For my last post in the Real Estate Investing series, I sat down with Becky Demastus, another agent in my office who works primarily with investors. She is a high-producing, award-winning agent who has been featured in The Wall Street Journal and Real Trends. She has also become our company’s resident expert for transactions involving flips, foreclosures, short sales, and all other situations that fall into the category of “motivated sellers”. She is a busy agent, so it took some time to coordinate our schedules, but our meeting was well worth the wait. I am thrilled to share her advice and knowledge with you all, because this world of real estate investing can be competitive, overwhelming, and frustrating. Have no fear though; I am ready to share some wisdom from one of the experts.
I began the conversation by asking how people get started in real estate investing. She answered by stating that if someone has 20 percent to put down on that initial property, plus a great agent who knows the process, anyone can navigate the investment business. The first thing Becky asks her investor clients is “What is your goal?” You need to determine whether you are looking for a property to flip or an income-producing rental. That goal will influence which properties stand out as smart buys. The next consideration is how you are going to pay for the property(ies). Since investors typically buy homes wholesale, through foreclosure and short sales, estates, and sheriff sales, conventional loans are not an option. They are not primary residences for the buyers, and they typically don’t meet safety criteria like homes that have been well-maintained by their previous owners. The most common ways investors finance their properties are through cash and commercial loans. Becky recommended talking to a trusted loan officer who is experienced in handling this particular type of transaction.
My next question started a great discussion. I asked Becky what types of markets are strongest for investing. I have always assumed big cities are the best places to invest in real estate, but she assured me that is not the case. Cities of all sizes have houses ideal for flips and renters. You just have to take your time to and start slowly so you find the right one that will provide a return on investment. In our market (Evansville, IN), for example, Becky told me that there are a lot of renters and a strong investment market. We are in a smaller city in the Midwest, so we do not experience the major swings in real estate values like other areas in the country. Therefore, we see more real estate investors who buy income-producing properties to rent to tenants rather than property flips. She said it can be a slower return on your investment, but it’s secure, especially if you work with a property management company that handles all paperwork and tenant issues like rent payments, proof of insurance, screening, evictions, etc.
Our conversation led into flipping because so many people are interested in how it works. Do flippers really make huge profits like the shows we see on TV? In some cases, yes. Flippers enjoy a profit of 10-20% , but that comes with a great deal of work. Properties that are great options for a flip are not always in good shape. Becky made a great point that when investors are looking at a house they want to flip, they need to use a formula for pricing. Start with the value the home will be worth upon completion and subtract the cost of repairs, taxes, realtor fees, your desired profit, and a cushion for unexpected costs. The number you have after those deductions is the price you can pay for the property. She said it does not matter what the listing price is. This is a business decision, and if the numbers don’t work, it’s not a wise buy.
With a flip, the repairs are probably the biggest variable. Becky recommended having a team in place for rehabbing properties before you ever make an offer. It is also a bonus if you can do some of the work yourself to save on labor costs. Ideally, your contractor should walk the property with you to estimate costs for all necessary repairs and check the condition of the major components of the house like the plumbing, electrical, roof, and foundation. It is critical to do your due diligence on these investments so they do not become money pits. In addition to the home itself, do some market research to ensure the other homes in the area are similar in market value. That will be important when it’s time to sell. Don’t “over invest” to the point that you price yourself out of that particular neighborhood.
Another great topic we covered was negotiating investment deals. I asked Becky if she handles those negotiations differently than primary residence buyers or sellers. Her short answer was “no”. She is aggressive and prepared in all her negotiations, but she shared a few tips that have helped her clients get the homes they want when it is a competitive property with multiple offers. The best way to get an offer accepted, especially when the purchase price is lower than asking, is to pay with cash, waive inspections, offer more earnest money, and allow for a quick close. Those are a buyer’s most aggressive means for getting that property. Just remember that the investment is a business transaction, so if you miss out on some properties, don’t fret. Becky noted that she has clients who make 15-20 offers per week once they’re established because they know other investors are doing the same thing and they will “lose out” on most of the deals. This is all part of the process.
As our conversation came to a close, Becky reiterated the importance of working with an experienced, knowledgeable agent when you’re buying and selling investment properties. You really need someone who is well-versed in the process and can help you make wise, profitable business decisions. I hope you have learned a lot from this series. It has been quite educational for me to write, and I look forward to continuing my research and expanding my knowledge on real estate investing. As always, if you have follow-up questions or want to know more, don’t hesitate to reach out!