Concept 4 - Expected Value
The 10 Essential Concepts Behind DeedGrabbing:
If you follow the first three DeedGrabber Essential Concepts, you'll decide on an overall real estate strategy, learn related specialty topics that will contribute to your success, and commit yourself to that strategy.
And, you'll multiply your efforts by getting more marketing done on a consistent basis, and properly working the leads you get from your marketing, even going so far as to proactively contact some of these leads yourself by phone or in person.
So, how to pick your strategy?
In order to make a living buying and selling real estate, you cannot rely on appreciation or equity buildup, especially in today's market.
You have to go where the equity (or "Expected Return") is.
Sometimes it's obvious - a seller owns a property free and clear, or they have a small mortgage compared to the property's value. Other times, equity can be created.
An example of this would be negotiating a short payoff with a bank, when the property owner owes more than the property's value. Very frustrating in my experience though. Unless a bank has already contacted the owner, and is hot to make a deal, I usually pass on these.
Another way to create equity is to negotiate liens that exist against a property.
Absent some way to create equity, don't bang your head against the wall, trying to make deals work where there is no obvious profit. Getting deeds to properties that have no equity, and trying to carry mortgage payments, is easy - and also a quick path to the poorhouse.
Therefore, the fourth Essential Concept Behind DeedGrabbing is as follows:
"Only pursue deals with motivated or indifferent sellers who have existing equity, or equity that can easily be created".
Sounds simple enough. But it seems to lead to a Catch-22:
"If an owner has equity, why would they be motivated to give me a good deal?"
"If an owner doesn't have equity, what motivates the mortgage company or lienholders to take much less than what's owed?"
The truth is, in normal circumstances, the answers to those questions would stop you cold. A reasonable owner with equity would simply list their property with a Realtor, and get market price eventually.
And mortgage companies are familiar with the real estate business - they're not ordinarily going to "fire-sale" a property for a huge loss, that they could foreclose and resell for a smaller loss on the open market.
So, without an external motivating factor, you'll just have to wait for an occasional uninformed or indifferent owner, or bank miscalculation, to walk away with a great deal by marketing to the masses. If there isn't an outside force encouraging the parties to act, it will just be a game of dumb luck.
But there is an outside force that will motivate owners and lienholders alike to act - and it also exposes the indifferent owners that we are looking for: non-payment of property taxes.
Indifferent owners, who really don't want their property, will show up on the tax-delinquent list right away when they decide to quit sinking more money into paying the taxes. We'll be able to spot them in the tax-delinquent list with more accuracy by recognizing that they more often live outside the county where the property is located, and we may receive returned mail when we market to them.
As mortgaged properties become more and more tax-delinquent, the mortgageholders (banks) will pick up on the situation and pay the taxes, removing these properties from the list. This leaves a higher percentage of free-and-clear properties on the list as time goes on.
Finally, the county will take action and start the tax sale process. By this time, banks are given formal notice of the tax sale and almost all of them pay the taxes on their mortgaged properties to avoid getting wiped out.
When we get to the last few months before the owner loses the property, owner motivation is at its peak, and any remaining lienholders or mortgage holders are much more likely to negotiate. If they don't do something, they will get absolutely nothing from their lien as the tax sale will wipe it out.
So, by dealing with tax-delinquent owners, we know that the likelyhood of equity, or easily created equity, is much higher - yet we're dealing with a motivated or indifferent seller at the same time! And things only get better, the more delinquent a property becomes.
|I called it "Expected Return"...|
It's also known as "Expected Value", or "EV".
What's EV? It's what you can reasonably and realistically expect to earn from a deal when your eyes are 'wide open'.
And yes, that takes into account all the "gotchas" that could happen during your deal.
Discover how understanding EV will likely make or break your real estate investing career...all those investors riding the bubble through 2006-7 will back me up!
Get "Gonzo Investing" - How the Real Estate Game is Played to Win, the training that changed everything for me, in downloadable format for less than $100 - you can have it in your hands in minutes.
Was it written in hindsight? NAH! Came out in 2005...
Everything You Need to Know to Profit From
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