Most of us are smart enough to realize that no real estate system is foolproof, and if anything seems too be good to be true, it probably is.
However, that doesn’t mean that you need excellent credit and a surplus of cash to get started in real estate. Here are some strategies for financially constrained aspiring investors to begin generating real estate cash flow.
You don’t have to own a property to profit from it. There are two types of quick-sale real estate investors: Retailers and dealers.
Retailers buy properties outright and sell them for a quick profit. Their risk is highest, but so is their potential reward. Retailers typically need substantial cash for a down payment and at least decent credit.
Dealers, by contrast, buy and sell contracts, not properties. They find bargain properties and sign purchase contracts with their sellers. Dealers then sell these purchase contracts to retailers, making a solid profit in the process. This is known as assignment of contract.
Usually, the only cash required is the earnest money to secure the deal. A good dealer can then flip the contract for a quick $1,000 to $3,000 without ever taking possession of the deed.
Use a double closing for greater profit potential. A double closing allows a dealer to earn a higher profit margin than an assignment of contract. With an assignment of contract, there is always potential that the deal will ultimately fall through.
The dealer is protected because she has already received her proceeds from the sale of the contract. But the retailer who buys the contract is wary of the deal falling through and will factor it into the price he is willing to pay.
With a double closing, the dealer assumes more risk because if the deal falls through, she receives nothing. However, with this greater risk comes a greater reward.
A double closing begins with the dealer signing a purchase contract with the property owner. Then the dealer signs a contract with the retailer, in which the retailer agrees to buy the property from the dealer at a higher price and deposits that amount in escrow. The property owner signs the deed to the dealer, who then signs it to the retailer.
The retailer then signs the loan documents, and the process is complete the property owner is paid his asking price, and the dealer is paid the difference. Note that the dealer came to the table with no money, and her credit was never an issue.
Be a scout no cash or credit required. Scouts are a third type of real estate flipper. Instead of flipping actual properties or contracts, scouts flip information.
Scouts face even less risk than dealers and have almost no cash or credit concerns. They simply gather information about distressed properties and sell it to interested dealers and retailers.
In effect, scouts do the dirty work for real estate investors, and investors are willing to pay them handsomely for doing it. Typically a scout will gather the following data on a potential deal.
The owner’s name and contact information, the asking price, information about the mortgage and whether payments are current, outstanding liens on the property, A photograph of the house, Pertinent information about the owner’s motivation to sell. Is he in the middle of a divorce, foreclosure, job transfer, etc.
Investors typically pay scouts $500 or $1,000 for good information. But what happens if an investor doesn’t pay? Simple. Don’t take any more deals to them. Successful investors realize the value of good information, and they are more than willing to pay for it.
Take over the seller’s mortgage payments. Prior to 1989, almost all home loans were freely assumable. This meant that anyone could take over the payment of the loans without objection from the lender.
However, due to rising interest rates that began in the late eighties, virtually all home loans issued since then contain a “due on sale” clause. This means that when ownership of a property is transferred, the lender can demand payment in full of the outstanding loan.
However, due on sale is merely a clause not a law. It is the lender’s prerogative whether or not to exercise this clause. If you buy a property and take over the loan payments, there is a distinct possibility that the lender won’t even notice. There’s an even greater chance that the lender will choose not to exercise the due on sale clause, as long as you make timely payments.
After all, the cost of enforcing the clause is significant, and as long as the lender is being paid, it is unlikely to care who signs the monthly checks. You can potentially buy properties without a credit check.
Real estate success always requires an investment. There are ways to profit from real estate without significant financial investment. That is not to say that success comes free and easy. At the very least, you will need to make a substantial investment in yourself. In order to succeed, you must be willing to work hard.
Even with a million dollar real estate portfolio, your brain will always be your #1 asset. Be sure to invest in your education on a daily basis and learn as much as possible about your local market, real estate law, and investment strategies.