Many people read about how to get started in real estate investing but they are still not informed enough to actually get out there and start investing. I am going to spend the next few minutes telling you about how I got started investing in real estate when I was just eighteen years old. I am now twenty-three and I have completed fifty deals over the past five years.
There are three types of investing techniques that you can start out with using no money. They are wholesaling, subject-to, and short-sale. I used all three techniques when I started investing. However, all three were extremely challenging in their own ways and I made a boat load of mistakes that could have been easily avoided if I just had the right guide. I will go over one of the techniques I used below to help you better understand the process.
The short sale is a great way to help people who are in need of dire financial help and also a way for you to make a substantial amount of money, This process is certainly a win-win situation and can make you quickly understand why this business is so great.
A short sale is a process by which a mortgage company takes a discount on a loan that is in default (foreclosure) in order to avoid having to go through the foreclosure process and obtain ownership of the property. A foreclosure costs the bank a lot of money and in the end they always lose. There is an entire department called the Loss Mitigation Department in the bank that mitigates losses for the bank and works with customers to complete short sales. This is where you, the investor can negotiate huge debts and essentially create money out of thin air.
You can use this process to help somebody who is in pre-foreclosure. If somebody is in pre-foreclosure and is behind on payments they are a perfect candidate for you to work with. At this point most people in this situation have recently had something major happen whether it be a job loss or an adjustable rate increase. Your job as the investor is to help these people out of this situation and to earn a profit while doing so.
You start by assessing the property to determine the current value and the balance they owe to the mortgage company. Once you determine some basic values you are ready to start negotiations with the mortgage company. You offer the bank an amount that you feel is a good enough offer that the bank will accept it, and it is still low enough so that you can sell the property and earn a profit. For example, if the homeowner owes 150k on the property and as-is you think the property is worth 125k (the amount you believe you can sell it for) you would offer the bank approximately 100k. This is a completely realistic scenario and I get deals like this accepted on a regular basis.
Once you are in the negotiation process and the bank receives your offer they will send out a BPO or "Brokers Price Opinion" to find out what a local agent feels the value is. At this point you will meet the agent out there and explain to them what you are paying for the property and that you are hoping you can help out the seller. The trick is that even is the BPO comes back to the bank at higher than your offer they will still accept approximately 82% of that value. This is the magic number for most banks, however some may have guidelines that require a slightly higher percentage.
Now while all of this process is taking place you must find a buyer. This can be a little tricky in how you go about this. I personally use the local MLS to list my properties. I take ownership of the property at the beginning of short sale process through various different methods. I hold title in escrow and put the property for sale contingent upon short sale approval. By doing this, I locate an ýend buyerý who is going to purchase the property from me.
All of these things can get a little sticky and confusing if you have never done it before but once you have this process down there is tons of money to be made. This is the only way I have ever seen where you can actually create your profit from negative equity.