In today's Cleveland (Ohio) Plain Dealer, there is an article on foreclosure sales that's worth reading. It says that in Cleveland and East Cleveland in 2008, there were 1,400 homes that sold for $1,000 or less ... and 133 of them for just one dollar!
This article appeared two days after an Associated Press article detailed how a little further north, in Detroit, investors from as far away as the United Kingdom and Australia are buying Detroit houses in bulk.
These are seasoned investors, buying sometimes hundreds of homes at a time -- sight unseen. That might seem risky, but buying in bulk actually reduces risk. One investor, James Barnes, in the Plain Dealer's article says:
"Some of them ain't worth having. I can't always choose which house will work and which won't."
He said he'll sometimes buy a house that he later finds is hardly standing. He ends up donating those to nonprofit groups that repair or demolish them.
The good ones sell as fixer-uppers to home buyers with poor credit. Barnes or one of his investment partners clear any back taxes -- which he says average around $3,000 -- then might sell the property for around $30,000.
If this investor buys 100 homes and averages $26,000 per home on the good ones, he can afford to take a $4,000 hit on a few of the dogs he gets stuck with, can't he?
The most interesting part of this investor's strategy is that at those purchase prices, he and his partners can pay cash for the homes, which allows him to sell to buyers and provide them the financing himself. He usually charges a 10% interest rate, according to the article, for a 20-year mortgage. This strategy allows him to capitalize on his purchase in several ways.
1. By being the "bank," he removes the challenge of buyers having to qualify with a lender for a mortgage. This massively increases his pool of potential buyers, which allows him to sell the homes faster. Selling homes quickly is the major challenge for wholesalers/rehabbers.
2. By marketing them as "fixer-uppers," he sells them to buyers who do the repairs themselves. If they default on their loan and he has to take back possession, it should be in better shape than when he bought it.
3. By financing the purchases himself, he makes additional income that is completely passive. The interest paid by a buyer at 10% over 20 years on a $30,000 mortgage is $39,481. That is more than the purchase price of the house!
In most real estate transactions, it pays to be either the high-equity seller or the bank. Why not be both?
Of course, we don't all have the ability to buy 100 houses for cash at one time, like the investor in the above scenario. But couldn't we combine another strategy with a version of his?
What if you were to buy a house, roll the repair costs into your mortgage, and rent it out for as long as it takes to pay it off? At discounted prices, you could easily find homes that the rent amounts could pay off in 6 to 8 years, a strategy I outlined in March's Income for Life Members-Only newsletter.
Once the house is paid off, then you could be the bank, sell the house, and pocket the interest the way the investor in the article does.
The article states that this investor and his partners bought more than 8,000 foreclosure properties in the United States last year. To me, that says their strategy must be working.
Wow!! Great info Rob. Who said the real estate industry is dead? Today's economy is creating both danger and opportunity and the better positioned we are, then the less dangerous it is. Opportunity is in our vision. Thanks for sharing.
I am in the business of making sure that my clients have 10 or 11 sources of income during retirement and minimizing the risks from today until life is over. Your title of Income for Life fits perfectly with my vision as well.
Posted by: Trent Fortner | March 11, 2009 at 01:55 PM