Dean Graziosi
Dean Graziosi, a real estate investor for more than 20 years. Based in Phoenix, he is author of two books on real estate, including Be a Real Estate Millionaire (Vanguard). www.deangraziosi.com.
Millions of Americans have lost their jobs in the past year, and finding new employment in this economy is very difficult. Some of the newly unemployed are searching for ways to make money on their own until the economy improves and employers are hiring again.
Creative real estate investor Dean Graziosi says that despite the bursting of the real estate bubble, there still is money to be made. You don’t even need to invest a lot of money — all you need is a smart strategy and the patience to wait for great deals.
Home prices have fallen by more than 20% from their 2006 peak. Where are they headed from here?
I believe real estate prices finally are bottoming out in most regions — but I don’t expect a quick rebound. Lenders are making it very difficult to obtain mortgages, and many Americans lack confidence in the economy. Real estate will not rebound substantially from its current levels until both of these things change, and that is unlikely to happen before late 2010 at the earliest. Real estate prices are unlikely to overtake their 2006 peak until perhaps 2015.
Given this bleak outlook for home prices, why do you believe people should invest in real estate?
Because home buyers are scarce these days, and some home owners are so desperate to sell that they are willing to accept very low offers. The only way to make money in this market is to buy property when it can be had for considerably less than its market value.
This typically means offering 30% to 50% less than the asking price. Most sellers will turn you down, but a small percentage — perhaps one in 25 — will accept your lowball offer.
How can people who have lost their jobs take advantage of their free time to make money in real estate?
Mortgage lenders are being very cautious these days, so people who are out of work are likely to have trouble obtaining mortgages on the properties they are hoping to buy. But there is a low-risk real estate investment strategy that does not require big financial risks, mortgage loans or long time horizons. First, put together a list of local real estate investors. To find them, check area real estate investment clubs. You can find real estate clubs through the Web site of the National Real Estate Investor Association (www.nationalreia.com) or REIClub.com.
Next, make lowball offers on dozens of local properties. Most of your offers will be turned down, but in this market, some desperate sellers are likely to accept your offer. When someone does, execute a contract that gives you the exclusive right to buy the property at the agreed-upon price within a certain period of time, usually seven to 30 days. Make sure this contract includes an “assignment clause” that allows you to transfer the contract to another real estate investor. If you find a great deal on a house, other investors likely will be more than willing to pay you to take over the deal themselves. I know real estate investors who have made $2,000 to $20,000 per house by selling contracts — it all depends on how good the deal is that you have found.
Speak with a real estate attorney before attempting this. Your bid must be made properly in order for you to back out of the deal if you cannot find a buyer for the contract… and contracts you sign must be written properly in order to be transferable. An attorney typically charges an hourly rate of $200 to $500. Most contracts can be written up in an hour or less.
How can real estate investors find sellers willing to accept low offers?
Start by finding a helpful real estate agent. Explain to him/her that you intend to make many lowball offers, and confirm that he is willing to help you do this — some consider the strategy too time-consuming even in this economy.
Your agent can use the Multiple Listing Service (MLS) to search for homes that are likely to have motivated sellers. These include…
Homes that have been on the market for at least 90 days. The longer a home sits, the more desperate its owner.
Homes in preforeclosure. Owners might lose their homes to their lenders if they do not sell quickly.
Foreclosed homes being sold by lenders (also known as “Real Estate Owned,” or REO, properties). Banks and other mortgage lenders sometimes sell such homes at steep discounts.
If a home has been on the market or owned by a lender for more than six months — or a preforeclosure is very near its foreclosure date — offer 40% to 50% below the asking price rather than the upper end of the range (30%).
Which locations are best?
Stick with neighborhoods in your region where prices have fallen the least. It’s tempting to buy in neighborhoods where prices have fallen furthest and the bargains seem greatest, but when a real estate bear market ends, prices rebound fastest and most dependably in the most desirable neighborhoods.
Within these relatively strong neighborhoods, favor homes in the price bracket that has best held its value. In some neighborhoods, high-end properties have held up best — in others, it is the moderately priced homes. Your real estate agent can use the MLS to identify homes that meet these criteria.
How can home owners afford to sell way below market value?
Many sellers cannot afford to accept lowball offers, but some can. Home owners who have lived in their homes for a decade or longer are most likely to have enough equity to do so.
Is selling the contract to another investor always the best strategy?
If you don’t need to turn a quick profit and you can qualify for a mortgage on the property (or buy it outright), consider buying the home and renting it out until the real estate market recovers. Demand for rental homes is quite strong in most regions because people who are unable to obtain mortgages or unwilling to buy property in this declining market are renting instead.
Mortgages are available for borrowers with great credit scores. If your credit score is above 700, you should be able to obtain a mortgage without a problem. If it is between 650 and 700, it might take some shopping around, but you probably can find a lender.
To gauge your local rental market, check the “homes for rent” section of the local newspaper to see how much properties are renting for in the neighborhoods that you are considering. If the rents are more than high enough to cover your anticipated tax, insurance and mortgage payments as well as maintenance costs, odds are good that your property will at least break even until the real estate market rebounds and you can sell for a decent profit.
You also can run a home-for-rent ad in a local paper or on Craigslist.org before you buy a property. The ad should imply that you already have a home for rent in the neighborhood where you intend to buy. It should describe a typical home for that region and list a rent high enough to cover your expenses. If you get a lot of calls in response to the ad, it’s an excellent sign that you would be able to rent out an investment property in that area. (Tell would-be renters who call that you might have something opening up in the area soon, and take their names and numbers.)
