Fast Cash Property Purchases – How do they Work?
In the world of real estate investing everything hinges on purchasing or developing a piece of property for less than its market value so when you sell that property there will be a profit to distribute to the investors. With this basic premise, the fast cash purchase of properties for well under their appraised value would be a simple and sure fire way to make good profits.
Simply find a seller that needs the money fast to avoid foreclosure or other financial crisis so that even if you are buying the property at a 20% discount there is reason for them to consider it and it makes sense for the seller. Then sell the property in the next 60-90 days for closer to full value and make a tidy profit in the process.
Why Distressed Sales Get a Bad Name
Given the basic premise that a bag of cash is all that is needed to save the property owner from ruin and you will provide that cash it seems quite simple but in reality it is far more difficult than that. That is, after all, the premise behind nearly all investment real estate transactions. Whether it is at the foreclosure sale for the bank or a cash offer that the homeowner trying to avoid foreclosure or is in need of liquidating immediately, the first thing to remember is that a typical investment property transaction is not something new or different.
Whether dealing with the property owner, the bank, or another real estate investment group, you want the property in a position to quickly turn over a profit and gain as much interest as possible. When deciding to focus on homeowners there is the added level of working with individuals that have emotional attachments and not just financial interests. People usually believe their home is worth more than it is and can sometimes think that you are trying to rip them off. The first hurdle to clear would be to educate the property owner (and the consumer protection groups) that making a profit does not necessarily mean you are trying to ruin them.
Making Property Owners Understand the Math
By reminding the property owner that when they sell directly to your group they will save 7% in real estate brokers’ commissions, plus the interest on their current mortgage each month until the broker manages to sell the property it is easy to show a 10% discount in actual net sale price is what they are looking at anyway. In order for you to have a reasonable chance to make a profit you only need to show 10% more in value.
Full appraised Value $200,000
Less 7% sellers commission in standard sale – $14,000
Taxes & Interest on Current Mortgage per month x6 $7,200
So on a standard sale you are already losing $21,200 in value. But you are offering typically 80% – so you made an offer of $160,000. An investor or investment group needs to show the other $18,800 in value you are offering.
Costs of Investing
The first area is in the fees, the appraisal, surveys and title research fees. As an investment group you would not part with a dime until all of these are done and assured to be in good order. Since the longer you hold the property the less your return will be typically, paying all the fees to have them in your possession as soon as possible only makes sense. In addition, the distressed seller is typically cash poor so showing they do not need to write out any of these checks has more value than just the amount of the bill.
In addition, going back to simple math showing the value of $160,000 6 months early. A bridge loan will easily run 8%-10% so the value of your money up front 6 months early is going to be $6,400 to $8,000. This leaves only about $10,000 in profit potential for an investment of $160,000. Most people can see at this point that is the cost of doing business. All of this also depends on the investor getting the full value from the home as well which is not a positive sure thing.
Why is it Difficult to find these Opportunities?
The biggest issue that will be in the way is the “upside down” or “underwater” mortgages and a lack of equity. In order for you to complete the transaction to benefit the investor and the homeowner, the dollar value of your offer must be enough to pay off all liens. Sometimes the exceptional customer may be able to contribute cash to the transaction to complete the sale but that would be the exception rather than the rule.
In addition is the issue of competition. There are many investors that would like to do this type of transaction with individual property owners. Many companies that specialize in cash home purchases like the House Buyer Bureau, with these standard valuations say the biggest competition is with the unscrupulous that make false claims of value offered (claiming to pay 90% or more but undervaluing the property to begin with).
A big advantage can be had if an investment group is willing to work with property owners and their mortgage holders to arrange a short sale for the deed. In this case, the bank will negotiate an acceptable price to close the mortgage and release the lien to avoid the costs associated with foreclosures and potential losses later at the foreclosure auction.