A Real Estate Formula
The formula was really simple. The ads were always in the newspapers, I just didn’t see it. The ads were always the same: 1% payments of the purchase price, 5% down on a house purchase. For example, $100 000 home with $5000 down and $1000 per month payments.
My friend actually explained the process. It works kind of the opposite as buying with no money down and it’s a great way to get good return on capital. There is not down payment when you buy, because you buy for cash.
Always remember that when you buy for cash, you can usually get a much better deal. With a promise of a faster closing, and no financing contingencies in the offer, sellers are willing to sell for less. For example, you can offer $92,000, for a house that might be worth $105,000. If they are only willing to sell it for say, &98,000, you walk away. There are always other opportunities waiting.
Now, if you buy the house, you do a few high-return improvements and repairs; don’t spend more than a couple of thousand on this. These repairs can include paint, leak fixes, better carpets/tiles and so on. Let us now say you spent $5,000, using our example, which now takes the worth up to $110,000.
You now target buyers who struggle to get financing when putting it up for sale. You now provide the financing. Because of the fact that you make it easier for the buyer you can now get more than the $110,000 – and not pay realtor’s commission. Now let’s say you sell it for $117,000. The buyer just needs to put down a down payment of 5% or $5850, and makes a monthly payment of $1170. You of course charge higher interest than the going rates at the banks.
What now results is a win-win situation. The buyer gets his home that he otherwise wouldn’t have been able to buy and you get a capital gain of say $15,000 after expenses, plus good interest. Your return on investment can often be over 20%!
In our town, the first to do this consistently were a father and son team of lawyers. They saved money by doing their own foreclosures when necessary. Once they foreclosed, they raised the price and sold the home all over again.
They made millions. An interesting fact is that if you can get 18% on an investment, you will turn $75,000 into more than a million in about 15 years. That gives you a good idea of the power of a good real estate formula.