? A

knowledgeable investor would have been

researching markets for areas that were

under-valued prior to the drop in interest

rates and lending qualiﬁcations. Then, the

investor could target areas based upon his

or her knowledge of the upcoming baby-

boomers who would be moving into certain

areas of the country when they retired. And

ﬁnally, the investor would have worked

closely with professionals in that area and

found out how many homes were on the

market, how long listings were taking to

move, and if any changes were taking place

within the community to signal a change in

expectations for that market.

So, a savvy investor in an under-valued

city like Bradenton, FL. would have been

buying property in 2002, 2003, and 2004,

but would have seen that prices were no

longer in line with the economy of that city

by early in 2004 and begun to sell before

things got out of control in terms of the price

of houses. Always remember, houses in any

city are there for people to actually live in

(what a concept)! If the average person

does not make enough to live in a house

or apartment (either buy or rent), there are

going to be vacancies! Real estate is like a

ﬁnely tuned instrument—it will self-correct or

“retune” itself whenever the prices get too

far out of line with the economy of the area.

about a topic tend to make decisions on an

emotional level—and then to compound the

problem, they have what I refer to as “recency

bias.” Whatever is happening today, sure

feels as if it will always be happening. That

is not a good place to make decisions from!

Think about this for a few minutes—if real

estate is dramatically increasing in value at a

rapid rate, it sure feels as if you’d better jump

on the bandwagon and buy real estate in

that area!

This is what happened to many investors

between 2003 and 2006. The news came

on at 6 p.m. and the announcer conveyed

the new NAR (National Association of

Realtors

) Quarterly appreciation rates for

the largest 125 cities in the country and

Bradenton/Sarasota, FL. was #1 in the

nation! What did uneducated investors do?

They jumped on an airplane for Bradenton

and bought four houses—and they had

no understanding of the above factors that

inﬂuence demand on real estate in the long

term scheme of things!

YOU’VE GOT TO KNOW WHEN

TO HOLD—AND WHEN TO FOLD!

What was wrong with that picture? They

bought AFTER the market had emerged

and grown—not before or during the

GUIDE TO REAL ESTATE INVESTING

Understanding Market Analysis & Evaluation

The educated and knowledgeable investor would have been selling

by 2004 and 2005—not buying! And, the people he or she would

have been selling to would, in large part, have been the people

who were buying airplane tickets and ﬂying into the area to buy

property that they didn’t have the correct knowledge to buy.

WHAT THIS MEANS TO YOU

At this point you might ask yourself, “How do I ﬁnd undervalued areas

to invest in? How do I evaluate where those areas are in terms of the

market cycle?” One of the best things you can do as you begin your

real estate investing business is have a mentor to guide you through

the process. He or she will know and understand the intricacies of

investing and market analysis. As well, your mentor will work with you

to identify new market trends that are taking place in the area under

investigation, the number of days on market, the sub-areas within the

overall city that are most likely to appreciate the most quickly, and

those that are most likely to stall and begin self-correcting ﬁrst.

Now, in a market that is already stalled, where do investors

begin? Start by identifying the sub-neighborhoods that are moving

the most quickly! Working with your real estate professional, do a zip

code search for the areas that have the properties that are moving

with the most frequency. And then, begin looking for distressed sellers

that are highly motivated to sell in those zip codes. If one of your

streams of income is going to be foreclosures, you could target all

sellers within a certain zip code who are in pre-foreclosure status.

If one of your investment strategies is to buy and hold using lease

option techniques, you could then buy the pre-foreclosure, hold it for

three years using a lease option technique, and realize the beneﬁts

of the appreciation that the city’s otherwise stalled market is not

experiencing.

SELF-CORRECTING MARKETS: Areas

that have either gone up too quickly

or too much due to dabblers investing

and creating artiﬁcial demand that was

not ﬁlled by actual long term buyers or

tenants, or areas that are undervalued

that need to adjust upward to change

the pricing for that physical location’s

proximity to nearby, higher priced areas.

DEPRECIATING MARKETS: Areas where

industry, manufacturing, or tourism has

declined, decreasing the demand on

the existing available housing and new

structures or sources of revenue are not

yet in place to create a new demand.

Based upon these deﬁnitions and categories

of markets, where would you categorize

your city, overall?

Many new investors, as they evaluate

their local markets, believe that property is

depreciating when it is actually self-correcting.

As well, they buy based upon price, rather

than buying based upon market potential.

Most new investors lean towards buying in

the low or middle income areas because they

feel the risk is lower. However, when market

analysis is a part of your knowledge base,

buying decisions are made based upon exit

and holding strategies, not on fear of risk

(bigger numbers).

The key concept in this chapter is for

new investors to understand the magnitude

of analyzing a real estate market prior to

buying property. If you are buying in a

stalled real estate area, and you understand

that from the beginning, you will know to

buy at a large discount to cover and build in

the lack of appreciation that you understand

is going to be a part of that deal.

If you know where you are in a market

cycle, you can buy, hold, or sell accordingly,

as well as change or modify your exit

strategy to complement the part of the cycle

you are in. The cycles or conditions of a real

market are as follows:

APPRECIATING MARKETS: Areas where

there is not enough housing, high demand,

or a shortage of land. Areas where an

increase in population is placing pressure

on the housing market. Neighborhoods

that are in high demand due to location,

school districts, or other inﬂuences are

cause the area to be considered “choice.”

FLAT MARKETS: Areas that have an

adequate amount of housing for the

population and housing demands. Areas

that have an abundance of land for future

development and few restrictions on

building new houses.

CHAPTER

THREE

s we learned in the previous

chapter, real estate investors

must know how to analyze an overall

market to determine what is happening

within it at any given time. In addition,

they must use their knowledge to identify

the most proﬁtable neighborhoods

within that market for their various

streams of income. Now, with that

knowledge we can begin to look at

ways to make wise buying decisions

in the right places.

The most important thing you will

do in real estate investing is buy right

(in other words, make the best deal

possible when buying a property).

This is where you will really make

your money in real estate.

In fact, you

may have heard people say it before:

you make your money when you buy;

you just realize it when you sell your

property and make a proﬁt, or when

you start getting positive cash ﬂow

from an income-producing property.

And it’s true. So, it’s imperative you

buy right, meaning you never pay too

much for a property.

To do this, you need to get to

know and understand the market

you’re buying in. After all, the only

way you can calculate the after-repair

value of a property is by knowing the

fair market value of houses in the area

you choose to concentrate in. It is a

crucial part of the evaluation process.

GETTING TO

KNOW YOUR

MARKET

GUIDE TO REAL ESTATE INVESTING

Getting To Know Your Market

DEFINING THE AREA

YOU WILL INVEST IN

Start by looking in a low- to moderate-income

neighborhood, where you will ﬁnd a large

inventory of properties. If you want to buy,

ﬁx, and sell, look for decent neighborhoods

where it is clear neighbors care about their

property and the community (these are often

termed “We Care” neighborhoods).

If you want to wholesale properties

(quick-turn properties to other investors – a

popular and proﬁtable strategy you will

learn about in greater detail later), you will

be looking more toward extremely distressed

properties or neighborhoods.

Of course, in order to deﬁne your target

area in relation to your goals, you need to

know where each of these areas is in your

city. If you are not sure where these areas

are, you will need to segment your city with

the help of your real estate agent. If you do

not already have a real estate professional

or need to know what to look for in a good

real estate agent, please refer to Chapter

Two.

TRUE MARKET VALUE

Some people think the true market value is

what they see advertised in the classiﬁed

section of the newspaper or in ﬂyers they

have pulled out of a box on a real estate

agent’s sign. But that is a “wish list” – what

the seller hopes to get. The true market value

is not what people are asking for. It is what

someone is willing to pay and someone else

is willing to accept. And more speciﬁcally,

it is the sales prices of houses that have sold

within the last six months (not what they were

listed for, but what they actually sold for).

No matter what type of real estate

investing you do (buy, ﬁx, and sell;

wholesale; foreclosure; lease option; income

property; etc.), you will need to understand

your market. Understanding your market

will help you know what to offer, how to

recognize a good deal when you see one,

and how to act quickly. And as you develop

your knowledge of the market, you will be

spending less time looking at properties that

aren’t worthwhile investments.

GUIDE TO REAL ESTATE INVESTING

Getting To Know Your Market

SEGMENTING YOUR AREA

Ask the real estate professional what the average price of a three

bedroom, two bath, single family home is in your city. You also want

the agent to pull up a one-line MLS (multiple listing service) list of

single family homes. Sometimes they call this a “short form.” Have the

agent start at $0 and go to 120% of the average home price.

With this information, you can now identify which areas are

low-income, working class, middle-income, and higher-income

neighborhoods. Next, take the average price of a home in your

city and multiply it by 70% and by 110%.

For example:

$100,000 = average price

70% = $70,000

110% = $110,000

EXAMPLE

Below 70% of

Average

70% of

Average

Home Price

110% of Aver-

age

110%+ of

Average

Low Income

Neighborhood

Working Class

Neighborhood

Working Class

Neighborhood

Middle Income

Neighborhood

$70,000 $70,000 $100,000 $110,000 $110,000

Once you have this information, you will need to get a map of your

city, which you can usually obtain directly from your city, purchase

from a store, or ﬁnd on the Internet. You will need to make at least

two copies of this map. Have one copy enlarged to a size that

allows you to easily see the streets and get this copy laminated. If

you live in a large city, begin by concentrating on about a one-mile

square area or on a 20 to 40-block square; you can gradually

expand your area.

neighborhoods more appropriate for

wholesaling opportunities. If you don’t know

where these areas are, talk to someone who

is knowledgeable about your area. You can

contact property management companies,

appraisers, postal carriers, cable workers,

or your local police.

These maps will also help you

understand what homes are selling for in

different segments of your city.

The second map should be on an

8 ½ x 11 inch sheet of paper that you can

put in a notebook and carry with you in the

car (you may need to use several sheets,

depending on the size of your city). Write

on the map where the low-income, working

class, and the middle-income areas are

based upon the information you received

from the agent. Identify extremely distressed

My City

Lease

Options

Wholesale

Pre-Fore-

closure Dovetailed

With

Buy & Hold

Lease Options

Com-

mercial Ofﬁce

Space

Apart-

ments

Wholesale

Rehab

Potential:

Revitalization Areas:

Historic Grant &

Tax Credits

Apart-

ments

Land

Develop-

ment

Wholesale

Mobile

Home Lease

Options

Lease

Options

Lease

Options

Wholesale

Pre-Fore-

closure Dovetailed

With

Buy & Hold

Lease Options

Com-

mercial Ofﬁce

Space

Apart-

ments

Wholesale

Rehab

Potential:

Revitalization Areas:

Historic Grant &

Tax Credits

Apart-

ments

Land

Develop-

ment

Pre-

Foreclosures

Pre-

Foreclosures

Wholesale

Mobile

Home Lease

Options

Lease

Options

GUIDE TO REAL ESTATE INVESTING

Getting To Know Your Market

As you become more familiar with real estate investing and

the skills needed for the streams of income you will focus on, this

map will become more valuable to you as time passes. Now, when

you are searching the MLS list for various properties that are for

sale, you can do speciﬁc searches of zip codes or neighborhoods

when you are ready to go after your next lease option, foreclosure,

wholesale, or rehab property.

DECIDE WHAT AREA YOU WANT TO FOCUS ON

As discussed before, pick an area you want to focus on. Your target

area will depend on what kind of investing you want to do. For

example, if you plan to buy a house, ﬁx it up, and then resell it, you

will be looking in the working to middle-income areas. If you want

to do quick-turns without ever ﬁxing up the property, you’ll look in

areas that are more distressed—areas that the rehabbers tend to

work in. If you are not sure which area to target, then start with the

working to middle-income neighborhoods. You can always expand

to other areas.

Once you have completed this assignment, you will be able to

go into another region, anywhere in the country, and get to know

the market there quickly.

DETERMINING PROPERTY VALUES USING COMPS

Now that you have picked your target area, you are ready to get to

know the market. You will now ask the real estate agent to pull up the

comps (nickname for comparables) within a certain neighborhood.

What you will get is a list of properties that have sold within the

If you are buying rental properties, the

appraiser will use an income approach.

The value of the property is based upon the

income it produces. This method is used in

determining the value of multi-units.

Have the real estate agent pull up a

list of houses that have sold within the last

six months in the area you are focusing on.

Ask the agent to pull up about 20 houses.

If 20 houses haven’t sold, that’s okay. You

can’t make more houses sell than have sold.

On the other hand, if the agent pulls up 40

houses, that’s too many. Ask your agent to

condense the list down either by square

footage, number of bedrooms, geography,

or style until you have 20 houses.

Keep in mind that information about

houses that have sold within the last three

months is more valuable than the comps that

are six months old, since the market can

change quickly.

WHAT THE COMPARABLES

WILL TELL YOU

Looking at the list of properties that have

sold within the last six months, you will see

information about each house, such as:

LISTED PRICE – This is the price the house

was listed for (the asking price).

last six months in the particular area where

you are focusing your investing. The reason

you need the agent to do this is because

the comps help you understand the market.

Earlier, we mentioned some people think the

true market is what they see in the houses for

sale section of the newspaper. But the true

market is what someone is willing to pay

and someone else is willing to accept in a

competitive and open market.

Real estate appraisers use the sales

comparison approach to identify properties

that have recently sold that are similar in

square footage, number of bedrooms,

location, property type, available amenities,

condition, etc. to the house they are

appraising. Appraisers will usually look at

three houses and determine the value of the

house they are appraising based upon the

recent sales prices for those similar houses.

Appraisers also look at other methods to

determine the value of a property, such

as a cost replacement method. With this

method, they are comparing this house to

what it would cost per square foot to build

a new one. This method is not as accurate

because supply and demand, as well as

the economics for an area determines what

people are willing to pay. You will ﬁnd

the appraised value leans heavily on the

comparables.

GUIDE TO REAL ESTATE INVESTING

Getting To Know Your Market

SOLD PRICE – This is the price the house actually sold for.

Now you will know if the sellers got the price they were asking for

or less.

DAYS ON THE MARKET, OR DOM – The number of days listed

next to this tells you how many days the home stayed on the market

before it was sold. Sometimes you will just see a number indicating

the number of days it took to sell the property; other times, you may

see both a listed and a sold date. Either way, this provides valuable

information because it helps you understand the time it typically

takes to sell a house in your area.

SQUARE FOOTAGE – This tells you the size of the house. It also

helps you determine the cost per square foot that homes are selling

for (some comps will actually list the price per square foot).

HOW MANY BEDROOMS AND BATHS

LOT SIZE – It may tell you the dimensions of the lot or indicate what

percent of an acre the lot is (for example, .20 = one ﬁfth of an

acre).

YEAR BUILT OR AGE OF HOUSE – This will either tell you the year

the house was built or how old the house is.

This is the minimum information you should have on each of the

comps. However, you will probably see more because you are

going to ask the agent to include the remarks (or comments) and a

picture. The reason the remarks are so valuable is you will be trying

to ﬁgure out why these houses sold for the price they sold for. You

will be driving by each of them, but because they have been sold,

DRIVE BY THE HOUSES THAT

HAVE SOLD

When you get your comparables list, you

need to drive by each of the houses on it.

Stop the car and look out the window. Write

down what you see. This is not a test to

ﬁnd something wrong with the property. The

house may look great! You are just trying to

ﬁgure out why the house sold for that price.

START WITH THE ROOF

How does the roof look? You don’t have to

be a rooﬁng expert to know it needs work

if you see some missing shingles or shingles

that are curling up.

LOOK AT THE EXTERIOR OF THE HOUSE

How does it look? Does it need work?

Again, this is not a test to ﬁnd what’s wrong

with the house. You have permission to write

down, “House looks great.” But if you do

notice something is wrong, then write it

down. Be sure to pay attention to the picture

on the MLS sheet. If the picture does not

look as nice as the house does now, then

the person who bought the house probably

ﬁxed it up.

LOOK AT THE YARD

Now, check out the yard. How does it look?

Does it look groomed and taken care of?

Again, pay attention to the picture.

you will not be able to see inside.

Since you

cannot judge a house by its cover any more

than you can judge a book by its cover,

the remarks will give you a clue as to the

condition of the house.

Things you may see in the remark section of

the MLS include:

• Great Fixer-Upper

• Handyman Special

• Needs TLC

• Sold As-Is

Reading this, you will know the house

probably needed some work even if it looks

great on the outside.

Other things you may notice in the remarks

section are:

• Motivated Seller

• Must Sell

• Foreclosure

• Bank Owned

• Illness Forces Sale

• Divorce

• Transferred

When you see words like that, it could be

an indicator the seller is motivated.

CHAPTER

FOUR

n order to be successful, you will

need to work with others… people

who know this business or can help

you build yours, people who can help

direct you to buyers for your properties

or provide ﬁnancial assistance, etc.

As an investor, you’ll learn how to

leverage your money, but you will also

need to learn how to leverage your

time. Careful selection of qualiﬁed

people who can assist you in growing

your business can help you manage

your time and energy more effectively.

And leveraging your team members’

knowledge can also help you avoid

making mistakes.

To help get you started, this

chapter will introduce you to the key

contacts you will most likely have on

your power team.

The important thing to remember is

you don’t need to try to do all the

work yourself. Seek professional help

and support and recognize you will

need to learn to delegate certain

responsibilities at some point.

You will ﬁnd that putting your

team together is an ongoing process.

Your team will grow as you expand

your knowledge of real estate and

take advantage of additional income

streams and opportunities.

FINDING THE RIGHT REAL

ESTATE PROFESSIONAL

A good working relationship with a

real estate professional is one of the

most important assets an investor can

have.

For one, when a property you

SELECTING

A POWER TEAM

GUIDE TO REAL ESTATE INVESTING

Selecting A Power Team

CHOOSING A REAL

ESTATE PROFESSIONAL

When choosing an agent, you want

someone who works in the business full time

and has strong knowledge of his or her ﬁeld.

You are looking an agent who is creative,

hard working, and aggressive, and who

knows how and where to ﬁnd deals.

Most real estate professionals have

not worked with investors. They have never

done a creative transaction. This can be

a challenge for you and it can take some

time to ﬁnd the right agent, but the time you

spend will be well worth it. Since your agent

is one of the most important, if not the most

important, member of your power team, he

or she cannot be your weakest link in your

power team chain!

One of the most important things you

are looking for is an agent who thinks

like you do—like a millionaire real estate

wealth builder! Most agents are not

receptive to “unusual” offers. They may not

believe in “nothing down” offers or creative

approaches. If you plan to make a creative

offer and you are working with an agent

who doesn’t think “outside the box,” it’s

time to ﬁnd a new one!

In the meantime,

insist on being the one to present the offer

because you want the owner to hear the

are interested in purchasing is listed with an

agent you will want to have your own agent

working with you to represent your best

interests in the deal.

Secondly, real estate

professionals can help you evaluate deals

by pulling up sold properties comparable to

the one you are thinking of buying, giving

you a good idea of the market value for that

neighborhood. And third, Realtors

have

access to the Multiple Listing Service (MLS)

remarks section, a valuable source for ﬁnding

potential deals. The MLS is a cooperative

exchange of listing information. When a

seller lists his or her home with a Realtor

the listing is put on the MLS, making the

home available for any agent who belongs

to the MLS to bring a buyer and share in the

commission with the listing agent.

The properties on the MLS will usually

include pictures and a good deal of

information about the property, including

the address of the property, the number of

bedrooms and baths, the square footage,

and available amenities. The MLS may also

include any special terms the seller may

consider.

As we discussed in the previous chapter,

the remark section of the listing will contain

clues about the condition of the property

and the motivation of the seller.

Your agent

can put keywords into the remark section to

pull up properties of interest to you.

GUIDE TO REAL ESTATE INVESTING

Selecting A Power Team

beneﬁts of your offer. Believing in those beneﬁts will be key to making

a convincing presentation.

Tell the agent what you’re looking for—and be speciﬁc. If you

are beginning with wholesale deals, let the agent know you are

looking for distressed properties that need repair. Do not let the agent

pre-qualify you. Let them know you use private funding and can close

quickly.

Find a real estate professional who works in your target area by

driving through the neighborhood. Look for agent signs and pick the

three companies with the most signs. As you do this, you may notice

an agent dominating the area. Real estate agents usually “farm” an

area, meaning they focus on a particular area and work it to get

listings. They do this by actively contacting the owners through phone

calls, mailing promotional material, and knocking on doors.

Begin your interview by saying, “We are real estate investors and

we’re buying houses in this area. We are looking for properties

that are 20-30% below market and/or distressed properties

in need of repair. We also look mainly for properties in need

of cosmetic repairs. We are also looking for an agent who

specializes in income properties such as apartment buildings,

duplexes, and four-plexes. Is there someone in your ofﬁce who

ﬁts that description?”

NOT TOO BIG, NOT TOO SMALL, JUST RIGHT!

One of the questions new investors have when it comes to choosing

the right person to work with is, “How much experience should

the agent have?” There is no one size ﬁts all answer to this, but

experience has shown me that somewhere between three and ﬁve

years seems to be a good blend of knowledge about the business

and not being too set in their ways.

by and present offers on properties that I’m

interested in.

This will be a good opportunity for

both of us to make some money. Are you

able to help me out?”

• How long have you been in the real

estate business? (You want a minimum

of one year of experience.)

• Do you specialize in any type of real

estate? (Their specialty should

preferably be your area of interest.)

• Do you specialize in any area of town?

• Do you have any satisﬁed customers I

can talk to?

• Do you make real estate your living?

(Answer should be yes!)

• Are you willing to put the time in to

help me ﬁnd the right properties?

• What neighborhoods are turning

around properties more quickly than

others?

•

Do you have any banking connections?

(Mortgage brokers, lenders, etc.)

REAL ESTATE PROFESSIONAL

INTERVIEW SCRIPT

The following is a sample script of what

you might say when interviewing potential

agents.

“Hello, my name is _______________. I’m

in a position to do some investing in real

estate. I am looking to buy properties in your

area and I want to develop a relationship

with someone who understands my needs.

I’m looking for any property that

makes sense. I will consider everything:

single family, and multi-units with a good

cash ﬂow. I’m interested in properties that

are cosmetically distressed. Fixer-uppers

are great. You know, paint, carpet, and a

little cleanup, that sort of thing. I am not

looking for any major repairs like plumbing

or structural.

I can pay cash in some instances.

Generally I use private funding to purchase

these houses and can close quickly (they

think commission!). However, I am always

interested in seller ﬁnancing.

I am looking for an agent who will

research the MLS for me to ﬁnd properties

that meet my criteria and fax or email me

a copy of those listings. I will do a drive-

GUIDE TO REAL ESTATE INVESTING

Selecting A Power Team

• Can you recommend a good closing agent in town?

• How much is your commission?

• Do you have the ﬂexibility to work with your broker?

• Is this a good time to buy? Why?

• What is your opinion of the direction the real estate market is

headed?

• What are the average number of days on market in ________

zip code?

• Do you own any real estate in town? (You want this answer to

be yes.)

• Have you ever owned investment property?

• Are there any areas you feel particularly good about? If so,

why?

• Where would you invest if you were going to buy property

yourself?

• What kind of properties would you buy?

• Does your ﬁrm manage properties? If yes, what do you

charge?

•

What is the vacancy rate in the area?

FINDING THE RIGHT

MORTGAGE BROKER

A good mortgage broker can be the real

estate investor’s best friend. You want a

broker who can put the deal together and

get it closed.

Sometimes you have to go through

several brokers until you ﬁnd the one you

want to work with, but remember that it

never hurts to have more than one contact.

In fact, we suggest that you have not one,

but THREE, mortgage brokers on your team.

Why? This keeps them on their toes and

provides you with more loan products to

choose from.

You are looking for a broker who has

been in the business a while. You want one

who is experienced in working with investors

and bridge ﬁnancing (hard money lenders).

And you want one who is thoroughly

familiar with FHA ﬁnancing, local down

payment assistance programs, grants, and

hard money lending.

A mortgage broker can be a good

source for ﬁnding investment deals and is

usually more creative than a banker when it

comes to funding your opportunities.

• How many properties do you have

listed? (This is just to give you an idea

of whether this agent works primarily

as a buyer’s or a seller’s agent.)

• How many properties did you sell last

year? (You want to see how busy they

are.)

• Do you work with investors? If so, how

many are you actively seeking

properties for, right now?

• Are you available on the weekends?

• Do you have any properties for sale

that would be a good investment for

me?

• Are there areas that seem to be going

up in value faster than others? If they

answer yes to this question, ask more

questions—such as what is driving that

market, why the demand is higher in

this area, etc.

GUIDE TO REAL ESTATE INVESTING

Selecting A Power Team

When you talk with mortgage brokers, do not let them run a

credit check until you ﬁnd a mortgage broker you like. Every time

they run a credit check, it can lower your score, so don’t authorize

a pre-approval credit check. The best way to ﬁnd a good mortgage

broker is often through a real estate professional. Interview at least

ﬁve mortgage brokers before choosing the ones you will eventually

work with.

Another good question to ask potential brokers is how they

are creatively dealing with the tight lending policies in place at the

present time. Find out what they will need you to have in terms of

credit scores, down payments, and other qualiﬁcations in order to

get deals closed.

MORTGAGE BROKER INTERVIEW

Ask the following questions to help determine if this is the right

mortgage broker for your team.

• Is the major part of your business reﬁnancing? (Anyone can

do reﬁnance. This is not what you are looking for.)

• How long have you been a mortgage broker? (You want at

least three years experience. It takes experience to know a

lot of different lenders and products, and the mortgage

industry is constantly changing.)

• Do you work with investors?

• Do you lend on appraised value or purchase price? (Will

they lend on the after-repair value?)

who had good credit but couldn’t

qualify because of employment history

or down payment amounts? Would

you be willing to refer those people

to me for possible lease option deals

and then I would send them back

to you when they have improved their

scores (or whatever else caused them

to be ineligible) for funding at that

time?

COMMUNITY BANKER

Your contact at the bank should be someone

at the vice president level or another

executive with lending authority. Take time

to interview several bankers until you ﬁnd

someone you would like to work with.

 There are several beneﬁts to using a

community bank. First, they have local

knowledge of the area and know the

growth pattern of the community ﬁrst-hand.

Second, they have local decision making

ability (decisions are not being made in

some other state where the person doesn’t

know your real estate market’s potential or

the trends of your market). Third, they offer

ﬂexibility and are able to be more creative

than the larger banks.

And fourth, they want

to build relationships. Finally, and far from

the least important point, they often make

•

Can you put together 100% ﬁnancing

packages?

• Do you have access to hard money?

• Do you specialize in the non-

conforming arena?

• Are you a correspondent lender? (A

correspondent lender can lend money

for 90 days until lenders complete

their funding. They help ensure you

won’t lose a deal because of last

minute problems with the lender’s

underwriting team. Correspondent

lenders get the job done by lending

the money themselves.)

• Do you have the ability to fund your

own loans? (If they are not familiar

with the term “correspondent lender.”)

• Would you help me put the deals

together? (The mortgage broker can

put the deal together for you.)

• Do you have names on ﬁle of people

who wanted to purchase a home,

were qualiﬁed in terms of a down

payment, but fell short due to their

credit scores? How about people

GUIDE TO REAL ESTATE INVESTING

Selecting A Power Team

what are referred to as LTV loans—loans based upon the value of

the property, rather than the amount of the contract and appraisal

combined. What does this mean? If you are buying at 70% of

FMV, and the appraisal on the house is $100,000, an LTV lender

will lend the full amount (and sometimes even more). A conventional

lender through your mortgage broker will typically lend a maximum

of 80% of the contract price or 80% of the appraisal, whichever

gives them the most secure position! Community banks are known

for providing great service and will usually tell you why you were

turned down if a loan is rejected and work with you to help you

overcome that hurdle. They want you to stay with them a long time.

Realize that building a solid relationship with the right banker

takes time, but the effort is worth it.

CONTRACTOR HANDYMAN

A contractor or handyman can perform the necessary repairs on your

properties (investors generally prefer working with a handyman).

It is critical that the person or persons you use are licensed and

insured to protect you and them. You need to ﬁnd someone you

can trust, and someone who can give you bids and manage the

subcontractors.

You can ﬁnd contacts for the services you need through your

local home improvement store’s bulletin board or get a referral from

other investors or individuals you know who have had experience

working with contractors or handymen. Another good way to ﬁnd

handymen is through internet sites, including internet referral sites.

LAWYER

Your lawyer must be in full-time real estate,

mortgage, and corporate law. You want

someone who is able to review documents

and contracts, and is familiar with rent

review and tenant’s protection legislation.

You also want an attorney who is aggressive

in asset protection. You don’t want to amass

a fortune and then lose it because of a

lawsuit. An attorney can also be a great

resource for ﬁnding deals.

TITLE COMPANY

If you invest in a state where title companies

are used, you’ll ﬁnd that a title company can

provide you with many beneﬁcial services.

For example, they can provide property

reports on properties you are thinking of

buying. And they can give you information

about owners of homes in an area you

are “farming.” Title companies can also

handle closings and provide title insurance

to protect you. Sometimes, they are able to

pull up pre-foreclosure lists for you. Another

advantage of working with a title company

is they usually know plenty of investors.

Ask them to alert you when deals don’t go

through.

TAX PROFESSIONAL

An accountant or CPA can help you take

advantage of any available deductions

from the ownership of real estate and can

help you stay on top of your taxes as a

self-employed individual. You need to ﬁnd

one who understands what you are doing

and what you are planning to do. And

they should be knowledgeable about real

estate and tax law, as well as the impact

of income taxes and capital gains on what

you plan to do. They should also understand

corporations and what will help you achieve

your ﬁnancial goals.

APPRAISER

Appraisers are hired to determine the market

value of homes when necessary and can

help with “Rent to Own” and “Sweat Equity”

programs. You want to ﬁnd an appraiser who

will do “subject to” repairs, and who is FHA

approved. Appraisers know what needs to

be done to qualify for FHA and they know

how to bring a property to code. You can

learn a great deal from your appraiser.

GUIDE TO REAL ESTATE INVESTING

Selecting A Power Team

HOME INSPECTION PROFESSIONAL

Develop a relationship with a home inspection professional. Be

sure to accompany the inspector as he or she inspects the house

and ask a lot of questions. Use a property manager or a real estate

professional to help you ﬁnd a good one.

SURVEYOR

These professionals will survey the land. A land survey is sometimes

necessary to close on the backend.

TERMITE INSPECTORS

Termite inspectors are sometimes necessary for closing and they can

alert you to expensive hidden problems. Use a large established

company. If the property is treated or was treated within the last

year, make sure there is a contract and that it is renewable.

INSURANCE AGENT

An insurance agent can be a great resource in helping you decide

the best coverage for your various properties and may be able

to direct you to potential deals. Look for an insurance agent who

specializes in working with investors.

MENTOR

Model yourself after people who impress

you. You will learn much from someone

“who has been there” before you. Follow

the approach of people who have proven

themselves in this business. A mentor could

also be a potential investor for you.

NETWORKING CONTACTS

Network with everyone you know and meet.

Hand out business cards whenever possible

because leads can come from some of the

most unlikely places (for example, stick them

inside the envelopes when you pay your bills

or leave them with your tip for a waitress).

Attend industry-related events such as

foreclosure auctions to meet and get to know

other investors and communicate regularly

with the members of your power team.

And deﬁnitely do not miss out on

attending meetings of your local real estate

investment club if you have one (if you don’t,

then consider creating one!). Most real

estate investment clubs have a guest speaker

and meet once a month. If you have trouble

ﬁnding a creative lender or another member

of your power team, you may get a great

PROPERTY MANAGER

If you are buying income properties and

don’t want to manage them, property

managers will be vital to your business. You

can learn a lot from property managers, such

as the vacancy rate for the area and what

the going rent is. Sometimes they will alert

you when an investor they are managing

properties for is thinking of selling. They may

also be able to give you a referral for a

good handyman.

GOVERNMENT GRANT

AND LOAN SPECIALIST

A government grant and loan specialist can

assist you in ﬁnding grants and loans that

will help you in your real estate investing.

You can ﬁnd them by contacting government

agencies or by calling several banks in your

area. You may also want to talk to other

investors to see what they know and to get

referrals.

GUIDE TO REAL ESTATE INVESTING

Selecting A Power Team

referral from a club member. And you can usually ﬁnd hard money

lenders at the meetings.

Check with other investors, title companies, real estate professionals,

mortgage brokers, or anyone who is in the real estate business about

an investment club in your area. They may charge a monthly or yearly

fee for membership. Ask if you can go free on a complimentary visit

the ﬁrst time you attend.

ASSIGNMENT

The following is a suggested assignment.

BEGIN BUILDING YOUR POWER TEAM.

Start by building relationships with a real estate professional, a

mortgage broker, and a banker. They are critical to your success in

real estate investing.

CHAPTER

FIVE

y now you should know how to

ﬁgure out the true value of a

property by using the comps you can

get from a real estate professional.

You should have started building your

power team and are now eager to ﬁnd

a deal. You are ready to make money!

We talked about how you make

your money when you buy and the

importance of buying right. Buying

right would mean getting a great

deal to maximize your proﬁt on the

backend.

Ultimately, you are going to ﬁnd

what creates a great deal is ﬁnding

a motivated or ﬂexible seller. In fact,

locating motivated sellers and helping

them with their problems is the secret

to great deals.

WHAT IS A

MOTIVATED SELLER?

Motivated sellers are real estate

owners who have to sell for one reason

or another. There are many factors that

affect their motivation to sell and these

factors fall into three main categories:

personal hardship, the property itself,

or economic problems.

What kind of personal hardships

may cause a homeowner to become a

motivated seller? For one, an owner’s

failing health may cause him to need to

sell the house. Or perhaps the owner

has a job out of state and the house

is vacant; as time passes, that owner

FINDING

MOTIVATED

SELLERS

GUIDE TO REAL ESTATE INVESTING

Finding Motivated Sellers

HOW DO WE FIND THEM?

Regardless of the factors that create the

need to sell, the point is there are many

motivated sellers out there and many ways

to ﬁnd them. In doing so, you can locate a

great deal.

This chapter offers some techniques

you will ﬁnd helpful in locating ﬂexible

sellers in your area.

WORK WITH REAL ESTATE

PROFESSIONALS

We talked about the importance of having

a good real estate agent as a member of

your power team and that it may take some

time to ﬁnd the right one. In fact, you may

have to try several of them out ﬁrst before

you ﬁnd the right agent or agents for you,

but that’s okay. Once you ﬁnd just a couple

of agents who have the ability to locate

deals and who will work hard for you, your

phone and fax will begin ringing.

Working with real estate agents is

usually the best way to locate good deals

and motivated sellers when you ﬁrst start out

with real estate investing. Look for the ones

who know how to be creative and who

specialize in working with investors.

will likely become more ﬂexible on price or

terms. Maybe the seller has suffered a job

loss and the house is going into foreclosure.

Or maybe divorce is forcing a sale. Perhaps

the owner died and the house needs to be

sold to settle the estate and pay the heirs. Or

a partnership has fallen through, causing the

need to sell.

The property’s condition may create

a need to sell as well. Perhaps the owner

doesn’t have enough money to ﬁx it up.

Sometimes a property may have ﬁnancing

that has a balloon payment due and the

owner can’t reﬁnance it because the property

isn’t in sufﬁcient condition to qualify for a

loan. Or you may ﬁnd a tired landlord with

a house that was trashed by the tenants.

Economic problems can create a need

to sell as well. But remember, some economic

problems you may encounter can be caused

by a change in the economy overall, not

just in the economics of the homeowner. For

example, a business that employs most of

the town, but then goes out of business, will

have an impact on real estate in the area.

Be careful! You may ﬁnd phenomenal deals,

but are they really great deals if you can’t

sell the properties or rent them out?

GUIDE TO REAL ESTATE INVESTING

Finding Motivated Sellers

WORKING WITH MORE THAN ONE AGENT

Most investors have more than one agent they work with because it

can be very beneﬁcial to have different agents on your power team.

A listing agent, for example, can hold off putting the property on the

MLS for a couple of days so an investor has less competition for his

or her offer. When you work with an agent who has pocket listings,

they may give you ﬁrst shot at making an offer on a property before

they put it on the MLS.

Another type of real estate professional you may ﬁnd good

to work with is a foreclosure specialist. There are banks that work

speciﬁcally with certain agents in listing their foreclosures. Even

though not every foreclosure is a deal, some are worth checking out.

Another real estate professional you may want to work with

would be a “hoop jumper” – an agent who is aggressive and works

hard for you as a buyer. They will put keywords into the MLS and pull

up comps for you.

No matter how many agents you work with, you need to

keep one thing in mind: be loyal. If you receive information from

one agent and then buy through another agent, you cannot expect

that ﬁrst agent to keep looking for properties for you. Real estate

agents have to eat, too. Always buy from the one who gives you the

information ﬁrst. Be loyal to that agent and always create a win/

win situation for both of you.

Additionally, some investors try to go around the agent to

avoid paying their fees. But this doesn’t make good business or

moral sense. You need to treat the agent who generates good

leads right by rewarding them and not trying to take away their

commission.

Since you will be working with more than one agent, you need

to understand that it may be a concern to an agent that he or she

will bring you a property, only to have you go directly to the owner

• Divorce

• Illness

• Transferred

• Foreclosure

• Condemned

• Bank Owned

• Desperate

• Estate Sale

• Moving

• Seller Will Finance

• Will Sacriﬁce

EXPIRED OR “AGED” LISTINGS

Once you have a good relationship with a

agent, you can ask him or her to pull up

the expired listings or the listings that have

been on the market for a while. Sometimes

the MLS system will allow your agent to ﬁnd

properties that are free and clear.

CREATE A FLYER TO ATTRACT

AGGRESSIVE AGENTS

If you want to attract agents who may

already have motivated sellers or who know

of interesting properties, you may want to

run an ad or send a ﬂyer to all the real estate

ofﬁces in your area of interest.

A sample of what your ﬂyer might look like

can be found on the next page.

or work with another agent. To alleviate this

concern, you could offer to sign a Buyer’s

Broker Agreement. In the agreement, you

state you will work with only this agent on

the particular property he brought to you for

a speciﬁc period of time. This protects the

agent and keeps him working hard to locate

deals for you.

Using keywords

As we’ve mentioned previously, the

real estate professional can put keywords

into the remark section of the MLS to ﬁnd

some interesting properties that meet your

requirements. For example, the agent can

put in the word “motivated” and the computer

will give a listing of every property that has

the word “motivated” in it.

Keywords you will want the agent to search

for include:

• Handyman Special

• Investor Special

• Needs Work

• Offer

• Must Sell

• Needs TLC

• As-Is Condition

• Fixer-Upper

• Motivated

GUIDE TO REAL ESTATE INVESTING

Finding Motivated Sellers

HOW TO

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phone number. Most neighbors realize this

vacant house is bringing down the value

of their home and will be anxious to help

you locate the owner. If they seem to know

how to reach the owner, but are hesitant to

give you this information, just give them your

business card and ask them to let the owner

know you may be interested in purchasing

the property.

Leave several ﬂyers at the vacant

house. The owner or a family member often

checks on the house.

HOW TO FIND THE OWNERS OF

VACANT HOUSES

• Look up the owner’s name in tax rolls,

appraisal districts, or computerized

services. Or check online at:

netronline.com. Click on public

records, then your county and state.

Look for the assessor or auditor’s ofﬁce.

Many times this information is on the

Internet.

• Check with the neighbors on both

sides of the house and see if they know

how to reach the owners or where they

have moved.

•

Send two letters, one to the address

FSBO (FOR SALE BY OWNER) SIGNS

By now, you are probably already taking

a different route to work every day. You

should be paying attention to any FSBO

signs you see, especially because some

of these properties may not even be listed

in the newspaper and the only way to

know about them is from the signs. Poorly

advertised FSBO homes are an excellent

source of leads (think less competition for

your offer!). Write down the phone number

and call the owner. Better yet, get out of the

car and knock on the door.

TRACKING VACANT OR

BOARDED HOUSES

Whenever you are in the car, you should

be looking for vacant houses, distressed

properties, FSBOs, and houses for rent. Drive

up and down your target area regularly and

seek out these types of properties. Owners

of vacant or distressed properties can be

motivated sellers.

Write down or tape record the

addresses of any vacant or distressed homes

you ﬁnd. You can look up the owner’s name

at the courthouse. If you have time, stop

the car, get out, and knock on neighbors’

doors. They may know where the owner

has moved to or they may have the owner’s

GUIDE TO REAL ESTATE INVESTING

Finding Motivated Sellers

of the vacant house asking it to be

forwarded, and the other one to the address with the words

“Address Service Requested – Do Not Forward” on the

envelope.

• Check with the utility company to see if a new account is open

in the previous owner’s name.

• Check the phone book or call Information to see if a new

phone number has been issued to the owner or if they have a

new address.

If you have a different mailing address for the owner, but it isn’t

listed in the phone book, check a reverse directory, which can be

found in the reference section of your public library. The directory

starts with addresses ﬁrst, allowing you to search for the owner’s

name when the only information you have is their address. Or go

to reverseaddress.com. Sometimes the owner may be living with

relatives with a different last name and reverse directories can help

you ﬁnd them.

• Employ a private investigator (look in the phone book under

Private Investigator) to have them do a skip trace to ﬁnd

the owner. Try to negotiate with them that they must ﬁnd the

information you are looking for or there is no fee.

AUCTIONS

Look in the Yellow Pages and in newspaper advertisements for

auctioneers. Call every auctioneer you ﬁnd and ask them if they

auction real estate.

If they say yes, ask to be put on their mailing

list. If you see an auction for real estate property being advertised

properties to.

HUD, VA, FDIC, IRS, AND OTHERS

In some areas of the country, HUD (Department

of Housing and Urban Development) and VA

(Department of Veteran’s Affairs) foreclosure

properties are phenomenal deals. In other

areas, people pay too much and they are

not a deal. To ﬁnd foreclosure properties

offered by HUD, VA, and others, such as

the FDIC, the IRS, and Customs, visit the

HUD website at www.hud.gov/homes/

homesforsale.cfm. HUD and VA foreclosure

bids have to be submitted through a HUD-

certiﬁed agent/broker.

Important Note: Never bid on an owner

occupied list unless you plan to live in the

property. If you are not going to live in the

property, you need to wait until it appears

on the list that is open to all bidders.

GARAGE SALES

When you see a garage or a yard sale,

get out of your car and talk to the owners.

Remember what most people do before they

put their house up for sale? They de-junk!

Someone having a garage sale may be

getting ready to sell his or her home. But

even if they are not planning on selling, they

or if you receive a notice in the mail from

an auctioneer, call and get the address

of the property. Drive by the house. If you

like the house, make an offer for them to

submit before the auction takes place (if the

property is bank owned, the bank will wait

for the auction to make the sale).

ABSOLUTE AUCTIONS

There are ABSOLUTE auctions. An absolute

auction means they will take whatever is

bid. Banks typically have 14 months to sell

an REO (Real Estate Owned); if it is not

sold by then, they have to quickly unload

the property. You usually have to enroll to

be able to bid. Get signed up and get a

bidder’s card.

FORECLOSURE AUCTIONS

Go to a foreclosure auction. If you plan

to buy at this auction, be sure to do your

due diligence ﬁrst. You will also probably

need cash. There will be lots of competition.

This is also a good place to ﬁnd investors

to network with. Go there to meet other

investors you can buy from or quick-turn

GUIDE TO REAL ESTATE INVESTING

Finding Motivated Sellers

may know of someone else who is. You will usually ﬁnd them to

be friendly and talkative. Talk to them about the neighborhood. Do

they know what houses sell for? Do they know of anyone thinking of

selling? Give them your business card.

COURTHOUSE RECORDS

The courthouse is an excellent source for researching and ﬁnding

motivated sellers. Get to know where the records are kept in your

county courthouse. Sometimes you may be going into different areas

of the courthouse depending on what you are researching. Look for:

Foreclosures

Foreclosure will inevitably create motivation. As mentioned

before, foreclosure doesn’t always mean a good deal, but some

foreclosure properties are great deals! When working a foreclosure,

there are four timeframes that provide proﬁtable opportunities. They

will be discussed in greater detail in the chapter on foreclosures.

PRIVATE NOTE HOLDERS

Many private note holders are investors. They may own several

properties or they may be hard moneylenders. Obviously, not all

private note holders are investors. But if you see a private note

holder with several notes, then you’ve probably found an investor. A

private note holder can become a very motivated seller if they have

to foreclose on a property they hold.

DIVORCE CASES

Divorce is a primary cause of foreclosure. Even if a couple does not

lose their house to foreclosure, divorce can cause great ﬁnancial

hardship and motivate the couple to sell. You must have full disclosure

with both sellers jointly signing any agreement.

there is a will, there can also be great deals

if the heirs and beneﬁciaries are just looking

to liquidate assets so they can disperse an

inheritance. This can be a huge opportunity

for an investor, especially when heirs live

out of town. The heirs may not want the

property or they may not be able to afford it.

Many times, the family tells the executor of

the estate to just get rid of the property and

the heirs are often willing to take a large

discount on it. And sometimes the executor

has to sell the property to pay off debts and

taxes. Contact the executor of the will. You

can ﬁnd contact information in the county

recorder’s ofﬁce or in public notices in the

legal section of your newspaper.

BANKRUPTCIES

You can ﬁnd information about bankruptcies

in legal papers or at the bankruptcy court.

The name of the trustee who has been

appointed to handle the case will appear

in the papers and the notice should tell if

real estate is involved. The trustee will give

you the information if you call. Creditors

will usually take huge discounts. Even if the

bankruptcy has been recently ﬁled and is not

closed, the court can release the property.

EVICTION FILINGS

Go to your county courthouse and ask the

OUT-OF-STATE OWNERS

If you can ﬁnd an out-of-state owner, you

may ﬁnd a more ﬂexible seller. It can be

a hassle to manage a property from a

distance. Or sometimes the owner had to

move quickly and now the house is sitting

vacant. Sometimes a title company will have

the ability to pull this information up for you

from the county records.

HOUSES WITH TAX LIENS

When an owner is having trouble paying

their taxes, it is usually a sign they are

having ﬁnancial difﬁculty. Often, there is a

lot of equity in the home and you could help

solve their problem and make it a win/win

situation.

LIS PENDENS

Lis Pendens is Latin for “suit pending,”

referring to a court action. In some states, it

is the beginning stage of foreclosure.

PROBATE SALES AND ESTATE SALES

With probate and estate sales, property can

be purchased from the estate of an individual

who has passed away. Sometimes good

deals can be found in circumstances where

there is no will or known heirs and the state

is liquidating the estate’s assets.

However, if

GUIDE TO REAL ESTATE INVESTING

Finding Motivated Sellers

clerk where to ﬁnd the department to ﬁle an eviction complaint.

A landlord can become a motivated seller after going through

an eviction and may welcome an offer from an investor who is

providing a way out of ever having to go through one again.

LOCAL NEWSPAPERS

You should be checking the classiﬁed section of your local newspaper

on a daily or almost daily basis. Nationwide, the classiﬁed ads are

ﬁlled with real estate properties for sale. A small percentage of

these ads are placed by owners who are slightly motivated to sell.

An even smaller percentage only 1 to 2%) of the ads are placed by

sellers who are desperate and intensely motivated. These are the

sellers you want to talk to.

In the beginning, you may think there are no motivated sellers

in your area, but be persistent and keep calling. Most investors

check a few ads and then give up. Don’t let that be you! Make the

effort and reap the beneﬁts.

You should also “grade” the ads, looking for motivated sellers

by using the keywords mentioned throughout this manual. Start by

circling or highlighting any word that might indicate a motivated

seller, a distressed property, or special ﬁnancing terms, such as

“must sell,” “will look at all offers,” “investor special,” “needs TLC,”

“rent to own,” “owner ﬁnance,” “no qualifying,” or “take over

payments.” The ads with your target keywords can be your “A”

list, your top picks to call ﬁrst. Call all the FSBO ads that depict the

keywords showing that either the property or the owner is distressed

or that there may be creative ﬁnancing available.

You’ll soon ﬁnd that your search for good leads is much more

effective when you know exactly what you are looking for.

these could be great places for your ad

in the same sections listed above. When

people are desperate to sell, they will often

look in the small newspapers. (We have

also provided other sample ads for you

throughout this manual.)

USE LEGAL NEWSPAPERS

Legal newspapers are another way to

ﬁnd motivated sellers, as people who are

struggling with bankruptcy, foreclosure,

divorce, etc. will be in the legal notices. See

if your local library has a copy or ask how

you can ﬁnd the legal newspaper by talking

to title companies, attorneys, and banks.

When you ﬁnd the legal notices,

you may want to contact these potentially

motivated sellers with a simple letter. Your

letter might read like the following:

I understand you have recently gone

through some difﬁcult circumstances in your

life and may be interested in selling your

home. If you are interested, please call me

at 555-1212.

People who are having difﬁculties will

often look in the legal publication to see

if their notice is in the paper, so consider

running an ad in a legal publication. You

may ﬁnd attorneys will also start calling,

asking for a business card to pass on to their

clients.

PLACE A “GOLDMINE” AD

In addition to being a source of ﬁnding

houses for sale, newspapers can be a way of

generating deals when savvy investors place

their own ads in the paper. Getting the seller

to call you is extremely important. This can

save you time and give you a good deal.

An example of a goldmine ad follows:

Private investor

looking to buy

income properties.

Will look at all,

any condition.

CAN PAY CASH

555-1212

As a buyer, you want to get the seller to

call you! You can place these ads in the

Real Estate Wanted section or in the Houses

For Sale section of your local newspaper

and real estate magazines.

Additionally

if your town has a “Thrifty Nickel,” “Penny

Saver,” “Shopper’s Guide,” or similar paper,

GUIDE TO REAL ESTATE INVESTING

Finding Motivated Sellers

I Buy Houses Any Area, Any Condition

CASH

Completely Conﬁdential Call 555-1212

“BIRD DOGS”

Bird dogs are referrals who act as your eyes and ears looking for

leads on your behalf. You might also hear this referred to as “ant

farming.” For the hard work they provide, you pay them a ﬁnder’s

fee.

Who can be your potential bird dogs? Think of the people

who are out in the neighborhoods every day, such as the mail

carrier and the cable installer. These people are regularly going into

your prime target areas. You may also consider talking to garbage

collectors, meter readers, lawn service workers, pizza deliverers,

newspaper deliverers, code enforcement ofﬁcers, ﬁreﬁghters, and

more.

CREATE FLYERS AND REWARD CARDS

To help you ﬁnd potential bird dogs, create simple ﬂyers and reward

cards to attract them to the opportunity and explain the beneﬁts of

your bird dog program.

To get the ﬂyers noticed, you may want to use ﬂuorescent

colored paper. For the reward cards, it may be best to use double-

sided business cards to make them easy to pass out. If your double-

sided business cards can have a ﬂuorescent colored front and a

white back, it will help them stand out from the average business

card.

Here’s an example of how your reward card might read:

BIRD DOG FEES SAMPLE FLYER

CASH

REWARD

$250.00

Bring me any

vacant or boarded

houses.

Fluorescent color front with black lettering.

I WILL PAY

$250.00

every time I

buy one!

Don’t bring me any agent signs.

Call

555-1212

White background and black lettering.

$CASH REWARD$

$250.00

Bring me any

vacant or boarded

houses.

Everywhere you go, hand your reward card

out. When you go out to dinner, put one

with the tip. When you see the mail carrier,

stop and give him or her a card.

Additionally, hand out a ﬂyer listing

the fees you would pay your bird dog. A

sample ﬂyer might include the following

information:

• Make $5 every time you bring us the

address of a vacant or boarded up

house whether we buy it or not.

• Make $10 every time you bring us

a Polaroid picture with the address of

a vacant or boarded up house whether

we buy it or not.

• Make $250 every time you bring us

the address of a vacant or boarded

up house and we buy it (paid at closing

only). Exceptions: Please be advised that we

do not accept properties in the following

areas:

GUIDE TO REAL ESTATE INVESTING

Finding Motivated Sellers

_______ or those with an agent sign on them or those addresses already

submitted by other bird dogs. All bird dogs are paid upon a ﬁrst-come,

ﬁrst-served basis.

NICHE MARKETING

SIGNS

A ﬂuorescent yellow sign with black writing attracts attention. Make

it a simple one-line ad that can easily be read from a distance

and include your phone number. Post your signs wherever you are

allowed in your city. For example, post signs on or at:

• Bus stop benches

• Community billboards (use small signs)

• Stadium seating

• Movie theaters

• Take out menus

• Grocery store carts

• Utility posts or telephone poles

(best when they are posted up high)

• Major intersections

(use surveyor stakes to put them in the ground)

You can go to an ofﬁce supply store and buy a package of

ﬂuorescent paper (8-1/2 x 11 sheets – 100 sheet package) for

your signs. Place them in plastic sheet protectors and staple them on

telephone poles. Or use plastic corrugated sheets (lightweight, but

sturdy sheets of plastic) for your signs and attach them with rooﬁng

nails. Make sure you are not violating any city codes.

in the neighborhood. Car windows and

mailboxes are off limits.

DOOR HANGERS

People generally respond well to door

hangers. Most printers will design and cut

them out for you. Hire someone to deliver

them or incorporate passing them out into

an exercise routine and do it yourself.

BULLETIN BOARDS

Put ﬂyers anywhere you see bulletin boards,

such as grocery stores, laundromats,

restaurants, the community center, the

unemployment ofﬁce, a city center, and mail

centers. Every time you enter a business

place, look to see if they offer a community

bulletin board where you can post your

information.

CAR WASHES

Ask the manager if they can hand out your

ﬂyers. Offer to pay them per car.

HANDOUTS

You can provide handouts wherever you

are, wherever it is allowed. You may be

able to distribute handouts at some school

or local events, for example.

Example signs might be:

I BUY

HOUSES

FOR CASH

555-1212

In the beginning, you will need to have an

answering machine. The message they get

when they call might be something like:

“Hi! I’m Jimmy. If you’re interested in buying

or selling a house…”

Later, you may want to use an

answering service; people like to talk to a

live person.

FLYERS

Design an 8-½ x 11-inch ﬂyer and distribute

it door to door in the neighborhoods where

you want to buy. The ﬂyer should read like

an ad:

“We buy houses, fast cash, fast closing times,

any condition, any price, 555-1212.”

 You can hire students or people from

your local labor board to distribute the

ﬂyers. Two people can put out 500 ﬂyers

in three hours. Put your ﬂyers on every door

GUIDE TO REAL ESTATE INVESTING

Finding Motivated Sellers

MAGNETIC CAR SIGNS

Put magnetic car signs on your car. It can give you credibility to be

in the neighborhood.

WE BUY HOUSES CASH OR TERMS PHONE #

Check with your car insurance company to see if you need to

change your coverage (some car insurance companies will consider

it a vehicle used for business if you display a magnetic car sign and

you will need to have that in the policy).

DRIVE FOR DOLLARS

As you are driving around looking for vacant houses, have your

signs in the back of your car along with a staple gun and tape.

Every time you see a vacant house, not only should you be writing

down the address, but you should also get out of the car and put

a sign on the vacant house (the wording can be the same as the

magnetic car sign). Make sure the signs are large enough to be read

from the street. We are not only trying to get the vacant homeowner

to call; we also want motivated sellers who happen to see our sign

to call us.

COOPERATIVE ADVERTISING

Have you ever received mail that contains advertisements for several

companies in one envelope, like Valpak®? Everyone shares in the

production costs, reducing your own cost. Make sure the message

is simple. The mailing company may have people on staff who can

help you design your ad.

Align yourself with a couple of banks or credit unions. Talk to

the branch manager and tell them you are involved in mailings and

ask them to join you. Tell them that every week, you will go to the

to continuous advertising or advertising

mixed with a few TV news-related programs.

In some markets, the cost of advertising on

this channel can be relatively inexpensive,

especially during non-peak times. This

is often the best time to advertise, when

people who can’t sleep turn on the TV.

Additionally, you may want to consider

radio advertising, which is another great

way to market your business, usually with

less competition for your services.

RESTROOMS

In some public restrooms, low-cost advertising

is offered on the back of the stall doors.

BUSINESS CARDS

Your business cards should say something

simple and to the point like:

I BUY HOUSES, CASH, ANY CONDITION

I BUY AND SELL HOUSES

WE BUY HOUSES CASH!

WE SOLVE REAL ESTATE PROBLEMS

You want your business cards to clearly

state what you do. Avoid phrases like “real

estate investor” which means nothing to a

Chamber of Commerce and pull out leads

and send their information along with yours.

Suggest that their part of the deal be to pay

for the postage.

DIRECT MAIL

Make sure that when you mail to people in

your target area, you do repeat mailings. It

usually takes four mailings for most people

to respond. If you want to target a speciﬁc

area, you can get a list of owners and

addresses from your title company. Some

people will use a reverse address book.

YELLOW PAGE LISTINGS

Successful investors advertise in the same

section as real estate professionals. Make

sure you advertise that if they call you, they

will not be paying a commission. You want

to stand out from the crowd.

LISTING PUBLICATIONS

Consider placing a small display ad

approximately 1” x 2” in your Sunday

newspaper’s free TV listings guide. The cost

is usually quite reasonable.

RADIO AND TELEVISION

Most cable programming offers a TV listings

channel showing what will be on for that

day. The top of the screen is usually devoted

GUIDE TO REAL ESTATE INVESTING

Finding Motivated Sellers

motivated seller. They are only interested in what you can do for

them: I BUY HOUSES, CASH! Your name should be the smallest

information on the card. Hand them out everywhere, such as

restaurants, barbershops or salons, stores, and ofﬁces. You should

be ordering new cards every three months or you are not getting

the best use out of them.

NETWORKING RESOURCES

BANKS, MORTGAGE COMPANIES, CREDIT AND FINANCE

The people at these businesses deal regularly with investors and,

quite often, are investors themselves. They sometimes have REOs

(real estate owned – bank owned properties), foreclosures, and

other leads.

PRIVATE LENDERS

Private lenders can be more than a great ﬁnancial resource; they

can also be a resource for potential deals. As more and more buyers

turn to them instead of banks and traditional mortgage companies

for loans, many of these private lenders start to build an inventory

of foreclosed properties when those loans default. Sometimes they

just want to cash out.

TITLE COMPANIES

Title companies close for other investors. By networking with them,

you can often ﬁnd out what other investors are doing.

Ask the title company to let you know when deals don’t go through

and to alert you to those opportunities.

to let you know of investors who are looking

to sell and to tell you what’s right or wrong

with their properties.

SECTION 8

You can get a free database of owners who

do Section 8. Go to the Section 8 housing

ofﬁce and get a list of properties for rent with

Section 8. Try to get a list of 1-to 4-bedroom

rentals. Bail Bondsman will also be on the

list if doing rentals.

CITY CODE ENFORCEMENT

Get a list of houses with code violations

from them. They tag the houses, so they

know before everyone else which ones are

vacant or have a code violation. In some

regions, the city council has a website and

you can pull up the minutes from their council

meetings. The code enforcement person has

to ﬁll out a daily form.

APPRAISERS

You can learn a lot from appraisers, such as

what needs to be done to qualify for FHA.

An appraiser also knows when deals won’t

work because the house doesn’t meet code.

They know a lot of investors and sometimes

hear of deals.

ATTORNEYS

Contact bankruptcy attorneys. The attorney

doesn’t care what the property sells for; they

RELO

CATION DIRECTORS

When an employee of a large corporation

is relocated, the company will often market

or buy the employee’s previous home as

part of their relocation package. These

corporations become extremely motivated

to unload these homes. To ﬁnd them, start

by mailing letters to the relocation directors

of major employers in your area. You will

need to get the address for the corporate

headquarters, which may be out of state. Let

them know what you are looking for. If they

don’t have anything at this time, ask them to

keep your letter on ﬁle so they can contact

you if something in your area becomes

available.

PROPERTY MANAGERS

Property managers often manage properties

for out-of-state investors who may be tired

of owning property in another state or

for investors who don’t take care of their

properties for any number of reasons. Many

property managers also actively invest in

property themselves. Network with these

individuals; they always come across deals

and are a great resource if you end up

needing property management yourself.

Remember, as managers of properties for

other investors, they are in a good position

GUIDE TO REAL ESTATE INVESTING

Finding Motivated Sellers

get the same amount of money regardless. And most of them only

have two or three investors they know to contact with opportunities.

In bankruptcy cases, the owner usually wants or needs the property

sold quickly. Usually they will settle for pennies on the dollar.

Contact attorneys who handle probate (check the Yellow

Pages). Get on their contact list to be the ﬁrst person they call to sell

property. They want CASH – the advantage you want to give them

is that you can buy with cash.

Additionally, attorneys know of people who are having

ﬁnancial or legal problems and need to sell their real estate.

Contact attorneys who specialize in real estate, foreclosure, estate

planning, and divorce. Network with them and ask them to refer

your services!

ACCOUNTANTS

Accountants work with people having ﬁnancial or tax problems.

They will most likely not give out names, but they may be willing to

give your name to their clients.

INSURANCE AGENTS

Insurance agents have clients facing issues such as ﬁre and water

damage, vacant homes, and mold. These situations can create

motivation on the part of the owner of such a house, and sometimes

the insurance company and lender. If they know you buy these kinds

of properties, they may be more than happy to pass this information

on to their clients.

BAIL BONDSMEN

When bail bondsmen bail people out of jail, some of those

people will have money and some of them will have property.

Send postcards to the bondsmen in your area. If they own a lot

of properties, they put signs out to get more people calling. They

can’t sell at a discount until after the four-

year period or no one would donate.

You might send a letter that reads:

To whom it may concern:

Hello, My name is _____________. I am a local

real estate investor in your area. I am writing you

to inquire about charitable donated properties

you may have in the church’s portfolio. If your

church has any single family homes or investment

properties that have been donated, I may be

interested in making an offer on any or all of

them.

Thank you for your consideration in this matter.

Sincerely,

CONDEMNED AND FIRE DAMAGED

PROPERTIES

Contact the health department, ﬁre marshal,

and the city code enforcement department

to locate these types of properties.

INVESTORS AND INVESTMENT CLUBS

Investors are a great source for both buyers

and sellers. For example, wholesalers (see

the chapter on wholesaling) are always

looking to quick-turn property and can lead

you to some great deals.

are used to buying and selling and they get

properties really cheap. They usually buy for

collateral and sell when they have too much

inventory. Some will do Section 8 rentals.

HEALTH AND SENIOR SERVICES

Health and senior services workers often

take care of people who have no family

to leave their properties to. In some cases,

the nursing homes have the right to sell the

assets. This is one time when you deﬁnitely

cannot put “and/or assigns.” The judge

wants to know who bought the property.

Contact the manager or the executors. Send

a postcard:

Attn: Nursing Home Director We buy homes

CASH

CHARITABLE ORGANIZATIONS –

A HIDDEN MARKET!

When a person donates real estate to

a church or charitable organization, the

appraised value is tax deductible. There is

a four-year hold for the full tax deduction.

If a church or charitable organization sells

at a discounted price before the four-year

period, the person who donates will not

get the full deduction , so churches and

charitable organizations are left holding a

lot of property, but they need the cash. They

GUIDE TO REAL ESTATE INVESTING

Finding Motivated Sellers

Too many investors don’t want to work with other investors.

This is ridiculous. Somehow they have a false notion they will be

supporting their competition if they share ideas or make deals with

each other, but that just makes them miss out on some amazing win/

win opportunities. In fact, the most successful wholesale investors

work almost exclusively with other investors. They recognize that

they don’t have to spend all their time working with potential

homeowners who are often unsophisticated when it comes to real

estate; they can instead work with investors who understand the

business, who can move quickly on deals, and who know how to

spot good deals when they see them.

The bottom line is networking with other investors can be both

educational and proﬁtable.

To begin building relationships with other investors, look for

their ads in local newspapers and contact real estate investment

clubs in your local area. Ask investors, bankers, and real estate

agents if they know where a local investment club meets. Attending

club meetings is a great way to sharpen your real estate skills,

network with like-minded individuals, and ﬁnd great deals.

Clubs usually meet once a month and have a guest speaker

who may provide valuable information about your area. But don’t

judge the club by the speaker; look at the investors attending. Who

are the members? How can they help you? Are they friendly?

Most clubs charge a monthly or yearly fee to members, so ask

if you can go free on a complimentary ﬁrst visit. At investor clubs

you will be able to ﬁnd referrals to build your power team. You may

ﬁnd deals, a hard moneylender, or creative ﬁnancing. Locating a

good one is worth the effort.

Now go out and ﬁnd a motivated seller and get a great deal!

• TRACKING VACANT OR BOARDED

HOUSES

– Drive up and down your target area

– Write down addresses of any

vacant or distressed properties

– Locate the owner

– Talk to neighbors

– Check county records

– Send out letters

– Check with the utility company

– Check the phone book or call In

formation

– Check a reverse directory if you have

a mailing address and want a phone

number

– Look on the Internet

– Do a skip trace

• AUCTIONS

– Call auctioneers and ask to be put

on their mailing list

– Can make a n offer before the

auction

– Check out absolute auctions

• FORECLOSURE AUCTIONS

– Attend an auction

– Research the property with

due diligence if you plan on buying

– Good place to meet and network

with other investors

REVIEW

The secret to great deals is ﬁnding a motivated

seller. We do not want to waste time working

with sellers who are not ﬂexible with their

price or terms.

We ﬁnd these sellers in many ways:

• USE A REALTOR®

– Work with more than one agent

– Have the real estate

professional search the MLS

using the keywords you have

learned

– Create a ﬂyer to attract aggressive

agents

• FSBO SIGNS

– Take different routes while driving in

the car

– Write down the phone number and

call or knock on the door

GUIDE TO REAL ESTATE INVESTING

Finding Motivated Sellers

• HUD, VA, FDIC, IRS

– Visit the HUD website: www.hud.

gov/homes/homesforsale.

– Bids must be submitted by an

approved real estate professional

– Good deals in some areas of the country

– Do not bid on owner occupied list unless you intend to live

in the house

• GARAGE SALES

– People get rid of their junk before they sell

– Get out and talk with the owners

– Ask about the neighborhood and may be thinking of

selling

• COURTHOUSE

– Foreclosures

– Private note holders

– Owners of vacant houses

– Divorce

– Out-of-stat e owners

– Houses with tax liens

– Lis Pendens

– Probate sales

– Estate sales

– Bankruptcies

– Eviction ﬁlings

– Direct mail

– Yellow Pages

– TV listing publications

– Radio and television ads

– Restrooms

– Business cards

• NETWORKING

– Banks, mortgage companies,

credit, and ﬁnance

– Private lenders

– Title companies

– Relocation director s

– Property managers

– Section 8

– City code enforcement

– Appraisers

– Attorneys

– Accountants

– Insurance agents

– Bail bondsmen

– Health and senior services

– Charitable organizations

– People who serve legal documents

– Condemned and ﬁre damaged

properties

– Investors and investment clubs

• LOCAL NEWSPAPER

– Check out the classiﬁeds

– Place a goldmine ad

– Legal newspaper

• BIRD DOGS

– Let others be your “eyes and ears”

– Pass out ﬂyers

– Mail carrier

– Cable installer

– Garbage collector

– Meter reader

– Lawn services

– Pizza delivery

– Paper carrier

– Code enforcement

– Fireﬁghter

– Offer a ﬁnder’s fee

• NICHE MARKETING

– Signs

– Flyers

– Door hangers

– Bulletin boards

– Car washes

– Handouts

– Magnetic car signs

– Drive for dollars

– Cooperative advertising

CHAPTER

SIX

holesaling is immediate money

in your pocket. When you

wholesale a property, you are buying

and selling, not buying, ﬁxing, and

selling. You don’t need to get a loan

to buy the property. You never ﬁx it up.

You don’t have to put a lot of time and

work into the house. You simply put the

property under contract and sell it to a

buyer without ever having purchased

it. Once you have a property under

contract, you should be able to have

a “payday” a week to ten days later!

This is called quick-turning a property.

When you wholesale, you are using

a buy low, sell low strategy. The type

of real estate you will be looking at

will be considerably below market

value. These properties can be single

family or multi-family homes, but most

of the properties you wholesale will

be single family. This is because there

is a larger inventory of single family

homes to pick from and your buyer,

the investor, will most likely be more

interested in the single family homes.

You will ﬁnd your best deals

in properties that are vacant,

abandoned, or boarded up –

properties no one is really looking to

buy. Banks won’t ﬁnance condemned

properties. Insurance companies

won’t insure them. Most real estate

agents won’t list them. You should be

targeting these types of houses.

MAKING

QUICK CASH:

Wholesales

GUIDE TO REAL ESTATE INVESTING

Making Quick Cash: Wholesales

WHERE TO FIND WHOLESALE DEALS

In the last chapter, we discussed how to

locate motivated sellers and, in doing so,

ﬁnd the “deal.” Use the ideas given there

to help you locate this kind of property. In

the meantime, here is a quick review of the

techniques we have found most useful in

ﬁnding wholesale deals:

• Read and advertise in your local

newspapers

– Check out the classiﬁeds

– Place a goldmine ad

– Use the legal newspaper

– Use bird dogs (pass out ﬂyers and

offer a ﬁnder’s fee)

– Mail carrier

– Cable worker

– Garbage collector

– Meter reader

– Lawn service worker

– Pizza deliverer

– Paper carrier

– Code enforcement ofﬁcer

– Fireﬁghter

Properties like this usually have

motivated sellers. For some reason the

owners are unable to take care of them or

just don’t want them. The houses don’t have

to be boarded up, just rundown and unable

to be ﬁnanced. You are targeting problem

properties. You want properties that are

physically distressed.

Sounds pretty bad – nothing you really

want to ﬁx up, so why are we talking about

these types of houses? Don’t we stress

“cosmetic work only?”

Some of the properties may only need

cosmetic repair, but many will need major

renovations. They may be in marginal

neighborhoods. What you need to

remember is:

THERE IS NO FIX-UP.

WE BUY AND SELL AS-IS!

Remember, the key to any real estate deal

is buying right. With wholesaling, you buy

them ugly and sell them ugly to investors,

maximizing your proﬁts with minimal effort.

Now that’s deﬁnitely buying right!

GUIDE TO REAL ESTATE INVESTING

Making Quick Cash: Wholesales

• Market your services whenever, wherever possible

– Signs

– Flyers

– Door hangers

– Bulletin boards

– Car washes

– Handouts

– Magnetic car signs

– Direct mail

– Business cards

• Drive for dollars (see the next section)

DRIVING FOR DOLLARS

Pick the areas of town that are known for having distressed

properties (identify two to ﬁve neighborhoods that would have these

types of properties). You will be looking at low to moderate class

neighborhoods and “we care” neighborhoods. These are the areas

where you will ﬁnd investors rehabbing and where you might see

Habitat for Humanity building affordable homes. Look for areas that

have a lot of renters. Homeowners living there have usually lived

there for several years and many have their homes paid for.

Once you have identiﬁed the areas with these characteristics, you

will be “driving for dollars” (literally driving around, looking for

proﬁtable deals). As you drive in your car, look up and down each

street trying to locate vacant or abandoned houses. You can easily

spot these kinds of properties.

Look for:

CASH

REWARD

$250.00

For ﬁnding vacant and

boarded up houses.

Any area. Any condition.

555-1212

Let others be your bird dogs – your eyes and

ears. Offer them a reward for helping you

achieve success.

Tell everyone in your world what you are

doing! Talk to the grocery store clerk, your

hairdresser or barber, people at your church,

those you work with, and the waitress where

you dine. Let all your friends know what you

are doing. Get the word out!

Additionally, put magnetic car signs

on your vehicle. Many of our students have

had tremendous success making money

simply off calls from people who saw their

magnetic car signs.

While driving for dollars, you should

also have signs in the back of your car along

with a staple gun and some tape. Make the

words bold and large enough so they can

• Tall grass, leaves all over, snow not

plowed

• Lots of newspapers in the yard, at the

bottom of the driveway, or on the porch

• No curtains or window coverings

• Broken windows, boarded up windows

and doors

• City or county stickers

• Abandoned automobiles, junk in the

yard

• Missing utility meters (electric, gas,

water)

• Flyers stuck in the door

• Property in bad shape – needs work

(might be “ugly”)

• Mail piled up in the mailbox

While you are driving for dollars, write

down the addresses of the distressed

properties you ﬁnd. And be sure to talk to

neighbors, mail carriers, cable workers,

and utility workers. Create a “reward ﬂyer”

and hand it out. Here’s an example of how

your reward ﬂyer might read:

GUIDE TO REAL ESTATE INVESTING

Making Quick Cash: Wholesales

be read from the street. Too many words will make it harder to read.

Keep the wording simple, such as:

WE BUY HOUSES CASH Phone #

Use colorful, ﬂuorescent paper to attract attention. We want

everyone to see these signs.

If a house is boarded up, staple the sign on one of the boards. If it

isn’t boarded up, but it is abandoned, tape the sign on a window.

If the house has a “no trespassing” sign, then don’t put the sign up.

Try to place the signs where they can be easily seen and read, even

from the street. You want people with unwanted houses calling you!

You can also have surveyor stakes that you can attach the sign to

and place in the ground at intersections and very visible areas.

When you drive for dollars, you are not only trying to ﬁnd distressed

properties, but you are also letting everyone know you buy houses.

$CASH$ FOR HOUSES

Any Area, Any Condition CALL NOW! Phone #

When you ﬁnd a vacant home, ask the neighbors if they know how

you can reach the owner (see How to Find the Owners of Vacant

Houses in the previous chapter). Or you can go to the courthouse

where the property taxes are paid to see if you can ﬁnd their name.

They may have a different mailing address.

to assign him or her the contract (the fee you

are charging for having found and made

this great deal that you are passing along).

The typical fee for an assignment of contract

is around $3,000 to $5,000. However,

students have made $10,000 or more

(when your proﬁt is this high, you will want

to do a double closing instead, which we

will discuss in a moment).

When you assign the contract, you will make

sure you collect a non-refundable deposit. If

you can collect the full assignment fee at that

time, by all means take it. Otherwise, try

to get half of the fee or at least $1,000 to

$2,000. That way, if for some reason your

buyer backs out, you still have made some

money.

In essence, what you have done is sold

your purchase contract to your buyer. You

never own the property, you should not have

to pay closing costs, and your name will not

appear on the deed. You get the property

under contract, assign the contract, and

make money. It’s a terriﬁc and very popular

way to make money in real estate.

DOUBLE CLOSING

(OR SIMULTANEOUS CLOSING)

Because your buyer will know how much

money you are making with an assignment

of contract, you will want to make sure you

don’t care if he or she has this information.

ASSIGNMENT OF CONTRACT

AND DOUBLE CLOSING

There are two ways you can wholesale a

property. You will either do an assignment of

contract or a double closing (also referred to

as a simultaneous closing).

ASSIGNMENT OF CONTRACT

With an assignment of contract, you will

have two contracts. One will be a purchase

and sale contract between you and the seller

of the property. In this assignable contract,

you will put your name plus the additional

words “and/or assigns” beside it (i.e, John

Smith and/or assigns). This gives you the

right to assign the contract. The idea here

is you have used your expertise to negotiate

a fantastic deal with the seller and now you

are assigning your right to make that deal on

the terms you have negotiated to someone

else, your buyer.

The second contract will be between you

and your buyer and is called an assignment

of contract. An assignment of contract will

have the address of the property, as well

as information about the seller, about you

as the original buyer, and about the buyer

you are assigning the contract to.

It will also

have the amount your buyer is paying you

GUIDE TO REAL ESTATE INVESTING

Making Quick Cash: Wholesales

Most investors and sellers will not mind you making some money.

You should be paid for your expertise and foresight. But if they

think you are making too much money, they may try to go behind

your back or not work with you again.

generally speaking,

when you are going to be making a lot of money on the deal (say,

more than $7,000), you will do what’s called a double closing (or

simultaneous close).

With a double closing, you will have two purchase and sale

contracts.

You will

have one between you and the seller of the

property. The other purchase and sale contract will be between

you and your buyer. This is how it works: You actually buy the

property and sell it in a simultaneous closing to your buyer. The

title company or closing attorney handles the transaction for you,

making everything happen simultaneously and smoothly, but without

ever having you, your buyer, or the seller together at the same table.

Your buyer will usually be asked to come in ﬁrst to close with you as

the seller. They will bring the money that is needed to purchase the

property (you will later use this money to pay the seller). The money

given to the title company or lawyer sits in a trust until the original

seller of the property comes to sign their paperwork associated with

you as the buyer. You will

come in last and sign both sides of the

transaction (as a seller and as a buyer). The seller will only see the

transaction between you and him or her.

Likewise,

your buyer will

only see the contract between the two of you. There will be closing

costs that you may have to pay.

CONTINGENCIES

Note: is section oers only general guidelines no legal advice is being

oered. Always consult with your local attorney for guidance.

If the FSBO house is not vacant, then put in

a clause of:

• Buyer shall have access to the

property for the purpose of showing

the property to prospective occupants

and to obtain bids on repairs.

An optional contingency you may add (be

aware that too many “subject to” clauses

can kill a deal):

• It is agreed that Buyer has 30

business days from the date of this

offer to perform due diligence. This

may include determining any needed

repairs, researching the title, and

conﬁrming market value. In the event

the Buyer determines that the property

does not meet with his/her approval,

the contract will become null and

void, and the Buyer’s deposit returned

immediately.

When doing an assignment of contract,

give yourself as long of a closing date as

you can (preferably at least 45 to 60 days).

If you don’t have a buyer within two to three

weeks, back out of the deal. We don’t want

to hurt people and get the reputation of tying

up properties and never purchasing them.

Because the properties you are looking at

to wholesale are not the sort of properties

you really want to buy, you will want to

use contingencies (“subject to”) to protect

yourself if you don’t ﬁnd a buyer (consult a

lawyer for assistance).

In both the assignment of contract

and the double closing, you will use the

same contingencies and conditions in your

addendum.

In the addendum, you may consider adding

these contingencies and conditions.”

• Sale is contingent upon inspection

and approval of bids by Buyer and

Buyer’s partner to be completed in

writing within _________ business

days.

• Upon acceptance of the offer, buyer

to receive key to the property and

have the right to show to any and all

prospective occupants.

Use this second contingency is generally

used if it is a FSBO. If the property is listed

with a real estate professional, put:

• Buyer to receive access to the property

upon acceptance of offer.

GUIDE TO REAL ESTATE INVESTING

Making Quick Cash: Wholesales

TITLE COMPANIES OR CLOSING ATTORNEYS

A critical element in being able to do an assignment of contract or a

double closing is having a good closing ofﬁcer who knows how to

do them. Start calling title companies (or attorneys if your state uses

attorneys for real estate closings). You will need to get past the front

desk and speak to the actual person who handles the closings. Ask

them if they have worked with investors. Can they do assignment

of contracts or double closings? Have they ever done them before?

Do not be discouraged if they don’t seem to know what you are

talking about. It is not uncommon for title companies and even some

attorneys to be unfamiliar with double closings and assignment of

contracts.

If you feel like giving up, don’t; just keep calling until you ﬁnd

one who understands what you want to do. Sometimes it helps to

get a referral from an investor who has done this before.

Make sure the closing agent understands you do not plan to

bring any money to the closing table when you are talking about

double closings. You are simply bringing two purchase contracts:

one between the seller and you, the other between you and your

buyer. Ask them what they would charge you to handle this type of

transaction.

Also ask if they charge you to do an assignment of contract.

Routinely, it will be the seller and your buyer who pay the closing

costs. You are just the middleman and once you have assigned the

contract, you are out of the deal except for the fact that they will cut

you a check for the agreed upon fee that is listed in the assignment

of contract.

Ask the closing agent if they have had any problems doing an

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• You will also like dealing with

investors because cash or hard money

means a quick closing. Wouldn’t you

rather have a paycheck a week after

ﬁnding your buyer instead of waiting

30 days?

BUILDING A DATABASE OF BUYERS

You may be worrying, “How will I ﬁnd the

buyer?” Finding the buyer is the easy part

when you have the right price accepted.

When you wholesale, it is not location,

location, location. Rather, it is the deal,

the deal, the deal! If you can buy it cheap

enough, you will have an investor who will

want the property. In fact, investors will keep

coming back to you for more.

When you wholesale a property, you should

create a database of buyers. Don’t panic if

you ﬁnd an exceptional deal and you don’t

have any investors in your database. You

should have no problem ﬁnding a buyer

who will want to purchase the property. If

there is money for the investor to make, he

or she will want it. However, you should start

networking with other investors and building

your database as soon as you possibly can.

assignment of contract or a double closing.

They may tell you that when your buyer’s

lender looks at the assignment of contract,

they may say, “Who is this Joe Buyer? We

want the contract between Sally Seller and

Jim (your new) Buyer. Get Joe out of the

way.” Well that will work if Sally Seller is

willing to redo the contract. Otherwise you

have a problem!

There are many reasons why we want to

work with an investor:

• An investor does not have to “fall in

love with the property.” They will

crunch the numbers and if it’s a great

deal, they want it.

• Investors have access to hard money

or cash. Hard money and cash don’t

care if it’s an assignment of contract

or a double closing. You should build

a database of hard moneylenders for

you to use if later on you want to

buy, ﬁx, and sell, and for your buyers

(if a buyer needs hard money to close

the deal, you can refer him or her to

the hard moneylender).

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There are many ways and places for you to ﬁnd investors for your

database, including:

• Investment clubs

• Auctions

• Properties with “For Rent” signs (write down phone numbers

and call)

• Talk to people rehabbing a home and ask who the owner is

(probably an investor)

• People who call off your signs

• Real estate professionals, title companies, attorneys,

appraisers, contractors, bankers

• Calling the “I buy” ads

• Advertising

The following offers a little more insight into how to tap these sources

for your database.

REAL ESTATE INVESTMENT CLUBS

When you attend your local investment club, you need to network

with the investors there. These are potential buyers for your deals.

You will ﬁnd endless possibilities when you rub shoulders with other

investors.

Tell everyone what you are planning on doing and see who is

interested. Ask them what types of properties they are interested in

and in what areas. Ask them if you can call them when you ﬁnd a

property you think ﬁts their requirements.

AUCTIONS

Attend a real estate auction. You will see other investors there. Talk

to them. Get their business cards and give them yours.

Again, your

goal is to ﬁnd out what kind of investing they do to see how you can

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REAL ESTATE PROFESSIONALS, BANKERS,

APPRAISERS, LAWYERS, ETC.

Professional people who are in the real

estate business know investors. They are

people you want to interact with.

CALL THE “I BUY” ADS

Call all the “I buy” ads you see in the

newspaper, such as advertisements that

read: “I buy houses. Pay cash. Any area,

any condition.” There are usually two

categories of people who place these ads:

1) wholesalers – buy low and sell low; and

2) retailers – buy, ﬁx, and sell properties or

buy, ﬁx, and keep properties.

When you talk to the wholesalers:

• Tell them you’re looking to buy some

properties

• Let them know you are a new investor

in town and you need

some deals

• Ask them if they have any inventory

(properties for sale)

• If they have inventory, ask them to fax

you a list of the

properties they have for sale

work with them. Let them know what you do

and tell them you come across phenomenal

deals but you simply cannot buy everything

you ﬁnd. Tell them you will gladly contact

them when you ﬁnd a property they may be

interested in purchasing.

PROPERTIES WITH “FOR RENT” SIGNS

Properties that are offered for rent are oftened

owned by investors. Perhaps they are

looking to purchase additional properties. It

never hurts to call and ask.

TALK TO REHABBERS

If you see someone rehabbing a property,

ask them if they are an investor. You might

ﬁnd yourself talking to the investor or with

a member of his or crew. If an investor is

rehabbing a property in one of the areas

you are focusing on, then he or she may

want a deal you ﬁnd in that same area or

one similar to the property they’re already

working on. Let the investor know you are

just starting out and that you will be looking

for houses that need to be rehabbed. Ask

them if they would like you to contact them

when you ﬁnd a rehab for a good price.

Most would be happy to have you bring

them a good deal. You save them time

researching so they can spend more time

rehabbing.

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Next, drive by the properties. Now you will see where these

wholesalers are ﬁnding the good deals and where wholesale

deals are being done in a short period of time. You will ﬁnd that

wholesalers typically farm an area. Usually they concentrate in two

to three different areas. You’ll also see how much they’re asking for

the properties and what type of houses they have.

Call them back and say:

“I might be interested in some of the properties you have for sale. I

like working with investors. I don’t care how much money you are

going to make on a deal as long as I get the deal I need. By the

way, the properties here on the list, are you going to be assigning

them or do you already own them?”

If they say they’re an assignment of contract, ﬁgure they paid about

$3,000 less than what they’re asking. If they say they own it (they

may not – but they may want more money), ﬁgure they paid about

$10,000 less than what they’re asking. Ask them if they have any

funding sources (hard moneylenders). Now we’re ﬁnding a potential

funding source for us to borrow money from. We are also ﬁnding a

funding source for our buyer to use.

When you talk to the retailers:

• Ask them what kind of properties they

are looking for

• Find out if they are into major rehab

or a little ﬁx-up

• Ask what areas they are focusing on

• Find out what price range they prefer

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your property, your phone should start

ringing off the hook!

Here are a couple of sample ads:

3 bdr 2 bath

Terrace Park Area

Worth $160K

WILL

SACRIFICE

FOR $100K

Call

555-1212

3 bdr 2 bath

Valued At $80K

FIRE SALE

$40K

Cash Buyers Only

555-1212

Whatever you do, don’t become a real estate

agent for other investors! Don’t waste time

looking for the “one” property an investor

wants. It is helpful to know what they are

looking for and where, but ﬁnd great deals

and let everyone know what you have.

Be sure to get their phone numbers, fax,

email, etc. so you can reach them quickly.

ADVERTISE TO FIND YOUR BUYER

As we mentioned before, don’t panic if you

don’t have any investors in your database

right now. In fact, many investors ﬁnd a

great deal and get an offer accepted

without having a potential buyer lined up.

They know if the price is right, it will not be

difﬁcult to wholesale the property. Again, this

goes back to the idea of buying right. If they

have ﬁgured in a good range of proﬁt for

an investor, investors will want the property.

In these cases, to ﬁnd their potential buyer,

they simply place an ad in the newspaper.

To attract investors, the ad should state what

the property is worth ﬁxed up and how

much you are asking for it (what you have it

under contract for plus your proﬁt). When the

investor sees a huge spread and calculates

his or her potential for proﬁt in purchasing

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Once you have started working on a database of potential buyers

for the properties you want to wholesale, be sure to use a system

that is organized and includes their names, phone numbers, fax

number, email, and other pertinent information, such as what types

of properties they are looking for, what areas they like to invest

in, and what price range they prefer. Included in this chapter is

a Buyer Tracking Sheet for you to use until you ﬁnd the system that

works best for you.

WHAT TO OFFER

When wholesaling a property, how do you ﬁgure out what to offer?

Here is a formula you can use:

What is the After-Repair Value (ARV)

$________________

Subtract repairs –

$________________

Subtract proﬁt for the investor –

$________________

If ARV is under $80K,

subtract $15K

If ARV is over $80K,

subtract 20% of the ARV

Subtract at least $5K for you –

$________________

(or whatever you want)

Equals the most you would offer =

(TOTAL) $________________

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Let’s see how using the percentage would

work:

FOR EXAMPLE

ARV $160,000

minus repairs $30,000

minus proﬁt for investor $32,000

minus your proﬁt (what you want) $10,000

equals the most you

would offer

$88,000

FOR EXAMPLE

RV $160,000

minus repairs $30,000

minus purchase price $112,000

leaves proﬁt for you

and investor to split

$18,000

This is not a deal that would be appealing

to the investor and would offer you very

little, if any, profit!

As you can see, if there are a lot of

repairs, using percentages alone will not

work. If there had been only 10K worth of

work, here is how the numbers would have

gone offering 30% below. This would be an

easy deal to wholesale to an investor!

Remember, you can always offer less. You

may also have no clue as to the cost of

repairs. You can get bids, ask the owner

what he thinks it will cost, or come up with

a ballpark ﬁgure. This doesn’t have to be

rocket science. You could get three bids

and there could be a $20,000 difference.

One investor may think it needs $10K worth

of work and another thinks it will be more

like $23K. If you would rather work with

percentages, you will ﬁnd it depends a

lot on the area and the prices. Here is an

average percentage guide you can use:

LOW-INCOME AREAS – Offer 35 to 70%

below ARV

WORKING CLASS AREAS – Offer 25 to

40% below ARV

MIDDLE-INCOME AREAS – Offer 20 to

30% below ARV or 30% below $160,000

Equals $112,000

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NEGOTIATING WITH THE SELLER

1 Introduce yourself

2 Find out if they are the seller

3 Ask, “Do you have a few minutes to answer some questions?”

Now take a moment and explain a little about how you operate.

You need to let the seller know how and why you buy. You need to

let them know you buy one of two ways: cash or terms.

“When I buy with all CASH, it is at a discount. I will ﬁx up

the property and sell it on a new loan to a new owner. Often,

this requires me to do a lot of repairs and bring it up to minimum

housing codes. Or I buy the property with terms such as owner

ﬁnancing and that usually means I will keep it as a rental. I may

even owner ﬁnance it for one of our potential homeowners that we

currently have approved.”

If you have their interest, continue to see if it’s a real deal!

4. Where is the property located?

5. How much are you asking?

6. Do you own the property free and clear?

7. If YES, this is great because they can do whatever they

want to do.

8. If NO, ask:

a. What is your Loan Balance?

b. How many years are left on the principal balance?

c. How much are the monthly payments? Does this include

taxes and insurance (PITI)?

d. What is the least you will take as a down payment?

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appointment with them to look at the property

immediately and get a signed contract.

Whatever you do, don’t procrastinate; if

you do, someone else will get there ﬁrst and

they will be the one making the money!

A useful tip when negotiating: Most of

the time you should make both a cash offer

and a terms offer at the same time. People

love choices and it helps them see the

difference in regards to the cash discount

versus terms. It also lets them decide if it is

really cash now that they need or getting

closer to the full price offer that they want,

which is only available if we can get owner

ﬁnancing.

CONTRACTS

Remember, these are SAMPLE contracts. It

is recommended that you have your attorney

review your contracts to at least come up with a

good standard contract before you start preparing

contracts.

To be a binding contract, it must be in writing.

You can use contracts found in proprietary

software or get one from your local Board

of Realtors

. You can also use a Letter of

Intent, a one-page offer that is simple and

9. Roughly, how much do you think is

needed to repair the property?

10. What is the lowest you will take, on

a cash or a term basis? Stop and wait.

(Remember, you have told them you are

an investor who buys houses for cash

to resell or for terms to hold for residual

income). Let them think about it; see

what they say.

11. Have you had any offers?

a. If so, what were they?

b. Why didn’t you accept any?

12. How long have you been trying to sell?

Now, you pause. Wait and see how they

respond to your conversation. Remember, if

someone is not motivated now, that does

not mean they will not be motivated later.

So, we need to let them know if it is not

going to work for us, they can call us later if

they do not have any luck in selling.

Now end with this:

“What will you do if you do not sell the

property?”

This is a great way to end. It makes them

really think, “What if?” However, if it

looks positive, you will need to set up an

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helps you in negotiations when you are using a real estate agent

and don’t want to burn them out when making lots of offers at once.

Make sure they are comfortable with it.

In order to be able to have the right to assign a contract, the

buyer’s name is listed as your name and/or assigns as the buyer.

This gives you the right to assign the contract. Always put in your

subject to clauses – give yourself a minimum of 10 business days.

This is for your protection.

Closing should be a minimum of 30 days, preferably 45 to

60 days. If the seller feels this is too long, tell him it takes about 10

business days to get all the contractor bids completed. Tell them if it

does not work for you, then you will back out of the contract within

the 10-day inspection period so it doesn’t tie up the property. Use

your title company or lawyer to close. Always try to have your seller

and your buyer pay all the closing costs.

Do not give a large deposit, even if the agent tells you to. $10

is preferable, but you may have to give $100. Never give the

deposit to the seller. Always have the title company or your attorney

hold the check.

Here’s how it looks:

Assignment of Contract

First Contract

• Get a signed purchase contract

• Fax purchase contract to closing agent

• Start marketing for your new buyer

• Assign the contract Assignment Contract

• Fax assignment contract to closing agent

•

Take backup offers until closed

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What Happens on the Day of Closing?

• New buyer comes to closing with all

the money

• Seller comes to closing to sign and

get his/her money

• You show up last and sign both the

purchase contract with you as the

buyer and the second purchase

contract with you as the seller and

collect your check.

WHY WHOLESALING?

Wholesaling is one of the quickest ways you

can make money in real estate investing. And

it can work for everyone. It is not necessary

to have great people skills to negotiate a

wholesale deal. If you lack conﬁdence,

putting money in your pocket quickly will

certainly do a lot to build conﬁdence.

You don’t have to use any of your

money or go out and get a loan. You don’t

have to spend a lot of time ﬁxing up the

property. And you can avoid holding costs.

You will not have to worry that the property

may not sell and you have to keep making

those monthly payments. You don’t have the

risk that, as you rehab the home, you may

run into major issues with electrical wiring or

plumbing.

Once closed... collect your check!

What Happens on the Day of Closing?

• New buyer comes to closing with all

the money

• Seller comes to closing to sign and get

his/her money

• You show up and get your check

Double Closing First Contract

• Get a signed purchase contract with

you as the buyer

• Fax purchase contract to closing agent

• Start marketing for your new buyer

• Find new buyer, sign second purchase

contract with you as the seller

Second Contract

• Fax second purchase contract to

closing agent

• Take backup offers until closed

Once closed... collect your check!

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Potential wholesale properties are often very easy to locate.

You will ﬁnd them in low- to middle-income neighborhoods where

there are distressed properties and more renters than owners. If

you happen to live in a middle-income neighborhood where none

of these types of properties exist, get out of the area. It will open

your eyes. Drive 20 minutes out of some cities and you will ﬁnd

yourself in a totally different market. There are varying real estate

prices even in close geographic areas. Look in the areas where the

working class lives. You can do it!

In some areas, you will ﬁnd that a four hundred thousand

dollar home is a distressed property. You will see this all the time

in California. Don’t be discouraged. You can still wholesale four

hundred thousand dollar houses! You may not do as many, but you

can still make money from them. Just ﬁnd the motivated seller with a

distressed property or situation.

As your understanding of wholesaling grows, you will see that

you can apply wholesale strategies to other real estate avenues

such as pre-foreclosures. For example, you can wholesale a pre-

foreclosure! However, you will ﬁnd that HUD and VA will not allow

you to put the house under contract with “and/or assigns” attached

to it (additionally, many banks will not allow an assignment of

contract).

Some investors will make an offer in the name of a trust and

then assign their beneﬁcial interest to the investor before closing. Be

careful with HUD and VA foreclosures. You should never bid on the

owner occupied ones unless you plan to LIVE in them. We are not

saying planning on living there and later changing your mind. DO

NOT BID if it is on an owner occupied list. Why do we stress this

so much? Because doing otherwise can land you in jail. If the HUD

and

VA properties do not sell while on the owner occupied list, they

will be offered to all bidders. That is the time you can go in and

make an offer through a HUD-certiﬁed agent.

112

Some properties you ﬁnd you may never

want to renovate. They may be so ugly, you

think they should be torn down. But another

investor may want it for the right price.

On others, you may decide you will try

to wholesale the house, but if you can’t make

the money you want from wholesaling, you

will buy the property yourself, ﬁx it up, and

make far more money than you planned.

Then there will be the properties you

want to do yourself right from the start,

whether it is to ﬁx the property up and sell

it or hold on to it. You may exercise other

techniques of real estate investing while

holding the property. For example, you may

rent it out and enjoy a positive cash ﬂow

along with the appreciation of the property.

Or you might decide to do a lease option

with the home, asking tomorrow’s value

but having cash ﬂow today without the

headache of being a landlord.

Understanding how to buy wholesale

properties opens up a variety of exit

strategies. The main thing you have to

remember is you just need to DO IT!

Go out and look for wholesale

properties. Make lots of offers and you will

ﬁnd a great avenue for quick cash.

At the close of this chapter are several

sample forms and advertisements that can

help you get started.

When you cannot put the offer in your

name and/or assigns, you can leave it

out and do a double closing. This is very

characteristic of what many investors will

do. Remember, some banks will allow and/

or assigns. But you will ﬁnd, for the most

part, banks are not excited about and/or

assigns.

Another caution is that when you are

dealing with HUD and VA, you may ﬁnd

they have certain stringent requirements

about the deposit and if you can get it back.

Find out how the system works by asking a

HUD- or VA-certiﬁed agent who specializes

in this kind of property.

EXIT STRATEGIES

Some of you may decide that after you

ﬁnd the deal, you would rather go for the

big money and ﬁx it up and resell it. That’s

okay.

As you look at properties, you will be

deciding what your exit strategy will be and

that exit strategy can change based on the

deal or your current situation.

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ASSIGNMENT

The following is a suggested assignment.

1 Target a low-income area

2 Know the value of homes in the area using the comps

3 Drive for dollars and market to ﬁnd sellers

4 Get a real estate professional and title company on your

power team

5 Make a lot of offers

6 Get a signed purchase contract with the seller in your name

and/or assigns

7 Find your buyer

8 Sign an assignment of contract or a purchase contract with

your buyer

9 Fax the documents to a title company or real estate attorney

10 Come to the closing and sign

papers if doing a double

closing

11 Collect your check!

Work on the 30-Day Plan of Action

below

114

7. Develop bird dog program, offer

ﬁnder’s fee

8. Drive for dollars at least 3 hours per

week

9. Call the “I buy” ads

10. Find and put under contract at least

one property you can assign or

double close in the next 30 days

11. Be deal driven – don’t care where

you ﬁnd the deals, just ﬁnd good

deals; that’s all that matters

30-DAY PLAN OF ACTION

The following is a suggested plan of action.

1. Set up shop

a. Get a separate phone and fax line

b. Get a d/b/a (doing business as -

ﬁctitious name)

c. Open a business checking account

d. Get business cards (can be simple…

“I Buy Houses”)

2. Locate tax assessor or county website

3. Market your business

a. Signs, ﬂyers – get 1,000 printed

b. Postcards for tracking vacant

houses

c. Run ad: “I Buy Houses”

4. Join a real estate investment club

5. Choose an area to target

6. Find and train at least one real

estate agent who understands this

business and is willing to make

multiple offers – possibly ﬁnd

at investor’s club

CHAPTER

SEVEN

115

e have already discussed

how you make your money

in real estate when you buy and,

therefore, the importance you need

to place on buying right. To recap,

you should never pay too much for the

property. When you buy right, you are

ensuring you get a great deal. And, as

you already know, the key to ﬁnding

a great deal is locating a motivated

seller. But to be successful in real

estate investing, you need to know not

only how to ﬁnd the motivated sellers

and the great deals, but also how to

ﬁnd the money for those deals.

In fact, in real estate investing,

what can make or break the deal is

the ﬁnancing. So you have probably

already been asking the common

question many students and investors

ask: “Where do I get the money?”

To ﬁnance your deals, you can use

traditional lenders such as banks and

mortgage companies. But if you don’t

have the best of credit or your debt-to-

income ratio is too high, you will need

to ﬁnd alternative sources of money.

In this chapter, we will discuss several

creative ﬁnancing options available

to you, so no matter your situation

or the transaction, you will have the

resources you need to close the deal.

GETTING CREATIVE

The more creative you are as you

ﬁnance your deals, the more successful

you will be. A crucial element to

creative real estate investing is how

SECURING

THE FINANCING

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118

transaction comes from understanding the

necessary ingredients that will satisfy the

seller’s needs, while creating a great deal

for you in the process.

WORKING WITH

MORTGAGE BROKERS

As you begin to build your power team,

you will realize a good mortgage broker

is essential to your being able to obtain

ﬁnancing for each transaction. You are

looking for a creative broker who works

with investors regularly and has many

ﬁnancing programs available. Mortgage

brokers tend to be more creative than

bankers since they have several sources

for funds and a variety of loan programs

at their disposal. Sometimes, however, you

may ﬁnd a small hometown bank will be

eager to help you in your investing. Some of

these hometown banks offer portfolio loans,

a loan the bank keeps in-house and doesn’t

sell to the secondary market. When a

lender sells a loan, there are strict guidelines

they have to follow. If you have a good

relationship with your banker and they do

portfolio loans, they can sometimes be more

lenient. Otherwise, you will probably ﬁnd

more creative ﬁnancing using a mortgage

well you solve the problems of your sellers.

Motivated sellers have a need, and as

you satisfy this need, you create a win/

win situation. You can make a lot of money

helping others solve their problems. And, as

you learn different techniques and strategies,

you will understand terms can sometimes be

more signiﬁcant than price or equity. You

may have heard from many well-intentioned

people that there is no such thing as a

no money down deal. This can become

discouraging, especially if you have heard

this said by a professional in the business,

such as a real estate agent or a mortgage

broker. You may even hear some investors

say you have to have money to buy real

estate. But think of it this way: These skeptics

have not used any creative ﬁnancing or no

money down techniques themselves, so

they do not comprehend how you can own

a property with no money down. Having

said that, even though many investors have

purchased real estate with no money down,

creative ﬁnancing does not always mean

“no down payment.” It usually refers to not

using any of your own money. Instead, you

want to use OPM, an acronym for Other

People’s Money. Using various strategies

and methods, as well as OPM, will afford

you almost limitless ways to fund your deals.

Structuring a successful no money down

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broker. Some mortgage brokers have access to private funds that

require no qualifying by the borrower. Equity in the house is their

only concern. It’s not the cost of the money that matters; it’s the

availability that counts. You need a mortgage broker whenever

you are going to deal in short-term money, unless you plan to

develop relationships with your own private lenders. Generally, the

money these mortgage brokers will ﬁnd for you comes from private

individuals. The only consideration for one of these private loans

is the Loan-to-Value (LTV) ratio. This short-term money is valuable

to us as investors because you can do a loan on the value of the

house, not what you paid for it. So if you buy right, you can borrow

the money to both purchase the property and cover the costs to

rehab it. You just factor these expenses into the cost of the loan.

Again, private investors are usually only concerned about LTV ratio

and the safety of their investment. Typically we call private money

“hard money” and these private lenders are sometimes called hard

moneylenders. A hard moneylender lends at a low LTV, usually 60

to 75% of the after-repair value (ARV). They charge a higher interest

rate (could be 12 to 18%) and points (1 point = 1%). The points

are based on the amount you borrow and can usually be built into

the loan. The payments are typically interest-only payments with a

balloon payment of the principal balance due in six months to one

year. Sometimes there are no payments and interest accrues with a

balloon payment of principal and interest in six months.

CALLING MORTGAGE BROKERS

To ﬁnd mortgage brokers, see if you can get a referral from a real

estate agent or another real estate investor.

Otherwise, simply open

your newspaper or phone book and call those who sound creative.

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it is okay to let them run your credit and do a

loan application so you can know just how

they can help you and how much you can

qualify for in purchasing real estate.

PRE-QUALIFIED VS. PRE-APPROVED

You may have been asked, particularly

by a real estate agent, “Have you been

pre-qualiﬁed?” or “Have you been pre-

approved?” You may have wondered what

the difference is between the terms pre-

qualiﬁed and pre-approved. When you

get pre-qualiﬁed, the mortgage broker is

looking at your income and debt to see how

much you can afford to pay in a mortgage

payment. Based on this information, they

can then tell you the maximum amount of

ﬁnancing you can get. They will give you

a pre-qualiﬁcation letter stating you are

qualiﬁed for a loan of “X” amount of dollars.

This is not a guarantee they will lend you the

money. It is simply stating how much you can

borrow subject to veriﬁcation of employment

and income, approval of your credit, and

an appraisal. Some sellers, particularly

banks selling properties or individuals

who are selling in a market where buyer

demand is high, require a letter of pre-

qualiﬁcation before you can submit an offer.

You don’t have to make an appointment

and meet with the broker; you just need

to make the phone call. It takes time out of

your busy schedule to go and meet with a

broker only to ﬁnd he/she cannot help you,

so start with calls. When you call mortgage

brokers, you may come across someone

who is rude and/or someone you are not

comfortable working with. Politely tell them

thank you very much and hang up. Some

students take this personally and feel if they

had more knowledge, the broker would

have treated them differently. But after you

start talking with several brokers, you will

ﬁnd this simply isn’t true. Some will be rude

or impersonal, but you will ﬁnd many who

will be very helpful. As you talk with these

mortgage brokers, you will see they are

eager to assist you in understanding what

they can do for you. When calling mortgage

brokers or bankers, you should never give

them your Social Security Number. Every

time they run a credit check, it lowers your

score. Before you allow the broker to check

your credit, you will want to make sure they

can help you. If you know your score, go

ahead and tell them what it is. Just don’t

give out your Social Security Number until

you are sure this is the broker you want to

work with.

Once you have decided this is

the broker you are going to work with, then

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With pre-approval, you are considered a step closer to getting

the ﬁnancing. Your income, credit, and employment information is

carefully checked. This is still not a guarantee for the loan. Other

considerations such as the appraisal and title work will

be factored in before you obtain the loan. However, with a pre-

approval letter, your offer to purchase will put you in a stronger

position with the seller, as your ability to obtain ﬁnancing appears

more solid. Also, since the loan has been “approved,” you should

be able to close quickly. This can be very appealing to the seller.

QUESTIONS TO ASK MORTGAGE BROKERS

When you call, introduce yourself, “Hello my name is _______.

I am looking to buy some properties and have a few questions.

Do you have a few minutes?” If they say yes, then start asking

questions. Remember not to give them your Social Security Number.

What is the most you will lend on a non-owner occupied

property? What is the minimum amount? In some areas of the

country, you can purchase properties for $15,000. If the minimum

they will lend is $40,000, you would want to know this.

What is the most percentage-wise you will lend on owner

occupied loans? What is the most for investor loans? We are

talking percentage or LTV.

Is that amount (the amount they are willing to lend) based

on appraised value or purchase price? Most of the time, they

will say purchase price or whichever is less (meaning appraised

value or purchase price, whichever is less). We like it when they

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the property is worth ﬁxed up and they look

at that number rather than the as-is value.

The next list of questions is for everyone,

whether they loan based on appraised

value, purchase price, or whichever is less.

Do you allow the seller to take back a

note? When a seller takes back a note,

he is holding a second mortgage, possibly

what would have been your down payment.

This can be one way to get in with no money

down. Some will say “yes,” some will say

“no,” and others will say “yes, but…” The

ones who say yes want money from you.

They may do an 80-10-10, meaning 80% 1st

mortgage, 10% seller carry 2nd mortgage,

and 10% out of your pocket. Or they may do

an 80-15-5, with 5% from you. The brokers

who say they do allow the seller to take back

a note may still want money from you.

Verify just what they mean by asking:

“So if the seller were willing to take back a

2nd mortgage of 20%, you would give me

an 80% 1st mortgage? Is that correct?”

You want to know now, not just before

closing, if they want money out of your

pocket.

say “appraised value,” but it is harder for

investors to ﬁnd this kind of loan. But if you

do ﬁnd one who answers appraised value,

you will ask him/her speciﬁc questions.

this case, give the broker this scenario: Take

whatever percentage they told you they

would lend, then take off the percentage

sign and add thousands of dollars to

become your purchase price. In other

words, if they told you they would lend

you 80%, your purchase price becomes

$80,000, 90% - $90,000.00, 70% -

$70,000.00. If they told you they would

lend you 80%, say to them: “Let’s assume I

ﬁnd a house that appraises for $100,000.

But my purchase price is actually $80,000

Would you lend me $100,000?” If they

say no, they’re talking purchase price or

whichever is less! If they say they would

lend you $100,000, then you will go one

step further. Take $10,000 off the purchase

price no matter what number you’re using.

In this instance, we will drop the purchase

price to $70,000. Then ask: “Suppose I

get an even better deal on this house that

appraises for $100,000. Instead of paying

$80,000, my purchase price is $70,000!

Would you lend me $100,000?” If they

say yes, ask one more question: “Do you

lend on the after-repair value?”

After-repair

value means the appraiser says this is what

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Do you do piggybacks? A piggyback is where the broker uses

either the same lender, but two loans, or two different lenders.

It is usually an 80% 1st mortgage and a 20% 2nd mortgage. That’s

100% ﬁnancing. The 80% 1st mortgage is usually at the normal

investor interest rate. The 20% is typically higher; it could be as

much as 10% interest. Not long ago, it was easy for an investor to

get a piggyback, but now it is harder. But if you have not purchased

a home, this is still commonly used for owner occupied homes.

Do you have any creative ﬁnancing, private investors, or hard

money? If they say they do, ask them what kind of creative

ﬁnancing they have. Can they get you in with no money down? Do

they have access to a lot of hard money and work regularly with

private investors? Also, ask about the terms of the private investors

or hard moneylenders as they can vary from lender to lender.

Do you have any equity lenders? Equity lenders lend a low

LTV, usually anywhere from 60 to 70% of the appraised value.

Typically, they are not as expensive (point and interest wise) as a

hard moneylender. The loan is usually a short-term loan of one to

two years and there could be a prepayment penalty on the loan.

Do you offer any loans for ﬁxing up the property? Sometimes

they have rehab loans to ﬁx up the property or construction

loans where they lend you the money to buy the property and rehab

it. Sometimes they have Title One loans and FHA 203K loans.

Do you have any non-conforming loans available, given the

tight lending guidelines in place at the present time? While

lending guidelines are currently hampered by constraints, money

does seem to be loosening up at the time of this writing, so we

are including some of the types of loans that have historically

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NO DOC – No documentation. This type

of loan only requires veriﬁcation of where

you have lived for the last two years. No

income, no assets, no employment. These

loans have a little higher interest rate than

conforming loans, but offer a lot more

versatility to an investor.

Is the loan based on the property

itself or do you look at my income?

If you are buying income property, they will

usually count 75% of the income. As long

as your mortgage, taxes, and insurance are

less than 75%, you should not have a lot of

difﬁculty qualifying for the loan.

Up to how many units do you lend?

Up to four is considered residential;

ﬁve or more is considered commercial.

Commercial loans will be different and

you don’t need to know how they work

at this time. But if you do ﬁnd a great

commercial property later on, you will know

which brokers to call back, including the

commercial loan ofﬁcer at the bank.

What is the interest rate? This will

change from day to day, but it

helps to have a ballpark number.

been available and encourage you to ask

your mortgage broker about them. While

they may not all be available in today’s

lending market, things change rapidly and

a creative and knowledgeable lender will

have some, if not all, of these loan products

at their disposal.

Here are some examples of non-conforming

loans and their description:

STATED INCOME LOANS – You do not

have to prove how much money you make.

It originally started for business owners who

take a lot of deductions.

NO RATIO LOANS – No debt-to-income

ratio. They will verify employment and

assets, but not your income. If you are

self-employed, they need to see a two-year

business license or veriﬁcation from a CPA

of two years employment.

NINA – No income or asset veriﬁcation.

They will check your credit and verify you

have a job. They will not verify where you

are getting your down payment. It can come

from a third party! They don’t care where the

money comes from (cash advance, relative,

etc).

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What kind of fees do you charge? When they talk about

points, remember one point equals one percent of the

loan.

Do you allow the seller to pay the closing costs? How

much do closing costs typically run? They will usually

allow the seller to pay 3% of the purchase price in closing costs.

Do you allow some type of seller concession, such as a

repair or decorating allowance? Usually they will allow

the seller to give a repair or decorating allowance that will come

out at closing. They usually allow a certain percentage. If they tell

you 6%, ask if the seller pays the closing costs, is that 6% total, or

6% concession plus 3% closing cost, equaling a total of 9%? Often,

they allow a maximum of 6% to be paid by the seller.

How long does it usually take to get an approval? How

quickly can you close? You want to make sure you put a

long enough timeframe in your contract. Usually make your closing

date a little longer than the broker expects it to be.

What would you like to see in a loan package? Try to

have everything they ask for to expedite the loan process.

If the seller were to put me on the deed, could I get a

reﬁnance loan instead of a purchase loan? Reﬁnance is

always based on appraised value. If we buy below the appraised

value of the property, we can get in with no money down. Be sure

to ask them if there is any “seasoning.” Seasoning means you are

required to have been on the deed for a period of time, usually six

months to one year.

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allow you to transfer a mortgage to another

property (substitution of collateral clause) or

allow you to obtain a new ﬁrst mortgage

(right to subordinate clause). There are no

due on sale or balloon payment provisions

in the mortgage if you do not put them there.

Some sellers will actually do 100% ﬁnancing.

Always ask the seller if they will carry 100%

of the ﬁnancing. Worst-case scenario, they

tell you no. But sometimes they will say yes!

When trying to get the seller to create

100% ﬁnancing, you have to gain their trust.

If they are concerned about no cash from

you, you can help them feel more secure by

giving something extra.

With any mortgage or deed of trust,

there are two basic documents. The ﬁrst is

a promissory note given by the buyer to the

seller acknowledging the debt as well as a

promise to pay and the terms of the note.

The other is a security instrument called a

mortgage or deed of trust.

In the mortgage or deed of trust, the

buyer who signed the promissory note

pledges the property being ﬁnanced

as security (collateral) for the debt. The

mortgage is a lien, not evidence of the

debt. In essence, when a buyer signs the

mortgage, he or she is saying, “If I do not

perform according to the terms of the note,

then you can take back the property.”

SELLER FINANCING

What is seller ﬁnancing? Seller ﬁnancing

simply means the seller is not getting all cash

at closing. It may mean the seller receives no

cash, but will receive mortgage payments

from you each month. They are the bank!

They did not lend you the money; instead,

they took a promissory note and secured

that note with a mortgage.

Sometimes the seller will receive some

cash at closing from the loan you received

from the bank and the difference between

the loan and the purchase price in payments

as a second mortgage. For this to work, you

will need to ﬁnd a lender who allows the

seller to carry some of the ﬁnancing.

Seller ﬁnancing is the best ﬁnancing

of all. You will ﬁnd you save money by not

having to pay fees associated with getting

a loan, such as points and origination fees.

Often, you can negotiate a better interest

rate, especially when savings accounts in

banks are receiving lower interest rates.

And with owner ﬁnancing, you can

easily negotiate certain terms in the mortgage

that will beneﬁt you. For example, you can

put special clauses in your mortgage that will

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When there is no cash given as a down payment, the seller

may be concerned that if the property was damaged, they could

lose money. The property itself may not be able to satisfy the debt.

If you give them something extra, like a lien on one of your other

properties, they may feel more secure knowing the extra collateral

will give them some cushion. The note stays the same; only the

mortgage or deed of trust is changed.

Most of the time, however, you will have a seller who wants

some cash in their pocket. Now you have to ﬁnd out what the

needs of the seller are.

Does the seller need some cash right now? Or does the seller

feel that if you have a vested interest in the property, you will take

better care of it and make the monthly payments? In other words, is

the seller just looking for security?

If the seller needs cash and wants a hefty down payment,

maybe the seller could subordinate his position, allowing you to

get a ﬁrst mortgage with a lender and have the seller hold a second

mortgage. See the example below.

FOR EXAMPLE

asking price $100K

seller willing to carry $80K mortgage

down payment $20K

you offer $100K

give seller $40K from 1st mortgage loan from the bank

seller will carry $60K 2nd mortgage

If the seller needs security, knowing that he received more money

up front may help alleviate some of his fears. In this case, you

may offer to give the seller more money and have him carry less.

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the purchase price and the assumable

mortgage. But when the mortgage is not

assumable or when qualiﬁcation by a new

buyer is required in order for an assumption

to take place, there will be an acceleration

clause in the mortgage that states if the

property is sold, the lender has the right to

demand payment of the remaining principal

balance. This is sometimes referred to as the

“due-on-sale clause.” In other words, if the

title is transferred, the bank may decide to

“call the loan due.”

Back in the ’70s when interest rates

began skyrocketing, people started having

trouble selling their homes. So sellers had to

get creative. They started letting more buyers

assume their mortgages or they created

wraparound mortgages. The banks wanted

the money that had been locked into low

interest loans to be available to lend at the

higher market interest rates. The acceleration

clause (a.k.a., due-on-sale clause) was a

way of eliminating low interest loans and

freeing up money to lend at the higher rates.

See the example below.

FOR EXAMPLE

asking price $100K

seller willing to carry $80K mortgage

down payment $20K

you offer $100K

give seller $60K from 1st mortgage loan from the bank

seller will carry $40K 2nd mortgage

If the seller is not comfortable in holding a

lien in second position, then maybe you can

give the seller even more cash and have

a much lower mortgage. See the example

below. If the seller is still concerned about

holding a note in second position, you will

need to try to ﬁnd out what will work for the

seller and still get you what you want. We

will explore other options that may be more

appealing to the seller shortly.

FOR EXAMPLE

asking price $100K

seller willing to carry $80K mortgage

down payment $20K

you offer $100K

give seller $75K from 1st mortgage loan from the bank

seller will carry $25K 2nd mortgage

DUE-ON-SALE CLAUSE AND LAND TRUSTS

Sometimes the seller has a mortgage on the

property, but they may still be willing to work

with you on the ﬁnancing. If the mortgage

is assumable and does not require a new

buyer to qualify, then you can assume the

mortgage and ask the seller to carry a

second mortgage for the difference between

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WRAPAROUND MORTGAGES

Wraparound mortgages are an important tool in buying houses

when there is an existing mortgage on the property. A wrap is a

seller carry back loan that surrounds (or wraps) already existing

ﬁnancing. It enables the buyer to obtain ﬁnancing without paying

off the existing loan.

The buyer’s mortgage and payments are based on the terms

of the wrap, such as interest and timeframe, and have nothing to

do with existing ﬁnancing. The seller keeps the difference between

what he or she receives from the buyer and the mortgage payment

of the existing ﬁnancing.

To illustrate, let’s say you negotiate to purchase a house for

$130,000. The seller is willing to do a wrap mortgage for the

full purchase price at 10% interest amortized over 30 years. The

seller’s existing loan is based on an original loan of $80,000 at 7%

interest amortized over 30 years. The seller has owned the property

for 10 years.

This is how it looks:

• $130,000 at 10% interest amortized over 30 years =

$1,140.84 per month

• $80,000 at 7% interest amortized over 30 years = $532.24

per month.

Each month, the seller will receive $608.60 more than his or her

mortgage payment. At the end of 20 years, the seller will keep the

full $1,140.84 per month until the principal is paid off in 10 years.

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OTHER LOW OR NO MONEY

DOWN TECHNIQUES

ASSUME FIRST MORTGAGE AND HAVE

THE SELLER CARRY A SECOND

One no money down technique is to assume

the ﬁrst mortgage and have the seller carry

a second. Often, there is a huge difference

between what you have negotiated with the

seller as a purchase price and the assumable

loan he or she has. This difference can

empty your pockets quickly or put the deal

too far out of reach. Ask the owner to carry

a second mortgage for the difference.

OWNER TAKES BACK A NOTE

Another technique is to have the owner

take back a note for a short period of time,

allowing you to get a reﬁnance loan instead

of a purchase loan. A reﬁnance is based on

the appraised value and not the purchase

price, so if you are buying below appraised

value, you can get into the property with no

money down. It can have interest accruing

and mortgage payments or no payments

and a balloon. However, you need to use

caution when using this technique. Ensure

you have a lender who can reﬁnance

quickly without seasoning and one who will

base that reﬁnance on appraised value even

though you have not owned the property for

very long.

In essence, a wrap allows the buyer to

take title to a property by combining a ﬁrst

mortgage and a second mortgage where

the second mortgage wraps around the

ﬁrst. Sometimes it is called an all-inclusive

mortgage (AIM) or an all-inclusive trust deed

(AITD).

LAND CONTRACT, CONTRACT FOR

DEED, AND AGREEMENT FOR DEED

The terms land contract, contract for deed,

and agreement for deed essentially mean the

same thing: a promise to pay. Until the debt

is paid, the seller retains title and the buyer

receives an equitable interest in the property.

The buyer does not become the

titleholder until the terms of the contract are

satisﬁed, at which time the seller actually

deeds the property to the buyer.

A contract sale is handled by an

escrow company that holds the Warranty

Deed signed by the seller until the buyer

satisﬁes the terms of the contract.

One beneﬁt of using land contracts

or contract for deed is they can be used

as a tool to avoid the due-on-sale clause,

since title does not transfer until the terms

are satisﬁed. Another beneﬁt is there are

minimum closing costs involved because

owner ﬁnancing is used.

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SPLIT FUNDING

With split funding, the investor offers a small amount of cash to

close the deal, with the remaining amount due months later. No

interest is paid and only one lump sum payment is due. Basically, it

is a way of getting in with no down payment or with very little down

and then having a balloon payment of the principal due later, such

as in six months.

The term is negotiable, but enables the investor to ﬁx up the

property and have it sold or reﬁnanced before the balloon is due.

The advantage to the seller is that a distressed property gets ﬁxed

up and the seller gets his or her money no later than when the

balloon payment comes due.

BALLOON THE DOWN PAYMENT

This is similar to split funding, but you give no cash. Instead, you ask

the seller if he or she will carry the note and wait six months or longer

for the down payment. You will be making mortgage payments each

month, which may relieve the owner of debt if it is a wrap mortgage

or of management woes if the seller owns it free and clear. This can

also solve problems the owner may have if they live out of state.

Additionally, this will give you time to come up with the money

if you plan to sell the property and thus pay off the debt and pocket

the difference. Or if you are planning on keeping the property, you

can possibly use the extra money from the rents (your positive cash

ﬂow) to come up with the down payment, or you may decide to

reﬁnance.

PAY THE DOWN PAYMENT IN INSTALLMENTS

You can ask the seller to let you pay the down payment in terms. The

payments can be made over several months or years. Of course,

if you are keeping the property for income, you will want to make

sure it still has cash ﬂow.

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pulling cash out for future investing or to pay

off the loan that was placed on an existing

property you own.

JOINT VENTURE WITH THE SELLER

Some deal types may not allow for this and

it is recommended that you consult your local at-

torney for speciﬁc laws and regulations in

your area.

Ask the seller to let you help sell his or her

property and split the proﬁt between you.

If there is a lot of equity or you can force

the appreciation by doing a little repair, you

and the seller can make some good money.

Make sure you have a contract that states

how much the split is and the terms you have

negotiated for your protection.

JOINT VENTURE WITH AN INVESTOR

Let’s say you ﬁnd a phenomenal deal, but

you are strapped for money. You could

bring in another investor to be the money

partner. Often, in the commercial arena, an

investor will bring in several other investors

to purchase high rises, etc.

PARTNERS

When using partners, you need to have

all your numbers worked out and the entire

deal planned very carefully. It is customary

to split the proﬁt equally, but sometimes you

may do a 40/60 or 30/70 deal.

SUBORDINATION

Subordination is simply moving a senior

loan to junior position. It allows you to get

a new mortgage, even though you already

have seller ﬁnancing in place. In other

words, subordination occurs when the seller

agrees to take back a second mortgage and

allows you to get a ﬁrst new mortgage on

the property. IIt works best with properties

carrying low or no mortgages.

Why are sellers willing to subordinate?

You may ﬁnd an extremely motivated seller.

Perhaps they have a distressed property they

cannot sell. Or they may get more money

from you with subordination than they would

get if they sold the property “all cash” to

some other buyer. Remember, the sales price

can sometimes mean more to the seller than

cash.

SUBSTITUTION OF COLLATERAL

Substitution of collateral simply means you are

taking an existing mortgage on one property

and you are transferring it to another. In other

words, you are substituting the collateral from

one property to another. This can work for a

down payment or can be used to purchase

the property. In using substitution of collateral

to purchase the property, you will now own

it free and clear. You can then reﬁnance it,

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How do you ﬁnd a partner? Attend your local real estate

investment group or advertise in the newspaper.

Important Note: When using a partner, be sure to consult with an

attorney. It may not be in your best interest to create a partnership.

Many people have been hurt as the result of a partner incurring

litigation, and having judgments attached to them and their assets

because of the partnership. It is usually best to keep them as a

money partner where both of you are placed on the deed. This

way, when the property is sold, you both will receive your portion

of the proﬁt.

RAISE THE PRICE AND LOWER THE TERMS

To make seller ﬁnancing work, particularly with no down payment,

you can offer to pay more money than the seller is asking. This may

appeal to a seller who is more concerned with price than the terms

and doesn’t really need the cash.

LOWER THE PRICE AND RAISE THE INTEREST RATE

This is often used to appeal to an investor who wants a higher

interest rate and sees the potential of making more money if the note

is carried over a long term. This is beneﬁcial to you because your

interest payments are tax deductible, and if you do sell the property,

you owe less because of the lower price (you have more equity in

the property). Again, knowing the needs or desires of the seller can

help you create the optimum win/win situation.

ASSUME THE SELLER’S OBLIGATIONS

Instead of giving cash for a down payment, you can assume the

seller’s ﬁnancial obligations. If the seller has a payment they need

to make, you could make the payment and count that as your down

payment.

Or maybe you could take over a credit card bill and

spread the down payment over several months or years.

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The advantage of a line of credit is

that if you need only $5,000 for a down

payment or for repair costs and pull out just

the $5,000, you will only pay interest on

that $5,000. If you then pay the $5,000

back, you will have no interest accruing,

but will still have access to up to $30,000

whenever you need it!

TRADE FOR THE DOWN PAYMENT

Trade something you already own that has

value for the down payment. You may have

something of value the seller would happily

take as a down payment. It could be

something as simple as a boat or a vehicle.

It may be a rundown property a motivated

seller deeded to you. Finding the needs of

your seller will allow you to ﬁnd creative

solutions to fund the deal.

USE EQUITY ON AN EXISTING PROPERTY

You may own a property that has a lot of

equity. Many investors will reﬁnance that

property and pull out the equity to be used

as down payments or to pay cash for the

next deal, and then reﬁnance that property

after it has been ﬁxed up if they plan to keep

it. Or they will sell the property and then use

the excess proceeds to buy again.

GET A LINE OF CREDIT

There are many different types of lines of

credit. You may have a strong portfolio with

your bank and can get an unsecured line of

credit.

Another line of credit is one that is

secured. Possibly you have a large sum

in the bank and you borrow against that

amount. This may freeze up your account,

but it can prove valuable in building a strong

relationship with your bank for future lines

of credit that won’t be secured. It can also

improve your credit as the bank reports your

good payment history to credit bureaus.

Another secured line of credit may be

taken on a property you own. This could

be your personal residence, or it may be

another investment property you own. It is

usually called an equity loan and is based

on the equity you have in the property.

For instance, if you own a property

worth $100,000 and owe $50,000, the

lender may give you $30,000 in a line of

credit, which becomes a second mortgage.

You will then have the option of pulling out

all of the $30,000 at once, or you will be

given checks to use as needed.

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BUY LOW AND REFINANCE TO PULL YOUR CASH OUT

If you have cash, you may want to buy low and reﬁnance to pull

out your cash. But if you want to go this route, remember that some

lenders may require seasoning.

Over the years, lenders were hurt by unscrupulous investors

who would purchase a property, do shabby repairs, and then sell

the property for more than the value using an appraiser who over-

inﬂated the appraisal. So many lenders started requiring seasoning.

You may still ﬁnd some lenders who don’t have an issue with

seasoning, but before you pay cash, make sure you can reﬁnance

quickly if that is your plan.

USE HARD MONEY

Hard moneylenders are a critical element to you being able to have

quick access to cash. Liquidity can make the difference between

getting the deal and losing it. Quick closings can also help you

negotiate much lower prices. They are also vital for an investor who

does not have good credit.

Hard moneylenders usually base the loan on the property itself,

not your creditworthiness. Because they lend at a low LTV, they have

less risk. If you don’t make the payments, they simply take the property

and sell it.

As already discussed, we can ﬁnd hard moneylenders through

mortgage brokers, but there are other ways to ﬁnd these private

investors. For instance, you can check the courthouse for private

note holders. If you consistently see a name that doesn’t look like an

institutional lender, you have probably found a hard moneylender.

Don’t be confused if the note holder is in the name of a Corporation

or LLC. Most investors who lend money will use one of these entities.

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factor in all the costs of the loan and can still

make money, why wouldn’t you use a hard

moneylender? Most investors who plan to

do rehabs will use a hard moneylender.

As mentioned before, hard money-

lenders are private investors. They lend at

a much higher interest rate, As mentioned

before, hard money lenders are private

investors who lend at higher interest rates

and typically charge points. Again,

remember one point equals one percent of

the loan amount.

You would want to pay a higher interest

rate with lower points than a lower interest

rate with high points. For example, if you

were to get a loan at 18% interest and 2

points that you had for six months, your cost

for the loan would be 1-1/2% per month X

6 months (equals 9% + 2 points = 11%). If

you were to get a loan at 12% interest and

10 points for the same period of time, your

cost for this loan would be 16% (1% per

month X 6 months equals 6% + 10 points =

16%).

You may consider negotiating with the

seller to pay the points. This could potentially

save you money, but it really is the same

as getting the seller to accept a lower

purchase price. However, you will ﬁnd that

for some sellers, this is preferable to actually

accepting a lower price. The reason is they

You can also ﬁnd hard moneylenders

through your local real estate investment club

and through other networking opportunities.

For example, network with other investors you

meet when attending auctions and calling the

“I buy” ads in the newspaper. You may come

across a hard moneylender or someone who

can refer you to a good one.

Other sources for ﬁnding hard money

include professionals associated with the real

estate business. For example, accountants

and CPAs have clients who are looking to

invest their money. They may already have

clients who hold one or more notes. Likewise,

insurance agents have to put the lender on

hazard insurance policies. If you know an

agent, maybe they would look through

their records to ﬁnd the private lenders. Title

companies and closing attorneys prepare

closing documents for private moneylenders.

Most should be able to give you at least one

source for hard money.

You can also look in the newspaper

for hard moneylenders. Often, you can

ﬁnd people wanting to lend money in the

classiﬁed ads of the newspaper under the

ﬁnancial, business, or real estate section.

Sometimes they may appear as “loan

sharks.” Remember, it is not the cost of the

money, but the availability of the money that

makes hard money so appealing.

If you

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may not want to tell family members they accepted the lower price,

when in fact they would accept less money.

This is something you may want to explore as you negotiate

with the seller. The beneﬁt of having a higher price for you is that it

may be easier to turn around and sell the property for more money

if it appears the purchase price was higher.

Most hard money loans are short-term loans of six months to one

year. The investor wants to get in and out quickly. They make their

money on the points and when this money is freed up, they can

lend it out again. They also want less risk and a short period of time

ﬁts their risk tolerance. Nevertheless, you may want to ask them if

there is a prepayment penalty if you pay the loan off early. There

probably won’t be, but it never hurts to ask.

Wanting to protect their interest, hard moneylenders will usually

lend 60 to 75% of the after-repair value. They usually do their own

drive-bys to ascertain the value of the property, but they may use

someone else, an appraiser or someone they trust, to assess the

ARV for them.

After you have established a good relationship with a hard

moneylender and they feel you know what you are doing, some

will put the money in your bank account within 24 hours. This will

enable you to take advantage of foreclosure auctions and other

deals that may need quick cash. And for those of you who may

have trouble getting a loan through an institution because of credit

issues, a hard moneylender can give you a pre-qualiﬁcation letter,

enabling you to make offers on bank owned properties and to

sellers who insist on having a pre-qualiﬁcation letter.

The bottom line is every investor should have at least one hard

moneylender in their pocket!

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The disadvantage is if you want to

sell one of the properties. To do so, you

will need the lender to release it (usually

they will for a price) or you will need to

reﬁnance. It is imperative that you get a

partial release clause put into the mortgage

contract to protect yourself (consult with a

lawyer). This clause permits the borrower to

obtain a release of any one lot or parcel

from the lien by repaying a certain amount

of the loan. The lien will stay in place on the

remaining properties.

Another reason you may want a

blanket mortgage is because once you have

multiple loans, it becomes harder to get a

loan. By combining several properties you

are purchasing, you will have less loans on

the books.

Sometimes a lender will insist upon

a blanket mortgage to reduce their risk.

They lend you the money to purchase the

property, but they want to attach the loan

to the one purchased and a property you

already own! Be careful. This is not a good

loan for you.

When you are ﬁlling out loan

applications, you need to be cautious. You

have to show your debts, so those properties

you have loans on will show up. But the

properties you have purchased without

institutional lending will not show up on your

SELL OFF PART OF THE PROPERTY

Sometimes you will buy a property that can

be split into several useful parts. You can sell

off part of the land or some of the houses

and use the proﬁt from that sale to make

your down payment on another sale.

For example, let’s say you are buying

six houses at $25,000 each. You negotiate

a 60-day close and you need 20% down.

You sell two of the houses for $40,000

each. At the simultaneous closings, you

make your down payment of $30,000 from

the proﬁt you made from the sale of the two

houses.

BLANKET MORTGAGE

A blanket loan covers more than one parcel

or lot. It is usually used to ﬁnance subdivision

developments. However, it can be used to

ﬁnance the purchase of any kind of property.

Blanket mortgages are used for multiple

reasons. For example, some lenders have a

minimum amount they are willing to lend. If

the house you want to purchase is less than

what they are willing to lend, you may want

to combine one or more properties in a loan

that blankets them.

The advantage of a blanket loan is that you

usually pay less in closing costs (one closing

for several properties).

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credit report. Even though they have equity, you may not want to list

them as an asset. The lender may want to attach them into a blanket

mortgage.

MAKING THE SELLER YOUR PARTNER

Equity participation is when you make the seller your partner by

giving them an interest in the property. For example, if your down

payment was to be 20%, you can give the seller an equitable

interest in the property of 20% instead of having to come up with the

down payment. When you sell the property, the seller gets 20% of

what the property sells for. To illustrate, if you purchased a property

for $100,000, you would get a mortgage of $80,000 and give

the seller a 20% interest in the property. Let’s say that after two

years, you sell the property for $150,000. The seller would receive

$30,000 ($10,000 plus his initial $20,000) and you would proﬁt

$40,000! Win/win!

EQUITY PARTNERSHIP

This is similar to the equity participation made when the seller was

your partner, but in this case, you make someone else your equity

partner.

Let’s say you are purchasing a property worth $180,000 for

$120,000. Your lender requires $24,000 for a down payment.

You know your dad has been complaining about the low

interest rate he has been receiving on his savings at the bank and

that he is interested in doing some real estate investing. You sell him

an equity share in the house. He has $12,000, so you give him a

10% share of the house.

You also have a couple of sisters who have expressed an interest

in doing some investing. You ask them how much they can invest.

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taking back a note could close the deal.

Also, if the owner does 100% ﬁnancing,

he or she may be unable to pay the agent

because of lack of funds. You can always

ask!

CLOSING STRATEGIES ON CASH FLOW

PROPERTIES

On income-producing properties, setting

the closing date between the 3rd and 5th

day of the month can help you produce the

down payment you need.

At closing, you would get most of the

rent for that month, plus the deposit and the

last month’s rent. Taxes are usually prorated

and the real estate tax credit could also help

with the down. But be aware that in some

states, the deposit is held in escrow and you

don’t collect the last month’s rent.

Find out what is applicable for you

where you live. Sometimes the lender wants

to see proof of funds and you have to bring

money to the closing table, but you can

put money back in your pocket afterwards.

With seller ﬁnancing, you will not have to

worry about proof of funds.

CREATE A NOTE AND SELL IT

There are many ways to create a note and

many different types of notes.

For example,

One sister has $9,600, so you give

her an 8% share in the house. Your other

sister who just got a bonus from work has

$2,400 to invest. You give her a 2% share in

the property. Now you have your $24,000

for the down payment and your family owns

20% of the house.

You purchase the house and sell it for

$180,000. You will have $60,000 proﬁt

from the sale. Your dad gets $6,000 (plus

his initial investment of $12,000); your

sister who had an 8% share in the home

receives $4,800 (plus her initial investment

of $9,600); and the sister with the bonus has

made $1,200 on her initial investment of

$2,400. And you have made a handsome

proﬁt of $48,000!

Do you think your family might want

to do this again? Do you think they may

spread the word and you will have a lot

more people wanting to own a share in the

equity of a house?

Ask the agent to take back a note for

his commission.

Some real estate agents may be willing

to take back a note for their commission,

particularly if they are having trouble selling

the property. Most of them realize something

is better than nothing. If their commission

would be the down payment you need, then

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when a seller carries the ﬁnancing, a promissory note is created

with the buyer promising to pay the debt and the terms of the note.

A mortgage or deed of trust is created as a security instrument using

the property as collateral for the debt. When a seller holds the

“mortgage” or “takes back a note,” the seller is holding a promissory

note and a mortgage or deed of trust.

These notes and the security instrument can be sold to an

investor. There are note buyers all over the country who buy notes

on a daily basis. Most notes are sold at a discount, which is one of

the ways a note buyer makes his or her money.

There are many factors that affect the value of the note. The primary

factors are:

• THE INTEREST RATE – The higher the

interest rate, the more valuable the

note and the higher the yield.

• THE CREDIT OF THE BORROWER –

The better the credit, the more the

note buyer will pay for the note.

• TIMEFRAME – The shorter the term,

the more they will pay for the note. If

it needs to be amortized over 30

years, then create a balloon in 10

years. Note buyers like to get in and

out quickly. Since they buy at a

discount, they make money when they

buy.

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You can get creative working with notes.

For example, you could sell a “partial” note

(selling part of the payments for your down

payment). To illustrate, let’s say you make

an offer on a property for $150,000. The

seller owns it free and clear and is willing to

carry the ﬁnancing with 20% down at 10%

interest amortized over 30 years. You offer

to give the seller the $30,000 cash down

payment he wants if he is willing to give

up the ﬁrst 28 monthly payments. You show

him how this will make him more money.

Here is how you get the $30,000 for the

down and convince the seller to carry the

ﬁnancing:

Create a $150,000 note at 10% interest

= $1316.36 monthly payments. You

are going to sell off the ﬁrst 28 months

of payments for $30,937.77. This will

give the investor who purchases the note

$36,858.08 – a yield of 15%! From the

$30,937.77, you will give the seller the

$30,000 down payment.

After 28 payments, the mortgage reverts

back to the owner. At this time there is a

principal balance of $147,916.97. The

seller already collected $30,000 and still

has 332 months of payments coming!

• HOW OLD IS THE

NOTE? – They like notes

to be “seasoned” one to two years. A

seasoned note shows a payment

history and provides less risk to the

note buyer.

• LTV – How much is the loan to value?

Note buyers want to see some equity

in the property.

• WHAT POSITION IS THE NOTE? –

Typically they want a note that is in

ﬁrst position.

• WHAT KIND OF PROPERTY,

CONDITION, AND LOCATION? –

They will take these factors into

consideration.

These variables will affect how much the

note is discounted and therefore the value of

the note (what the note buyer ultimately will

pay). Many investors will work with a seller

to create a note that is sold at the same

time the property is closed on and the seller

gets cash at closing. This is a simultaneous

close and even though it doesn’t have any

seasoning, this technique can be valuable

to the investor buying the property.

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If you added the principal balance of $147,916.97 to the $30,000

down payment, the owner has already made $27,916.97 in

addition to the remaining payments he will be receiving. Even if

you sold the property or reﬁnanced it at this point, the owner will

have made $27,916.97 above the purchase price!

If you continue making mortgage payments, the owner will

make $263.27 more per month than if you were paying on a

$120,000 note ($150,000 purchase price minus $30,000

down = $120,000 note at 10% interest = $1053.09 monthly

payments). You have just created a win/win situation!

Make sure that when you sign the purchase contract, you put

in the contingency: “Sale is subject to buyer selling 28 monthly

payments at $1316.36 for a minimum of $30,000.” Your lawyer

can help you with contingencies. The note sale will take place

simultaneously with the purchase of the property giving the seller the

$30,000 down payment.

1031 TAX EXCHANGE

In layman’s terms, a 1031 Tax Exchange allows an investor to pull

his proﬁt from one or more real estate properties to purchase other

property without it becoming a taxable event.

An exchange occurs when an investor buys and sells a property

simultaneously to defer capital gains tax. Capital gains tax can be

permanently deferred as long as an outright sale does not occur.

The properties have to be like-kind. All real estate is considered to

be like-kind.

144

GRANTS

There are many federal, state, and city

grants available depending on where you

live and what you want to do. For example,

the government offers several grants for

property improvements and property

development that is intended to help low-

income families or the elderly. And there are

grants available for rehabilitating speciﬁc

geographical areas.

Talk to bankers, real estate agents, and

your city to see if they know of any grants

available and contact your local housing

authority to ﬁnd out how government grant

programs work. You should also network

with investors who do rehabs or provide

housing for the low-income population.

You’ll also want to check with the

federal government. You can go to the

hud.gov website and look up the grants

that are available there. HUD (Department

of Housing and Urban Development)

provides numerous grants for neighborhood

revitalization. Additionally, the USDA (U.S.

Department of Agriculture) provides loans

and grants for rural multi-family housing for

low-income individuals.

Try to locate a government grant and

loan specialist to help you take advantage

of the various grants available.

Qualiﬁcations of a 1031 Exchange include:

• Must use a qualiﬁed Intermediary

(Exchanger) that is unrelated

• The seller must identify the property he

or she plans to purchase within 45

days of closing

• The property must be purchased within

180 days of closing

• The replacement property has to be

the same or more than the property

being sold

• The replacement property must be held

for a minimum of two years

There are many things you can do when you

implement a 1031 Exchange. For example,

other investors may sell several properties

at once to purchase a large commercial

building using a 1031 Exchange. Consult

with a tax professional for assistance with

1031 Exchanges.

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OPTIONS/STRAIGHT OPTIONS

An option is basically securing the right to purchase a property

up to a certain time period for a speciﬁc price. There is usually

consideration money given that can be non-refundable. You are

paying for the right to tie up the property for a period of time for an

agreed upon price. The seller cannot sell the property to anyone

else during this time. You are not obligated to purchase the property;

you just have the right to purchase it for a certain period of time.

Sometimes this is called a straight option.

Straight options are commonly used by developers purchasing

raw ground and by those investing in commercial properties. These

developers and investors don’t want to purchase a property only

to ﬁnd out that after they have run tests and feasibility studies, they

cannot build on the property or that it is not suited for what they

want to do. Sometimes they have to get zoning changes. At the

same time, they don’t want to spend all this time and money doing

their due diligence only to ﬁnd out the owner sold the property to

someone else.

When it comes to houses, most people only think of lease

option. But you can sometimes secure a straight option on a house

and assign the option for a fee. Sometimes you will ﬁnd a motivated

seller who has not been able to sell the home. You know it is because

the seller lacks the marketing skills and you feel you could sell this

property quickly. Using an option would allow you to do just that.

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REVIEW

There are probably a thousand and one

ways to creatively purchase real estate. But

the ﬁrst step in creative ﬁnancing is solving

the problems of your motivated seller.

Become a problem solver! This is an

essential component in real estate investing.

Think creatively as you attempt to satisfy the

needs of your seller.

Strive to produce a win/win situation at

every opportunity. Sellers will work with you

if they feel you can satisfy their needs and

help them with their problem. Be creative.

SANDWICH LEASE OPTIONS

A sandwich lease option is where you buy

with a lease option and then sell with a lease

option. You are essentially sandwiched

between two lease options.

Many investors like the sandwich

lease option because you can usually get

in with minimal cash (usually $100) and

receive from your tenant/buyer 3 to 5% of

the purchase price in option consideration

money. At the same time, you can have

positive cash ﬂow.

The properties involved in lease

options are usually nice homes in great

neighborhoods. We will learn more about

lease options in the next chapter. Be sure

to look into the laws of your state regarding

lease options.

ASSIGNMENT OF CONTRACT

We discussed assignment of contracts in our

chapter on wholesaling, but, as a reminder,

with an assignment of contract, you never

purchase the property. You get the property

under contract and either assign the contract

or do a double closing. This is quick money

with limited risk. You don’t have to get a

loan or rehab the property because you

are not purchasing the property. You ﬁnd

a great deal and wholesale it to another

investor who does all the work.

CHAPTER

EIGHT

147

Important Note:

Be sure you contact your local real estate professional or real estate lawyer to research the appropriate documents

that are required for all real estate transactions in your state.

PROFITING BY

CONTROLLING

PROPERTY:

Lease Options

149

n option is a contract that

gives you the right to purchase

a property for an agreed upon price

up to a certain timeframe. This is

called a “straight” option. This kind

of transaction is called a unilateral

contract because only the seller is

bound by it. An option obligates the

seller, but not the buyer. The buyer has

the “right” to purchase the property,

but does not have to.

As we learned earlier, a straight

option is frequently used by developers

and buyers of commercial property.

builder does not want to purchase raw

ground only to ﬁnd out it cannot be

built on or that approvals to subdivide

the property won’t go through. By the

same token, the builder does not want

to pay a lot of money doing perk tests

and feasibility tests only to ﬁnd out

the seller sold the property to someone

else.

So the builder uses a straight

option, an important element of which

is consideration. The builder gives the

seller consideration (usually money)

that is frequently non-refundable for the

right to tie up the property and lock

in a purchase price.

Another way of

thinking about consideration is that it

GUIDE TO REAL ESTATE INVESTING

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ELEMENTS OF A STANDARD

OPTION CONTRACT

Elements you will always see in an option

contract include:

THE CONTRACT MUST BE IN WRITING

As with all real estate contracts, an option

must be in writing. A handshake or verbal

agreement is not enough. You must have all

parties on the title sign the option contract

and date it. Be sure to check the title so you

know who will need to sign the contract.

Who are the individuals involved? Who is

the buyer and who is the seller?

LOCATION OF THE PROPERTY

If the property has an address, write it

down. It wouldn’t hurt to also put the parcel

identiﬁcation number in the contract. If it is

raw ground, you may also want to put the

legal description of the property in addition

to the PIN number.

CONSIDERATION

The amount of the consideration will be in

the option contract. This is what makes the

contract a legal, binding contract. Usually

the consideration is money, but it can be

whatever the buyer and seller agree to.

is money the buyer pays to the seller to

have the right to purchase the property at a

later date.

Investors will use a straight option to

hold on to a property for future appreciation.

They know the potential of the area and want

to lock in at today’s value. Other investors

will get an option and sell the contract to

another investor.

You may ﬁnd a homeowner who has

a property he wants to sell, but is having

trouble selling. You know you could sell the

property quickly because you know how to

market a property and attract buyers. So,

you get an option to purchase the property

and start marketing it for sale. Why would

the seller do this? Because the seller got the

price he wanted and you are willing to do

all the work.

The idea here is that an option gives

you control of the property without you

having to purchase it.

It is creative ﬁnancing! You can make

a proﬁt without using any of your money.

You can quick-turn a property and make fast

cash just like when you wholesale a deal!

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When you are the buyer, you will want to pay as little as possible

(perhaps as little as $10). But when you are the seller, you will want

your tenant/buyer to pay three to ﬁve percent of the property’s

purchase price.

TIMEFRAME

A speciﬁed timeframe is written into the option contract that gives

the buyer a period of time to exercise the option. This timeframe will

have a date. Any time up to that date, the buyer may exercise his

option. This means that even though the buyer may have a ﬁve-year

option, he can exercise it any time before that date. If he decides

to purchase the property six months into the option, there is nothing

stopping him from exercising the option and buying the property.

PURCHASE PRICE

In the option contract, it will state the agreed upon price.

WHAT IS A LEASE OPTION?

Just as the name implies, a lease option incorporates two components:

an option (the right to purchase the property for a speciﬁc price

for a certain period of time) and a lease agreement. You have

probably heard the term “rent to own,” which is what most people

call a lease option. Negotiated in the contract are the particulars of

the terms that have been agreed upon.

A lease option is an excellent tool in controlling real estate

and creating wealth. Gaining control over a property with relatively

no risk empowers an investor and opens up immense opportunities

for obtaining properties with very little money.

Lease option vs. lease purchase

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• ADDITIONAL MONTHLY OPTION

CONSIDERATION – Many investors will

charge more money for rent and give a

credit towards the purchase if the option

is exercised. If you do this, be careful to

not call it “credit” in your contract as this

may give the tenant/buyer an equitable

position in the property.

• MAINTENANCE – Usually there is

something in the contract that states who

pays when something needs work.

BENEFITS OF A LEASE OPTION

There are beneﬁts in a lease option to

both the buyer and the seller. Let’s explore

the beneﬁts and then see how those same

beneﬁts will help you as an investor.

BENEFITS AS A BUYER

The advantage of a lease option to a buyer

who cannot qualify for a loan to purchase a

property is that it gives him the opportunity

to become a homeowner.

As the buyer works to build his credit,

most lenders consider a lease option as

though the buyer was actually purchasing

the property.

Often, they will do a reﬁnance

There is a big difference between

a lease option and a lease purchase. A

lease purchase obligates the tenant/buyer

(lessee) to buy the property within the term

of the lease, whereas a lease option gives

the tenant/buyer the right, or option, to buy

the property and the seller (lessor) must sell.

With a lease option, the tenant/buyer

is not required to exercise the option and

therefore is not obligated to purchase the

property. With a lease purchase, however,

the tenant/buyer is obligated to purchase

the property. As a buyer, we only want to

do lease options.

Another term you should not be confused

with is purchase option. A purchase option

refers to purchasing the property with the

exit strategy of selling it on a lease option.

Additional components of a lease option

You will have the same elements in a

lease option contract as you would in a

standard option contract, however, you must

additionally have:

• LEASE PAYMENTS – Speciﬁed in the

contract will be the amount of the rent

and when the rent is due.

• TERM OF THE LEASE – How long the

lease is for and if it can be renewed.

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instead of a purchase loan. Usually the buyer can reﬁnance on

appraised value after six months. Also, prompt payments on a lease

option by the buyer can help him qualify for a loan easier than if he

had just been renting. A lease option can also beneﬁt a buyer who

does not have a lot of money for a down payment.

As an investor/buyer, you will gain ﬁnancial leverage with

a lease option while your risk is reduced. You can control a very

expensive and potentially proﬁtable home with very little money of

your own and without owning it.

Many of these properties would normally require 10 to 30%

of the purchase price down. Option consideration money is small

compared to the property’s value and the costs that would have

been involved had you secured a loan.

Even if you could get a loan, it’s much better to make money

without loans. You can walk away from the contract if the property

value goes down. You control the property.

You will accumulate equity faster than you would through

conventional ﬁnancing. This makes it even easier for you to “buy

right.” Because you are not getting ﬁnancing and don’t “own” the

property, there will be no public record (other than a Memorandum

of Option).

You will also have increased buying power. You can get into

a lease option with as little as $10 consideration money when you

have a motivated seller who needs debt relief.

Additionally, you will not have the property showing up as a

debt on your credit report. This, in itself, will help you be able to do

other types of transactions without this particular investment creating

an adverse effect.

As a buyer, you want to make sure the contract is assignable.

You may decide to just assign the contract. Sometimes this is called

an assignment option. You can assign a straight option or a lease

option. You could even “wholesale” a lease option!

154

a house that is worth between $110,000

and $116,000 according to the comps. If

houses were appreciating at 8% per year

and you gave your tenant/buyer a two-year

option to purchase the property, your asking

price would be $135,000 ($116,000 X

1.08 = $125,280 X 1.08 = $135,302.40).

As a seller, you will typically ask for 3 to 5% of

the purchase price in non-refundable option

consideration money. In our example, you

would ask between $4,000 and $6,750.

If the buyer’s credit was horrible, you might

want to get even more.

You can generate more cash ﬂow as

you can charge higher than fair market rent.

With the higher rental fee, some investors

will give credit towards the purchase price.

Again, if you do, remember to be careful that

you call it additional option consideration,

not credit in your contracts. You must always

be careful to not give equitable interest in the

property. If your tenant(s) default, it is hard to

evict them if they have equitable interest. At

that point, you might have to foreclose.

Another beneﬁt as a seller is you have a

guaranteed rental income. If the buyer is

ever late, the option is void. This is a great

incentive for your tenant/buyer to make

payments on time.

Additionally, maintenance is not a

problem. Anything under $500, your

Some investors will use a lease option to

allow them to gain control of the property

and ﬁx it up. They either sell it with a double

close or bring it to a point where they can

now obtain the ﬁnancing based on the

appraised value of the home.

You will ﬁnd investors will also purchase

rental units using a lease option. They get

in for relatively little money and can ﬁx

these units up and increase rents, thereby

forcing appreciation. Now the property will

appraise much higher and they will likely

have no difﬁculty in reﬁnancing the property

and possibly pulling cash out (making sure

they still have a positive cash ﬂow)!

A lease option requires very little or

no money and offers investors a quick and

productive way of generating income.

BENEFITS AS A SELLER

As a seller, one of the advantages of a lease

option is you can sell the property quickly.

This is beneﬁcial especially in areas that

are experiencing a sluggish economy and

where sellers have to wait a long time to get

their houses sold. You have a great pool of

buyers when you do a lease option.

With a lease option, you can ask top

prices and get them. Typically, investors will

charge the higher market value and then

add for appreciation.

An example would be

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tenant/buyer will have to pay for (stipulate this in your agreement).

Usually, the tenant/buyer (optionee) will take better care of the

property than a traditional tenant would. They now have the pride

of homeownership, which will help free up your time from property

management issues. And vacancies are rare. If the tenant/buyer

moves out, you get to keep the consideration money.

You collect non-refundable option consideration upfront.

Option money is tax deferred until the option is exercised and sold,

or forfeited. That means you have tax-deferred money you can use

for other properties you wish to invest in. You remain on the deed

and maintain all the tax beneﬁts of ownership.

As you can see, there are many advantages to doing a lease

option for both the buyer and the seller.

BUYING AND SELLING WITH A LEASE OPTION

BUY WITH A LEASE OPTION

Some investors will purchase a property using a lease option. They

take control of the property without the ﬁnancial stress of large

down payments or having to qualify for a loan. Then, they rent the

property out and receive a positive monthly cash ﬂow.

When it comes time for them to exercise their option, the

property has increased in value and they qualify for a loan with no

extra money out of their pocket. Or, they can simply walk away and

not purchase the property.

SELL WITH A LEASE OPTION

Other investors have purchased a home and ﬁxed it up. They want

a monthly income, but don’t want to become landlords. They sell

using a lease option, knowing they will get more than the property is

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You receive a non-refundable deposit

collected from your tenant/buyer –

Quick money like wholesale!

You have a monthly income

(difference between your payment

and what you receive from your tenant/

buyer) – Positive cash ﬂow like a rental!

You receive money at the backend

(difference between the option price

you have with the seller and the option price

you receive from your tenant/buyer) – Large

proﬁt like retailing (buy, ﬁx, and sell)!

As you can see, you can make quick money

doing a sandwich lease option, just as you

can when you wholesale a property. The big

difference is instead of looking for distressed

or “ugly” houses, you will be looking for nice

homes in nice areas. For many investors, this

makes lease options more attractive.

You probably noticed that you would

also receive monthly income, just like if

you were doing a rental, except with

considerably less headaches. And you

can see more proﬁt at the backend without

having to spend a lot of time and effort

rehabbing a property and trying to sell it, so

you escape the risk of time and capital often

associated with investing in rehabs.

worth today and have a nice cash ﬂow with

a tenant/buyer who will take good care

of the property. They also get some upfront

money from the option consideration.

SANDWICH LEASE OPTION

Then there are investors who purchase using

a lease option and then turn around and sell

the same property using a lease option. As

we learned earlier, this technique is known

as a sandwich lease option where you

are “sandwiched” in between two lease

options, one with you as the buyer and the

other with you as the seller.

 Sandwich lease options are great proﬁt

centers. Understanding the mechanics of a

sandwich lease option will not only increase

your ability to ﬁnd deals and make money,

but you will also be able to just “buy” using

a lease option or just “sell” using a lease

option. Sandwich lease options will be the

focus of the rest of this section.

Sandwich lease options are one of the

best moneymaking tools in real estate. There

are three ways you get paid when you do a

sandwich lease option:

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GUIDE TO REAL ESTATE INVESTING

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WHO AND WHAT ARE WE LOOKING FOR?

What are you looking for? Motivation! Motivation creates the

circumstances that create the deal.

As discussed in Chapter 3, you will be looking for motivated

sellers. No matter what kind of real estate investing you do, you

will ﬁnd a motivated seller is the key to ﬁnding the deal.

There are two kinds of motivation to sell. You are looking for

owners who need to sell, not want to sell.

WANT TO SELL – PROBLEM PROPERTIES

Problem properties mean it is the condition of the house that is

motivating the seller to want to sell. It may be an “unwanted house”

the seller inherited. It could be a distressed house that is vacant and

boarded up. This abandoned house may have owners who live

out of state and can’t take care of it. Or it may be an “ugly” house

because of all the disrepair.

These are the types of homes we usually wholesale or rehab,

but sometimes you may still want to do a lease option with such

properties if you ﬁnd the right deal.

NEED TO SELL – PROBLEM OWNERS

Problem owners are sellers who are distressed because of personal

circumstances. It may be the result of a divorce or the loss of a job.

The seller may have a lot of debt and is having trouble making house

payments. Illness or death can create despair and the need to sell.

Rising medical costs may create ﬁnancial burdens. Any number of

factors can create a need for debt relief, which is the number one

motivation for a seller to do a lease option. These sellers need to

sell. They are the types of sellers we should be targeting for lease

options.

158

• NICE HOMES IN STABLE

NEIGHBORHOODS WITH LITTLE OR

NO EQUITY – We are talking about

nice homes in areas where

families want to live. Target

those neighborhoods. Usually these

properties will not have much equity, but

that works to our advantage. No equity

can be the incentive for a motivated

seller to do a lease option. In such a

case, we might tell the seller:

“We usually buy cash or owner

ﬁnancing, but that won’t work; you owe

too much! One thing that might work is

our lease option program. We can

make payments for you and maintain

your house until we sell it. When would

be a good time for me to come take a

look at it?”

• HOMES PRICED 75% OR

HIGHER THAN THE MEDIAN SALES

PRICE IN THE AREA – Get information

about the median sales price for your

area from your local Board of Realtors

For example, if the median sales

price in the area is $150,000, you

would be looking for homes priced

$112,500 or higher.

WHICH PROPERTIES DO YOU TARGET?

Once you start focusing on certain

neighborhoods and become familiar with

them, you will have a good idea of the

value of the homes located there. But until

you are familiar with the prices in your target

neighborhoods, be prepared by getting the

comps for each area.

Look at the comps and separately add

up all the square footage of all the homes

that recently sold in the area and then divide

that total by the number of houses sold. This

will give you the average square footage of

homes in the area. Next, add up the selling

price of these houses and divide that total

by the number of houses sold. This will give

you the average selling price of the homes

in the area. Then take the average selling

price and divide it by the average square

footage ﬁgure to get the average price per

square foot for that neighborhood.

Do this for each neighborhood you are

targeting. This will give you an idea of the

value of the homes in each area.

Now that you have that information, let’s

look at what types of properties you should

be targeting:

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• HOUSES WITH NO PROBLEMS OR NEEDING LITTLE

REPAIR – With a lease option, you do no want a lot of rehab.

• HOMES THAT ARE WELL LOCATED – You want to attract

buyers. The homes should be in desirable neighborhoods.

• THE HOME SHOULD HAVE A FAVORABLE LAYOUT – Again,

you want to easily put someone into the home.

HOW TO EVALUATE NEIGHBORHOODS AND AREAS

Here’s a quick look at how you might evaluate a neighborhood to

determine the best investment strategy for a property.

• LOW-INCOME – Not for lease option (they are great for

wholesale buying!)

– Attractive prices

– Favorable price versus rent ratio – area ratio 80/20

(80% renters/20% owners)

– Strategy – Get in and get out

• MODERATE-INCOME – Critical difference is homeownership

– Homeowners

– Tenants work in blue collar sector

– Tighter competition for deals

– Area ratio of ownership is 50/50 or 60/40

– Strategy

– Wholesale

– Buy on terms (owner ﬁnancing), turn around and sell to

buyer and be the bank

160

present time for property purchases. As well,

there is an overabundance of housing due

to the tremendous amount of building that

took place a few years ago, so we have

a perfect match up of motivated, distressed

sellers and motivated tenants with white

collar jobs!

Consider this match up carefully as

you begin your lease option investing!

For the ﬁrst time in many, many years,

you can buy or control very nice houses,

in GREAT neighborhoods, and purchase

them at tremendous discounts as the market

continues to self-correct or remains stalled.

Canvas and market for lease option tenants

(often young married couples with college

degrees), and ﬁnd out where they want to

live. Then, using your multiple streams of

income knowledge base, begin searching

for pre-foreclosures in this market area. It’s

like magic! You ﬁnd your tenant FIRST, and

then you go ﬁnd the perfect home. Your

tenant is pre-qualiﬁed in terms of income,

so you know that he or she can afford the

monthly lease and the option payment!

And, these tenants are much more motivated

to do whatever it takes to get their personal

situation handled within the three year lease

option period.

• MIDDLE-INCOME – Most are owners

and work in high-level blue collar jobs

– Area ratio 80/20

– Strategy

– Great for purchase option

– Retail – buy, ﬁx, and sell

– Rentals – Not as good cash ﬂow, but

have appreciation

– Get in title

– Urban

– Quick-turn

 – Don’t ﬁght low-income tenants

– Suburban

– Hold

– Control without owning

– Structure favorable ﬁnancing

A NEW REAL ESTATE MARKET EMERGES:

NEW CONSTRUCTION LEASE OPTIONS

There is another area for lease options

that has emerged over the past ﬁve years

and this new opportunity is due to the

over-building that occurred during the real

estate boom that took place between 2003-

2006. It is the lease option market for new,

or fairly new, construction. Given the tight

lending guidelines currently in place, there

are many motivated and highly qualiﬁed

tenants with good jobs, substantial cash,

but not strong enough credit to qualify at the

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WHERE DO YOU FIND THE DEALS?

• REAL ESTATE AGENTS OR BROKERS – Many times, an

agent is unable to list the home because too much is owed. Ask

agents if they would refer those people to you. Have an agent

pull up everything for sale higher than 75% of the median price

for the area and target those subdivisions. Ask if the agent can

pull up expired or aged listings. Send postcards to the expired

listings.

• LOCAL NEWSPAPERS – Call on FSBO and other house for

sale ads that have been in the newspaper for a while. Ask if

they would consider a lease option.

• ATTORNEYS – Many attorneys work with people who have

personal difﬁculties like foreclosure, bankruptcy, divorce, and

probate. They may know someone to refer your services to.

• TAX LIENS – A tax lien can be an early detection of future

ﬁnancial problems. Check courthouse records.

• DIVORCE FILINGS AND BANKRUPTCY FILINGS – The

majority of foreclosures are triggered by divorce or job loss.

Check for recent ﬁlings at the courthouse.

• CHURCHES AND SERVICES THAT HELP SENIOR CITIZENS –

They sometimes counsel people with ﬁnancial difﬁculties.

• “FOR RENT” ADS – Calling the “homes for rent” ads

in your local newspaper is an excellent way to ﬁnd someone

willing to do a lease option. You are targeting the frustrated

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