Today is a great day, Moguls! Why? Because we’re introducing a brand new awesome Faculty Advisor, hooray!
We are super excited that Lex Levinrad is joining the ranks here at Mogul, and you will be too, once you hear all the amazing expertise he has to offer and share with us.
Lex, who’s also a Realtor, has been doing REI full time since 2003 – he’s done rehabs, wholesales, fix and flips and rentals, and specializes in buying foreclosures, short sales and bank-owned properties (REOs) – to the tune of more than 500 transactions. He also trains new real estate investors in his own company, the Distressed Real Estate Institute.
Lex is also invited to speak about investing all over the country and has been featured on Fox News Radio, Mortgage Daily News, Yahoo Real Estate, Real Estate Professional Magazine, Real Estate Wealth Magazine and a bunch more publications, websites and blogs. Lex even hosts his own radio show.
Pretty smart and successful guy, huh? Well, we thought so too, which is exactly why he’s our newest expert. So, we’re gonna let him take it away from here…
From Lex Levinrad…
Hi to all of you Real Estate Moguls and real estate investors out there…
Today’s lesson is about investing in distressed real estate.
This is the first in a series that will teach you about distressed real estate, what it is and why you need to understand it. If you want to find great deals on properties that you can buy, fix or flip for a profit, then you will have to understand how distressed real estate works.
Finding wholesale deals with tons of equity for way less than market value is a skill. And for you as a real estate investor, it is a very valuable skill worth learning.
And it starts with understanding why you need to buy real estate from people who have to sell, not from people who want to sell. There is a big difference between those two types of sellers. And in that difference lies your profit – which is why it is so important that you understand it.
Most sellers would sell for the right price. But most sellers are not desperate. And talking to them would be a waste of your time (and theirs).
Let’s talk about sellers…
Like I said, there are two types of sellers. Those who want to sell and those who have to sell. Which category do you think most sellers fit into?
The answer…
Those who want to sell.
However, you don’t want to waste your time on those sellers. That was the first lesson and the best lesson I ever learned when I started investing in real estate. I see many beginners make this mistake – focusing on what they think is a deal with a seller who is not motivated enough to sell because they are not desperate.
Focus your energy on sellers who have to sell. And for you as an investor, the best seller is a distressed seller who has to sell RIGHT NOW.
So the big question is, how do you find these people?
And why on earth would a seller need to sell right now?
The answer…
They are desperate (i.e. distressed)
You see, sellers are distressed for primarily two reasons:
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The property is distressed (damaged from a fire, flood, hurricane, etc.)
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They are in financial distress (foreclosure, pre-foreclosure, short sale)
So let’s backtrack for a second with an example…
Imagine that you were the seller and you wanted to sell your house. What would you do?
You would do what most people do – you would call a real estate agent and you would list your home for sale. And, indeed, that is what most sellers do when they want to sell their home.
But what would you do if your property was damaged by a fire? Or a flood? Or a hurricane?
And you could not live in your home... but you still had to make the mortgage payment every month? You would want to get rid of it fast. And it wouldn’t show well to any prospective listing agents. I mean who wants to list a damaged house? So most agents would not want that listing.
Why? Because you couldn’t sell that damaged house to a regular buyer!
Why not?
Because a regular buyer purchases a house with a mortgage. And the mortgage company requires an appraisal and insurance.
And no insurance company is going to insure a damaged property. No insurance means no mortgage. No mortgage equals no regular retail buyers.
This means that the only buyer who can buy that damaged property is a CASH BUYER.
A cash buyer investor who is buying a property that is damaged and needs major repair is someone who fixes up properties for a living. These investors either fix and flip the property for a profit or fix the property and hold on to is as a rental property.
Now these investors are not stupid. They didn’t amass their cash by being stupid. They are not going to go to the time and expense of purchasing a house, fixing it and reselling it if there isn’t sufficient profit potential for them to make the whole endeavor worthwhile.
For this reason they will offer to buy the property for cash, but only at a price where they can make enough of a profit for it to be a good return on their money. In many cases, these investors will have to borrow the cash from a private lender in order to buy, fix and flip the property. For this reason there will need to be sufficient profit potential for it to be worthwhile for them to buy the property even after factoring in their interest payments and holding costs.
In short, the cash investor will need a deal. They will need to buy it at a wholesale price that makes sense. That cash investor could be you so I hope you are paying attention.
So in the above example, if you were the seller what would you do?
Imagine you have a damaged property and that every month that goes by, you as the owner would have to make your mortgage payment... But you can’t live in the property. So in addition to making your mortgage payment you have to pay rent for where you are currently living. You would effectively have two housing payments. And you would be going broke – quickly.
This means…
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You would be DESPERATE
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You would sell to the highest cash offer you could get from any investor
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You would do anything to avoid having to continue making 2 payments.
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And you would probably just want to move on from this nightmare of your damaged property
In this situation, as the seller, your choices are very simple:
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Fix the house and move back into it
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Or take the insurance money, sell the house and move on
Now if you had insurance on the house and you were the seller, you might take the insurance money and repair the house.
But if you did not have insurance, then what would you do?
And what would you do if the quote to fix up the house was more than what the insurance company was paying you?
Let’s look at a real-life example that happened to me…
This is a great example of a damaged property, and you’ll be able to see the transaction from both the buyer’s and seller’s perspectives and see why it makes sense.
You have to make sure you understand this example of a damaged house in order to see how you can buy houses that are damaged for way below market value and make a huge profit doing so.
The year is 2004. Hurricane Frances hits Florida and destroys thousands of homes. Thousands of people all make insurance claims at the same time. There are not enough insurance adjusters to go to all these houses.
There is a six-month backlog until the insurance adjuster can get to your house. Meantime, you are still stuck making the mortgage payment. The fact that your house is damaged and you cannot live in it does not mean you can just stop making the payments. And, you have to pay to live somewhere else, too.
There are not enough general contractors in town for the amount of repair work. There is so much repair work that general contractors from all over the country are flying in with their crews. And since homeowners are desperate to get their homes fixed, the general contracts are charging the highest they can get away with and literally price gouging on their repair estimate quotes. Some homeowners are even offering more money to get the contractors to start working quicker.
In this example, the state insurer was Citizens Insurance. The town in question was Port St Lucie, Florida. The average insurance payout from Citizens Insurance at the time was about $42,000 for a hurricane damaged house. Most general contractors were charging around $45,000 to repair these houses.
The only problem was that the contractors could usually only start 4 or 5 months out since there was a backlog of work. And it would take another 2 months to do the work... meaning that homeowners were looking at 7 months of making mortgage payments on a house that they could not live in.
Homeowners were frustrated.
They were staying at a Motel 6 or a Best Western, paying for every night that they stayed there and were still responsible for making their mortgage payment. They were trying to sort through the mess of having their property being damaged by the hurricane. Many of these homeowners had maxed out their credit cards buying new clothes, shoes and toiletires since water had destroyed all of their belongings. And they were putting their motel stay on their credit cards.
Many had not made a payment on their house in a few months and the banks were threatening to file foreclosure if a payment was not received soon.
Basically, they needed out.
And they needed out really quickly.
They were desperate.
They could not list the house on the MLS with a real estate agent. Remember no insurance equals no mortgage. And no agent could sell their house in that condition. They needed to sell fast. They needed to sell NOW.
They needed a cash buyer. They needed an investor, like myself, who would step in, buy their house for cash and pay off their mortgage.
And then one day they open the newspaper and they see my classified ad.
And it says:
“We Buy Hurricane Damaged Houses for Cash. You Keep the Insurance Money”
And they call me.
And I offer to buy their house for exactly the amount of the mortgage balance. My purchase price is about $50,000 less than current market value for a house that is repaired – which is known as After Repair Value (ARV).
In their mind, they get to keep their insurance money and walk away. It makes sense for them. They can move on and rent or buy another house.
As an investor it makes sense for me, too. You see, I have a full-time repair crew that works on all my houses. They can fix that house for around $20,000, which is way less that what the general contractors were quoting.
If I buy that house and fix it, I will have about $30,000 in profit left over. And for me, that is sufficient profit to make the deal acceptable.
That, Mogul friends, is a real-life example of a distressed seller with a hurricane-damaged property.
Putting a “We buy houses for cash” ad in the newspaper cost me $185 for 14 days. I modified the ad a week later to say “We buy hurricane damaged houses.” A few weeks after that, I added “You keep the insurance money.”
My phone rang off the hook. We literally had 8 appointments a day. And we purchased almost all of those houses from people who called.
Remember Hurricane Katrina? Remember what happened in the Gulf by Biloxi and Gulfport, Mississippi? I have a student who cashed in on that big time.
The next time you see a big hurricane or flood – think of the opportunity.
The same holds true for fire-damaged property, water-damaged property or any property that has some major repairs required before it can be sold or lived in.
Coming up…
Well, we sure covered a lot in my first lesson. But here’s sooo much more!
In my next lesson on investing in distressed real estate, I will focus on distressed sellers who are facing foreclosure, in foreclosure or considering a short sale.
Comments, questions, thoughts…
Do you have any questions about our first lesson on distressed real estate? Ask your question in the comments section below and I will respond as soon as I can.
Only buy from sellers who are desperate and have to sell
Understand why a distressed seller would sell way below market
Know that you have to be constantly marketing to distressed sellers
Filter your distressed seller leads – only focus on the desperate sellers
Beat your competition by finding distressed sellers BEFORE anyone else