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How to Buy Real Estate for at Least 20% Below Market Value Volume 2 Cover How to Buy Real Estate for at Least 20% Below Market Value Volume 1 Cover

There are three broad categories of investment strategy that I advocate:

Bargain purchase is the purchase of real estate for at least 20% below current market value.

In the increase-value strategy, you buy a property for its current market value, but you select only properties with some unrealized potential. Then, immediately after purchase, you make whatever changes are necessary to increase the value of the property. In general, you must increase the value by at least 20% within six months in order for the strategy to be worthwhile.

Double-digit cap rate means that you buy the building on terms that it has a capitalization rate of 10% or more. The capitalization rate is the net operating income (rent minus operating expenses but before debt service) divided by the purchase price. In other words, it is the cash-on-cash rate of return you would get if you owned the property free and clear. In the absence of a bargain purchase, double-digit cap rates are very hard to find. They generally only occur temporarily in depressed markets or in small market niches.

The most common real estate investment strategy, however, is one which I condemn: buying properties which the investor believes will soon increase in value due to market-wide appreciation. This is, in fact, pure speculation. No one knows which areas will appreciate. Many billions have been made by investors pursuing this strategy, but they were simply lucky.

Another common strategy which is advocated by most real estate gurus are various forms of finding unsophisticated sellers and using some convoluted real estate transaction to take advantage of their lack of sophistication. These strategies are unethical, immoral, and often illegal. I do not advocate them.

Holding periods

There are two broad categories of holding period:

Long-term means you hold the property for years. Most investors do that. I used to advocate that. I no longer like long-term holding. It requires clairvoyance, a skill that humans do not possess.

Flipping means selling the property as soon as possible after you acquire it. In some cases, you can even sell it before you buy it or simultaneously with buying it. Some seminar gurus are big on advocating this, probably only because it sounds really spectacular to a novice. In fact, selling before you close or simultaneously, although theoretically possible and occasionally done, are quite difficult to do and may not be worth the trouble. When I talk about flipping I generally mean to sell as soon as possible after acquisition.

Your time available

Different strategies require different amounts of time or require that you be available for particular hours of the week. For example, rehab is extremely time-consuming. Anything involving the government, like buying at sheriff's sales or appearing in court, generally requires that you be available during business hours on week days. If you have a full-time job or do not want to give up all of your after-work hours for real estate, you must not choose a time-consuming investment strategy. If you work at a regular salaried or hourly job during business hours, you probably cannot pursue a strategy which requires you to do real estate stuff during business hours.

Cash available

Some strategies, like buying foreclosures, require huge amounts of cash. Others, like buying judgments secured by real estate or buying at builder auctions, require little or no cash. In general, cash makes your investment life much easier. Too often, the use of cash is dismissed as non-macho or some such. That's nonsense. But if you absolutely have no cash, you must either get some or use strategies which do not require any. The grandaddy of all real estate gurus, William Nickerson, wrote the book How I Turned $1,000 into $5,000,000 in Real Estate in My Spare Time and How to Make a Fortune Today Starting From Scratch. In those books, he talks a great deal about ways to save the money you need for a down payment. The concept of saving must seem downright quaint to graduates of today's real estate gurus' seminars and boot camps. They all preach the "something for nothing down" approach. I prefer the save-up-the-down-payment approach. The book The Millionaire Next Door says that real millionaires are big savers. Real estate gurus, most of whom are phony millionaires, either ignore saving or dismiss it as impossible.

Your aptitudes

I am not mechanically inclined. On the other hand, many people mistakenly think that I am a lawyer. Accordingly, it would not be a good idea for me to specialize in rehabs, but it might be a good idea for me to specialize in a legally oriented strategy like foreclosures. Similarly, you should take stock of your real estate related aptitudes and gravitate toward strategies that take advantage of your strengths and avoid your weaknesses.

People skills

Different strategies require different interactions with people. The amount of the interactions varies, as does the nature of them. If you hold long-term, you must be a landlord, and an employer if you buy multi-unit buildings. If you buy pre-foreclosures, you must negotiate over the kitchen table with people who are in financial difficulty. On the other hand, if you buy foreclosures, about the only people you encounter are the auctioneers and all you have to say to them is the high bid. In other words, there are places in real estate for the gregarious as well as for recluses. Just make sure you know which you are and that you select your strategy accordingly.

Ethics

Much of what the current crop of gurus teach is unethical. In general, it's difficult to do nothing-down or lease-option deals ethically. I talk about the ethical, legal, practical, profitable ways to buy real estate for 0% to 5% down in How to Buy Real Estate for Little or No Money Down. When pursuing bargain purchases, there is a strong temptation to lie to the seller about the market value of their property. Bribery is big in the business of increasing values by getting favorable zoning changes. Transactions between sophisticated and unsophisticated people create powerful temptations for the sophisticated to take unconscionable advantage of the unsophisticated. There are plenty of ways to do real estate investment ethically. Anyone can resist temptation. But real estate also has more than its share of ways to misbehave. Let's be careful out there.

'Bargain-purchase techniques' Articles in back issues of Real Estate Investor's Monthly

Title
Date of issue Subject
Adverse possession
5/93, 6/93
Acquiring property by adverse possession
Alcoholic and drug addict sellers
6/88
Acquiring property from addicted sellers
Bankruptcy property
12/90
Acquiring property out of bankruptcies
Bargain lots at lenders' auctions
3/94
Acquiring lots from lenders who seized them from failed builders
Builder leftover lots
12/96
Acquiring unsold lots from developers who want to move onto their next project
A corporation and its real estate are soon parted
4/88
Acquiring "surplus" corporate real estate
Assessment district sales
10/93, 11/93
Acquiring property auctioned off for nonpayment of special assessments
Delinquent subdivision mortgages
4/95
Acquiring property indirectly by buying delinquent mortgages on subdivided land
Delinquent tax sales
6/91
Acquiring property that is being auctioned off for nonpayment of property taxes
Discount lien releases
10/90, 11/90
Acquiring property which apparently has no equity but where lenders will release liens at a discount
Distressed builder auctions
9/91
Acquiring property from lenders who have foreclosed on failed housing developments
Distressed owner bargains
3/95
Acquiring property from persons who are in various personal difficulties
Drug property seizures
4/91
Acquiring property from U.S. Marshals who seized it from drug dealers
Execution sale super bargain
12/90, 1/91
House auctioned off for nonpayment of homeowner dues, featured on 60 Minutes
Executive suite sandwich leases
2/92
Lease unfurnished condos long-term from owners then sublease them short-term and furnished to executives on temporary assignments
Existing options
3/90, 4/90
Acquire property by purchasing "in-the-money" options on real estate from persons who cannot or will not exercise them
Foreclosure redemptions
11/95, 12/95
Acquire property by buying rights of redemptions from foreclosed owners who cannot redeem on their own
14-unit, no-equity foreclosure bargain
3/98
Acquiring property where the minimum bid is cut at the last minute at foreclosure auctions
40%-80% discounts
10/90
Acquisition of landlocked land adjacent to investor's already-owned land, assembly (combining two substandard parcels into one standard one, Acquiring both the life estate and remainder estate on the same property
Home builder leftovers
4/92
Acquiring the last few houses owned by a builder who has closed his on-site sales office and moved on to his next development
Houses that smell
9/95
Acquiring house that are shunned because of severe odor problems
How one vulture made $1 million since 1988
3/92
Acquiring property in a temporarily-depressed area (Anchorage)
How to bet on real estate races after the race is over
11/89
Acquire property by buying rights of redemptions from foreclosed owners who cannot redeem on their own
How to buy for half price and nothing down
8/88
Acquiring to-be-torn-down buildings and moving them to a new site
How to get positive cash flow: Buy 2, get 1 for 2/3 off
2/88
Acquiring houses which have another house in their back yard
Inner-city fixers
6/98
Acquiring rehab property in bad neighborhoods
IRS sales
3/91
Acquiring property which has been seized by the IRS for nonpayment of income taxes
Investing by flashlight (HUD repos)
9/88
Acquiring repossessed properties from HUD
Judgment investing
7/89, 2/91, 5/94
Acquiring equity in real estate indirectly by buying small claims court judgments against persons who own real estate
Life and remainder estate bargains
6/90, 7/90
Acquiring life estates and remainder estates
More on partial interests
4/89
Acquiring tenant-in-common interests in real estate
Bruce Norris's bargain purchase system
5/96
Acquiring property through property-wanted ads and OREOs
OREOs
12/89, 1/90, 2/95, 5/96
Acquiring property from lenders who acquired it by foreclosure
Owner unknown
4/91, 5/91, 6/91
Acquiring property whose ownership is unknown to local tax authorities by tracing the heirs
Partial interests
2/89, 3/89
Acquiring tenant-in-common interests in real estate
Partnership 'divorce' and no-charge lien releases
7/98
Acquiring property from partners who are fighting and property which apparently has no equity but where creditors will release liens for nothing
Phoenix VA repos
8/92
Acquiring repossessed VA homes in Phoenix during a real estate depression in that area
Pre-tax auction bargain
12/91
Acquiring property from an owner who is on the verge of losing it for nonpayment of property taxes
Probates 1/89, 6/90, 9/90, 10/94, 2/99 Acquiring property from estates
Profiting from the bank and savings & loan crisis
4/93
Acquiring OREO property from special agencies set up in the wake of the savings and loan crisis
Profit opportunity in bad foundations
6/88
Acquiring property which is shunned because of seemingly serious foundation problems
Property-wanted ads
11/88, 5/96
Acquiring property through property-wanted ads
Right-of-redemption bargain
5/98
Acquire property by buying rights of redemptions from foreclosed owners who cannot redeem on their own
John Schaub's fsbo system
11/90
Acquiring property from owners trying to sell without a real estate agent
Sellers who are likely to sell cheap
10/87
Acquiring property from various categories of sellers who tend to sell cheap like bureaucrats, heirs, donees
Sellers who welsh
9/89
Acquiring property by suing sellers who renege on option agreements for specific performance
The Stephenson system (rural land)
5/90
Acquiring raw land from out-of-county owners
Stigmatized properties
8/98
Acquiring property which has been stigmatized for irrational reasons
Three bargain purchases
7/92
Acquiring property through property-wanted ads
Case Study: title problem = profit
10/86
Acquiring property with serious title problems
20% discount purchase
2/97
Acquiring property from a divorcee enroute to foreclosure
Two bargain houses
8/90
Acquiring one property from an out-of-area owner and the adjacent extreme fixer property
Two bargain purchases
10/98
Acquiring one property from a lender by getting creditors to release liens at a discount and another at a foreclosure auction
Two OREO bargains
12/94
Acquiring two office condos OREO from lender
Two probate bargains
10/94
Acquiring property out of estates being probated
'Unfit for human occupancy' property
8/90
Acquiring property which has been condemned
Using CD-ROMs to pursue pre-foreclosures
1/96
Acquiring property from owners who are enroute to foreclosure
Workout
2/88
Acquiring property from troubled syndicates