How Desperate are You to Buy a Fixer-Upper?
I remember the good old days when you could buy foreclosed houses, fix them up a little, then sell them to end buyers with enough profit to share with funding partners or hard money lenders. I was able to do this, and a lot of people that invested with me or purchased through me made good money.
The easy days are over.
Many around me are looking for deals in real estate. There is desperation exuding from their pores. With foreclosures priced close to retail, sellers thinking their house is worth more than it is, and the rising prices that prove it, it’s almost impossible to maintain a career as a house flipper.
Add into the mix all newbie real estate investors being churned out of the seminar mills, demand exceeds supply which causes prices to rise. Unfortunately there are buyers that will pay these high prices. The experienced developers know how to add value to the property, the newbies most often get burned.
This is why I suspended my efforts as a house renovator.
Oh, I’ll be back. Real Estate is cyclical and will always be cyclical. I will merely wait until the next downturn. In the mean time, what can we do to make money? (No, I’m not rich yet like the infomercials promised.)
There are several ways to make money in this competitive climate:
- Gamble on Continued Appreciation
- Find a deal, wholesale it
- Be a lender
Continued Appreciation:
There are times that a rising market can work to your advantage, but I wouldn’t put that in my pro-forma spreadsheet. I’ve seen many developer/deal sponsor get burned really badly because there was a slight dip in the market, or the house didn’t sell as fast as they expected or there was some other surprise. There are some that have been successful at this, but I don’t recommend this approach at all.
Wholesale:
Sure, go ahead and make offers, get a deal. Someone may buy it. Just because the numbers don’t work for you doesn’t mean it won’t work for someone else. Remember, it is the developer that takes all the risk and it’s not your responsibility to educate them on why it’s a bad deal.
Lend:
In my experience, it’s the LENDER that seemed to consistently make money in real estate. It didn’t matter how good or bad a project went, the lender got paid NO MATTER WHAT. And they got paid well, frankly.
A word of caution: Just lending money on a real estate deal is not enough. You MUST make sure you’ve secured the property with proper legal documents AND make sure to follow up that those documents are in the public records.
Lend vs Joint Venture
Sometimes a joint venture arrangement with a real estate developer seems more lucrative, and many choose that route due to the profit potentials. You must know that by joint venturing, you are also putting yourself at the same risk level as the developer. If a lender is involved, or becomes involved, that lender will get paid before you do.
I see lending as the way to go in this competitive market.
Anyone want to talk about this? Should I schedule a Q/A call about being a lender?