By: The Hughes Brothers
The biggest mistake beginning investors make is talking to unmotivated sellers. This is a waste of time and will only frustrate you into quitting this great business. The key to making big money in buying single family homes for profit is…..motivation! Not yours….the seller’s. In previous articles we covered many areas of motivation that a seller might have to complete a deal with you. Here is an example of one such deal. An elderly couple wanted to move to Florida to escape the winters and bask in the sun during their remaining years. They had entrusted their daughter to sell their home because it was just too much for them to handle. The daughter advertised in the paper “by owner” and we called her on a Saturday afternoon. The house was owned free and clear. After seeing the property and determining that we were interested in buying it, we made an offer: Asking price 75,000 Our offer 70,000 (With a note back from the sellers for 20,000) After some negotiation we agreed on: Purchase price 75,000 Note back 25,000 (no interest, no payments for 5 years) Case study questions: 1. Why pay full price? (Because I am investing for long term growth and have none of my own money invsted in this deal)
2. How was my cash flow? (Break even at best the first two years, then positive after raising the rents) Do not forget my tax benefits and principal reduction paid by the tenants!
3. What did I do when the note came due? My options were to sell or refinance. I refinanced and paid the seller's note off and continued to own a great investment house with NO MONEY OF MY OWN INVESTED!
4. Why would any seller do this? Because he was motivated to sell and his equity remained in the same place that it was before...his house!
5. How secure was the seller’s 25K? Just as secure as it was before he sold to me...the 25K note was secured by second mortgage on his house.
6. How much money did it cost me to get into this deal? Nothing!
7. What is the house worth today? 150,000
8. Was there a deal after the deal? Yes, each year we approach those sellers that have taken back a purchase money note and ask them if they will let us buy our own note back now...before it is due...at a discount. This seller took 20,000 for the 25,000 note two years after the closing date.Persistence is important is this business. You will not get a lot of people to do the above deal, but you will get some. Your job is to find those that will. Never underestimate the value of hard work. Diligence is the key to success, regardless of your skills. Don’t let anyone tell you that these kinds of deals aren’t out there. They are and you might as well get them as the next guy. This process is like playing the slot machine. You might work hard getting the machine to the point of paying out and then quit just when it is ready to pay the big jackpot!
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