I am a college student interested in making an extra income in real estate.
I know a little about foreclosed homes. I know that you have to go to a site and bid on them.
I also know a little about Tax Lien lands and homes. They are properties you pay taxes for b/c the owner couldn't. The owner now pays you interest rate? - okay, maybe I'm a little confused about this one.
But what I want to do is buy cheap homes, make some repairs and flip them and sell them for profit.
What are your tips to get started? Tax liens occur when a county or municipality places a lien on a property because of delinquent taxes. Illinois offers 34% returns to tax lien investors. Tax lien certificates tend to be auctioned by the county. This means that you must show up to the place that the lien is being auctioned at in order to become a bidder. Usually, it is a reverse auction, which means that bidding starts at 34% on the note and goes downward.
If other investors are present, an investor might offer to take 33% per note. This results in a bidding war that will go to the lowest minimum value an investor is willing to take. Sometimes, states have a cap and will guarantee a 5% return on the note. The life span of a tax lien depends on how fast the delinquent tax payer pays back the amount owed. This means that the delinquent person/business could pay within a week of you purchasing the tax lien, and the lien is no longer valid.
Nonetheless, if this is the case, you will still receive your principal AND interest back in a lump sum. On the other hand, there are cases where the delinquent owner never pays back the backed taxes, thus you will receive the benefits of a high interest note indefinitely.
How it works:
California, for example, offers tax liens starting at 18%. This means they will pay investors 18% per year for fronting the money that the delinquent tax payer owes. Meanwhile, California may charge the delinquent party 19% per year, thus California keeps the 1% spread.
The owner does not pay you interest. The state pays you interest per year. The state can do this because the government pretty much has an unlimited budget because of taxing, and the laws regarding foreclosure ensure that the government will eventually get principal back if worse comes to worst. Meanwhile, interest is being accumulated on the lien and compounding, thus forcing the delinquent to pay more and more as time goes on.
There have been instances where the delinquent individual never pays back the taxes after the lien was issued and the state forecloses on the property. If the delinquent individual files for bankruptcy, however, your tax lien may no longer be valid, depending on different state laws, and your principal may not be returned.
Tax lien investing protects you from liability in the event of a foreclosure, because you are not the owner of the property. Thus, if the property was foreclosed on and had other liens and mortgages on the property, you would not be liable. If, however, you purchased the tax deed (not the tax lien) and this occurred, you may very well be liable for all other debt on the property depending on the state.
You mentioned foreclosures. As a beginning investor, I would only look at foreclosures or bank owned properties. When purchasing a foreclosure, you can get a great value without having to pay high broker fees. The foreclosure should be local to you, so you will have the opportunity to personally inspect the property.
The number one thing you should research is the location. Location is the most important part. If you have a bad location, you may not be able to flip the property. If it is a good location and everything goes wrong when you try and renovate it, at least you will have a better chance of liquidating the property and getting cash back. Secondly, look for the worst house on a block, rather then the best. This way the values of all the other houses will bring up the property after you do minor renovations.
One of the other things that is important to remember is that it is not always what you are buying, it is more about how much or how little you are paying for it. The cheaper you are, the more potential profit there is. If you had the opportunity to purchase a million dollar property on a block where all the others are 2 million dollars, it may very well be a good deal.
Bottom line is make sure you are getting a property well below sticker price. It is best to look at many properties before you make any decision. For every 100 properties listed there is 1 good deal.
Structuring the deal:
I would put at least 10-20 percent down and have a decent cash budget for renovations. I would also get a fixed rate mortgage from a hard money lender or bank. There are mortgage banks that specialize in writing short term construction/refab loans that may offer same day approval. You may also want to look into an interest only mortgage. This is a mortgage that you only pay interest on, because you are anticipating on flipping the property in a short period of time.
Exit strategy. Flipping a property and profiting in today's market might be harder then you would expect. Thus with sufficient cash down, this protects yourself and acts as a cushion. Plan B: If you are not able to flip the property, you should be ready to rent it out to cover the mortgage cost. Essentially, your tenant will pay your mortgage for you while conditions improve.
Remember: Flipping tends to be speculative. Speculators may win in the short run, but investors tend to win forever, because of cash flow.
The most lucrative way to profit in real estate is to buy a distressed property, fix it up and then lease it and hold on to the property FOREVER. Meanwhile, the property will pay for itself, and eventually when the debt load is reduced you will have strong cash flow. This strong cash flow will allow you to put another down payment on another distressed property. You can now use the free cash flow on your first property AND the revenue on your second property to pay off your second property in half the time as your first. And then you can repeat until you are satisfied.
Go to your local courthouse and check out the foreclosure & auction listings. Only look at houses that are court ordered foreclosure and auctions. Condos may be appealing, but the very best value you may get for your money is by investing in single or multi-family (duplex, triplex, etc...) dwellings. With a condo, you only own the area between the walls, and no land. That is an awful deal. Stick with unattached dwellings.
Hope this helped.
If you have any more questions, my e-mail is paulmorisseau@gmail.com You're suffering from the fear of the unknown. Its perfectly normal and natural.
Here are your options:
a] Ask around for a real estate investment group. Join it AND BE ACTIVE!
b] Look in the local paper or on-line. Look for that name which appears on a consistent basis.
c] Invest the time to learn about sheriff's sales and foreclosures. Go to at least 3 sales - strictly as an observer. You should see the same faces at sale after sale.
Offer to take one of them to lunch or dinner and discuss your intentions.
d] JUST to get a very good foundation and knowledge how the business works: Enroll in the sales person's course. You don't have to take the exam. You'll learn A LOT about the business. In fact, you should be able to have a pretty good understanding what happens after the contract is prepared right through to settlement or closing.
Thanks for asking your Q! I enjoyed answering it!
VTY,
Ron Berue
Yes, that is my real last name! |
