What is the attraction of buying real estate below market value? Perhaps the eternally well-coiffed Donald Trump said it best: It's tangible, it's solid, it's beautiful, [and] it's artistic […] I just love real estate.
Real estate investing can be a great way to prepare for retirement
As the United States real estate market recovery continues to defy expectations and home values claw its way back to pre-recession levels, more and more Americans are losing their fear of investing in realty. Wannabe real estate investors are educating themselves about the best way to get started, and experienced investors are once again getting their feet wet (this time armed with knowledge and a little more common sense).
What’s the motivation? Fear of reaching retirement age and not having anything in the bank.
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Check out the scary stats in the infographic below:
Some workers are not ready for retirement
The link between buying real estate below market value and retirement
So what’s the secret to making money in real estate and setting yourself up for a worry-free retirement? As any professional can tell you, investing boils down to one principle: buy low and sell high.
With so much public interest in real estate investing (including TV shows make it seem that anybody can fix and flip a house), it’s easy for the average American to feel overwhelmed with the sheer variety of methods for getting started. So let’s have a look at some of the most popular methods out and look at the pros and cons of each.
Methods for buying real estate below market value
Tax sale can be a great source of real estate below market value
Foreclosure auction:
When a homeowner takes out a first or second mortgage with a bank, they often use their house as collateral. In other words, if the person stops making their mortgage payments then the bank has the right to seize their house and sell it in order to collect the money they are owed.
In the midst of the 2008 recession, a foreclosure auction organized by a bank was a great way to get a house for far below market value. Often, the bank was only interested in getting back what it was owed, which could mean getting a house for anywhere from 10-50% below market value.
But in the past few years, large hedge fund have begun to pour their money into foreclosure auctions. That means that the average investor (whose pockets aren't as deep as the hedge fund's) can't compete at the auction.
Short sale:
As is the case with bank foreclosure auctions, sometimes homeowners find that they have taken on too much debt and have no hopes of repaying it. Instead of waiting for the bank to take action against them, they take the initiative to try and work out some sort of agreement with their creditors by selling the house for below market value and using the money to pay back at least part of what they owe.
Even though this means that a creditor might not receive 100% of what they are owed, they will often accept a short sale because it saves them the trouble and cost of an auction and they know exactly how much money they will be getting.
The issue with short sales – especially for investors who help homeowners navigate through the process – is that they take a lot of time and it is a drawn out negotiation process which often needs a professional to get things done well and with a profit. And as is the case with bank foreclosure auctions, more hedge funds are getting involved and buying up masses of houses, meaning banks might choose to deal with them instead of individual investors.
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Buying a fixer upper and repairing it yourself:
Made popular by shows like HGTV’s “Flip or Flop” and A&E’s “Flip This House”, many investors have caught the fever of buying a fixer upper and doing the repairs themselves. They put their savings on the line and spend weeks or even months doing the work themselves.
While there are good profits to be made in the world of fixing and flipping houses, it is a lot of work. Like, really a LOT of work.
Plus, every fix and flipper who we have ever talked to has told us horror stories about surprise repairs that ended up blowing the repair budget way above what it was estimated at. Or the market moved against them, and instead of selling them at the desired price they had to sell it for less and ended up not making much money or even lost money.
Would you be surprised to know that, after taking their profits from the deal and dividing it up by the amount of time they spend on the project, some investors end up making only $20 or $30 per hour? That’s hardly the way to create wealth, especially considering the stress that comes from working with contractors, having inspections, and trying to market the house for a quick sale and the risk of these surprise repairs.
Bird-dogging houses:
One method that is still a well-kept secret in the world of real estate investing is bird-dogging. Because bird-dogging often involves around houses with no mortgages that have fallen behind on their property taxes, the houses are all very high equity deals. Yet, very few investors even know how to find these deals which means it is virtually an untapped market.
In many ways, bird-dogging is the Holy Grail of buying investment properties at a discount. You are working with motivated sellers, properties are sold at bargain prices, there are practically no waiting periods, there’s no competition, and the properties are desirable.
The best part is that bird-dogging does not require that you take ownership of the property for any extended period of time or at all. As the name implies, investors use the method to flip their properties fast and avoid getting bogged down by doing the repairs themselves.
Each deal (which can be just a few hours of work on your part) can mean a profit of many thousands of dollars, in many cases $10,000 or more in your pocket.
A breakdown of 7 popular real estate investment methods
Probate sale:
Buying a house through probate can mean getting a nice property at a discount, but for many investors the complications and long waiting periods associated with probate sales far outweigh the savings. In most states, a probate sale begins once a homeowner dies without leaving behind clear directions as to who should inherit their home.
If all the heirs agree to a sale and splitting the proceeds, then a probate court will make sure that home is listed publically. The first person to make an offer is usually expected to put down a 10% deposit and then to initiate a probate hearing in about 30-45 days. The probate hearing will also act as a sort of public auction where other interested parties can bid.
Buying a house in probate sale (especially if the heirs are anxious for a quick sale), can mean buying for below market value; but it can also mean enduring squabbling family members, the slow moving wheels of the judicial system, and having the deal snatched away at the last second by a rival investor.
Foreclosing on a tax lien:
Another way of buying investment properties at a discount is by foreclosing on a tax lien that you hold. Tax liens are issued by counties against properties whose owners have not paid their property taxes. In about half of the states in the US, investors can purchase these liens and – if the property owner pays what they owe – can get back their investment with double-digit returns.
If the owner does not pay what they owe within the specified period, then the investor can legally foreclose on the property and take possession of it.
While that sounds like a great way to get an investment property, across the county roughly 97% to 98% of tax liens are never foreclosed on, because the owner pays the county what they owe. But you can increase that rate, and if your goal is to get the underlying real estate then you can increase your chances if you know what to focus on.
Tax deeds are available directly from the county
Tax deeds:
While half of the states in the US sell tax liens to investors to collect delinquent property taxes, the other half sell tax deeds at auction. I other words, investors in those states can go to an auction and buy the legal deed to a property often for just a fraction of its market value. Better yet, with the sale of the tax deed, all mortgages and liens (with the exception of Federal liens) are wiped out and the transfer of the title takes a very short time.
But the biggest obstacle for investors is the amount of competition at tax deed sales. While the opening bid for properties is the amount of taxes owed (sometimes just a few thousand dollars), “auction fever” sets in quickly and the price is soon driven much higher, in some cases almost to market value.
But you can still make money with tax deeds if you know where to look and educate yourself beforehand.
Americans who are worried about retirement are looking to buy real estate below market value to increase their cash flow.
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