One of the biggest problems is not financing, it is finding good deals. Financing was somewhat of a problem at the worst of the recent recession because banks had pulled back so much of their activity, but there were still private funds available. As we have heard many times and seen it proved, if you find a good deal, the money will happen.
Assuming you have money, the easiest is to use a real estate agent or develop a network of finders. (Discussed in Acquiring Properties) Or you can use a wholesaler.
Real Estate Agents
Real Estate Agents – The problem here is that most are used to vanilla transactions with homeowners and they don’t know any investors and they don’t know what a good deal looks like. Others do know what they are doing, but they keep the good deals for themselves. Others know but aren’t interested because of the work involved. Why? Because every offer you make is not going to get accepted. Your offers will follow a formula and they are often well below asking price. A lot of offers will be rejected. There is a lot of paperwork for the agent to put together an offer, so he or she can get tired of only 1 in 10 or 20 offers being accepted.
The odds might get better over time as you get a feel for who to make offers to, but it is still a numbers game. Another problem is that frequently it is easier to find deals in lower priced housing. It takes the agent the same amount of work to create the paperwork for a million dollar house as a $50,000 dollar house. There will be more expenses in marketing the million dollar house, but their commission is also a lot larger.
You are probably going to need to train an agent you work with on what you are looking for. Most agents don’t think the way investors do. There are exceptions. The fastest growing real estate company in the country and one of the largest is Keller Williams. Its head is Gary Keller who has written a number of books and believes that agents are perfectly positioned to find and invest in real estate. Despite this, many Keller Williams agents still just stay in the traditional model. However, he has written some excellent books on investing.
Gary’s books include the Millionaire Real Estate Investor as well as the books Flip and Hold.
You can also get people to find property for you and pay them a fee. This is often called a bird dog. There may be some legal issues here, but there are ways around it. One way you can find people is through Craigslist and another is going to your local real estate meetings. Most are known as Real Estate Investment Associations (REIA) and the name of the area they are in. If you google that, you should find clubs in your area. Or go to http://www.nationalreia.com/ and check out their list of local clubs. They are a good place to find contacts and information.
This is where you can also find wholesalers. These are people who find properties and put them under contract and then flip the contract to you before their deadline to close on the property. This is perfectly and done by people selling malls and apartment buildings and other transactions in the millions of dollars. Flipping got a bad name because some people were doing it illegally. They were getting inflated appraisals and doing other fraudulent things. Flipping in and of itself is perfectly fine and legal. For that reason, many investors now call it flipping. Banks who were burned a few years back can also be leary.
Drive & Learn
If you don’t use other people to find properties, how do you find them? You can look at Craigslist ads or place them yourself. A tried and true method is driving. Pick an area and get familiar with it.
So, how do you pick an area? You want middle income homes. Why? You may find a deal in the $800,000 to $2 million dollar houses, but is will not be often. Plus, how many people will then have the capital to be able to purchase it. You are dealing with a very small slice of the market. Not a good idea.
What about the low end? That market is mostly renters so you are only going to be dealing with investors. Also not a good idea for this particular purpose. For buy and hold it might not be a bad area but not for this.
You probably want houses in the $150,000 – $300,000 range. That will change depending on where you are. In some really high priced markets it may be a bit higher and in some areas of the country where real estate prices are much lower overall it will be lower than this range. Check out the pricing in your region. You want where the bulk of the home buyers can afford.
If you drive all over randomly it won’t work well. The idea is to get familiar with an area so you know what is going on there. Take a map (if they still make them) and lay out a pattern. Drive every street. Take notes on what you see. Be on the lookout for houses that need paint badly or the lawn hasn’t been cut in ages. Write down these addresses. You can also walk a street and talk to people and ask them if they know anyone that needs to sell. People don’t like rundown houses on their street. It brings down everyone’s value. If you tell them that you are looking to purchase, fix up and sell to a homeowner, they will probably be willing to point you in the right direction or if you give them a card, they might call you if they hear of something. You want to get known as the go to guy/gal in the area.
Once you get home, go in the internet and find out who owns the house and then contact them. This is very easy in some states and in other states who are way behind the times technologically it can be tough. In the worst case, if you know a real estate agent or a title attorney, you could ask them to find out for you. Repay the favor by using them in the transaction where it makes sense.
The above is informational only and not legal advice. Each state has different laws and frequently there are differences between counties, cities and towns. You need to check with your lawyer and other appropriate professionals.