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Friday, March 2, 2012

February 2012 Update - Looking For The Next Real Estate Investment

The new year is well upon me and the plans have been made and goals have been set. First and foremost I started the year just right because we managed to get House #8 under contract and we just closed on the sale last week…yipeee! I will have all the juicy details on what it took to get that house sold and all the financials on it very soon, really ;-)

For 2012 I am shifting my focus from flipping properties to acquiring 1 or 2 good properties that I can hold as rentals. I still plan to flip at least 1 or 2 houses but the main goal right now is to find me a rental house. With that being said the last two months I have been looking for the next property and submitting a lot of offers.

Right now I have looked or should I say evaluated about 50 houses and submitted about 30 offers year to date. To some real estate investors that might not sound like much and to others it might sound like a lot. But considering a full time job, other projects including this website and of course the all-important family-life balance this has been pretty challenging for me.

The point is we have not gotten a single offer accepted and the few properties where we have even gotten a counteroffer back it has been a joke! 99% of offers we have made have been on bank owned properties and these banks are not making any big cuts on the listing price.

And you know why?...They don’t have to!

Banks are selling properties left and right!...

That’s right…in contrast to the doom and gloom about the housing market you still hear in the popular media, every single offer I have put on bank owned property has sold to someone obviously offering more than I am.

Two caveats, first, I am making offers in a very concentrated geographical area in North Atlanta (same as my last two flips) so that is the first limiter. Second, I am making some loooow offers.

I am a conservative house flipper to begin with so when I make an offer I look at foreclosures that have sold nearby the house I am considering and then make a very conservative estimate of what the house that can sell for. So either I lose to someone that is willing to pay more just because they think that since they are buying a foreclosure it already is a good deal at the list price or I lose to another investor just willing to pay more, period.

Also, most of the houses I have put offers in are in decent shape, they are not as messed up as House #7 and House #8 where, therefore more competition. It is hard to find ugly houses in this area, which I guess it’s both good and bad because when I actually find one then it’s easier to sell as you can see from House #7 and #8.

The above comments apply to houses that I want to flip. I have also made a lot of offers for a house that I want to buy to keep as a rental. For this type of property the calculations are a bit different for several reasons:
  • I am not paying cash, I am buying with a mortgage. I want to use my cash for houses I am going to flip so I want to use money from a bank (30 year mortgage) to buy a rental house since I will keep it long term. The downside of this is that I am competing with people paying cash therefore my offers are not as strong. 
  • Because I am making an offer contingent on being approved for a mortgage I have to be willing to offer a bit more than those paying cash in order to make my offer competitive. 
  •  I can offer a bit more for a rental property than for a flip property. Because I am looking for cash flow, meaning that the rent I can get for the house is at least $300-400 more than the monthly mortgage/insurance/tax payment on the house. So as long as the property meets the cash flow criteria the purchase price is less important. Of course I always want to buy as low as I possibly can… 
  • I am not as picky about the neighborhood. Don’t get me wrong, I don’t want to go into warzones or areas with 20 “For Rent” signs one after the other…but I am willing to consider neighborhoods that might not be as good looking and attractive as I would like for a flip property. 

So….keeping in mind the above criteria and the fact that I have been unsuccessful so far I have to either keep on trying the same thing until I find something or expand my search area little by little. In the following weeks I will start looking at a wider area to see what is available but the reality is that real estate investing is a numbers game so I got to keep on trying (does not make it any less frustrating). I will make slight tweaks but I got to persist.

The final piece of the puzzle is the fact that the market is improving. I see more selling activity every day and like I mentioned above, foreclosures are selling…I will have to keep my eye on that and see how to adapt. I’ll keep you posted…

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