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HOT TIPS FOR BUYING IN A HOT MARKET

HOT, HOT, HOT. Even before the summer buying frenzy begins, housing markets across the country are cooking. Seller's are in control, and they're getting high prices. Property owners are watching their equities grow.

But even in a hot market, most houses listed by Realtors don't sell. That translates to opportunities for buyers. Although even an empty house goes up in value, most sellers reduce the price of an empty house until it sells. It's hard to remain completely rational when making payments and cutting the grass on an empty house.

In Las Vegas next month, I'll be teaching my updated Making It Big on Little Deals seminar. I will focus on buying in an appreciating market. Students will get a hands-on opportunity to hone their skills, buying in the HOT Las Vegas market. Many students from around the country have decided that Vegas is a good place to own a home. Taxes are low, the rental market is strong, and prices are jumping. Whether or not you want to own a home in Vegas, I hope you can join us for my latest strategies for buying.

FLIPPING CONTRACTS 

If you are interested in increasing your cash flow, buying and selling houses is a great business. My goal is to buy and sell five houses a year. We can live comfortably from the income these sales produce. If we don't need all of the income, we simply rent a house rather than sell it.

In a hot market, you can sometimes flip, or resell a house before you even close on it. You negotiate a contract to purchase a property, and rather than close on the contract, resell your position to another for a quick profit.

Flipping happens regularly at foreclosure sales. Another interested buyer offers the winning bidder, before he even completes the purchase.

Property Value $140,000
Winning Bid $110,000
Quick Sale Offer $120,000

The buyer at the $120,000 price is still getting a good buy, and the bidder is making a nice profit without ever writing a check.

WHOLESALE BUYERS GENERATE BIG CASH FLOW

Wholesale buyers use this technique to make quick profits when buying houses from owners. They contract to buy a house, using a contract that is assignable. Rather than closing on the contract themselves, they then sell it for a small profit to a user or another investor. 

Most contracts are assignable, unless there is language within the contract to the contrary. It is in your best interest to assign the contract, rather than to go into title and then resell the house. I use, and recommend to you, a corporation or LLC (limited liability company) as the entity to use for buying and then assigning contracts. 

These purchases may be inexpensive houses sold to investors looking for cash flow. Or, they may be houses that are more expensive, suited for users or high-end investors.

I have a student from the Northeast who regularly contracts for five inexpensive houses a month. He then resells his contracts to other local investors, taking only two or three thousand dollars per house as his profit. By leaving the bulk of the profit in the deal for the next buyer, he can always resell the contracts quickly.

These are not houses he wants to keep, as they would not attract great tenants. The cash flow he makes from buying and selling allows him to invest in better properties.

GETTING OTHER INVESTORS TO BRING YOU DEALS

Locally, I encourage other new investors to contract for better houses, and to bring them to me. These are the buyers fresh out of the get-rich-quick seminars who are running ads, and putting up signs all over town. 

Recently, one such buyer contracted to buy a house for $135,000, by simply taking over the payments on a current loan. The seller was out of town, and the house had been empty for many months.

The house was worth about $175,000. The investor brought me the deal, unsure or unable to assume and make the payments. We handled the loan, and rather than paying him a small finders fee, I offered to lease/option the house to him at a price that would allow him to make a larger profit. 

He turned around and lease/optioned the house to a user at a higher rent and higher price. We are both pleased with the results. I have only a couple of hours invested, and have a high return, safe investment. He has a few more hours invested, but little of his own money, and has a good shot at a larger profit than he would have made by just selling me the property.
SHORT TERM PROFITS VS LONG TERM CAPITAL GAINS

Those who need to generate income today can do it by flipping their contracts. However, this is ordinary income and will be taxed at the highest rate.

If I hold the property at least 18 months (my plan is to hold it until it at least doubles in value), I can either exchange it tax free or sell it and take capital gains. The 18-month period is not a requirement for exchanges, but holding for 18 months is good strategy and increases my opportunities.

Flipping contracts is different than taking referral fees. If someone calls me with a lead, and I buy the house, I typically pay a $500 referral fee. If instead, you actually negotiate the contract and assign it to me, I am willing to pay more because you have done more work. The amount I will pay depends on how well you did that work. If it's a good house at a price well below the market, that profit is often $5,000.

BUYING UNITS TO BE BUILT

Are builders and developers developing new subdivisions and condominium developments in your town? Are they pre-selling units that they have not yet built?

If so, many will allow you to sign a contract on a unit to be built, put up a small deposit today, and then close when they complete the construction. If you can make a $1,000 deposit today and tie up a property worth $150,000 or more, then sell that property to another the day you close (or assign your contract if allowed), you can make a significant short term profit.

In a hot market, prices on those units may increase 10% or more before they start construction. They may jump another 10% before you have to close on the property. Even a 10% increase on a $150,000 property is a good return on a $1,000 investment. It's remarkable when it happens in less than a year. By contracting for several to be built units in a hot market, you can increase your income dramatically.

You should read the contract you sign carefully. Does it allow you to assign your contract, or do you have to close on the unit first? Could you sell part interest to another investor who could then qualify for and close on a loan (or just loan you the money until you resold)? What is your liability if you do not close? There are no standard contracts, and everything is negotiable. Ask for what you need to make the deal work for you.


BUILDING SPEC HOMES

A spec home, is one built on the speculation that you can sell it before you complete it. In contrast, a contract home is one that is contracted for (sold) before it is built. 

Some builders like the security of building only contract homes. They know that the house is pre-sold, and they won't be stuck with it. Of course, they have to deal with the buyer looking over their shoulder throughout the construction process. The contractor also bears the risk of increasing material and labor costs during the construction period, because he has typically agreed on a set price with the buyer before he began construction.

Other builders prefer to build spec homes. This way they can build what they want without a lot of advice. They can also raise the price of the house if the market continues to appreciate during the building period.

A builder of spec homes has only one plan. Build it and sell it. As an investor, I have Plan B, build it and keep it as a rental. I can be an asset to a spec builder as I provide him with Plan B in case he cannot sell a house. Of course, in order to make Plan B work for me, I need to buy the house at a good price. I have made this arrangement with a local builder of spec homes. 

He builds them, and I arrange the loan for an amount to cover just the cost of the house and the lot, with no profit to him. If the house is sold within three months after completion, we split the profit 50/50. If he cannot sell the house at a profit within that period, I keep it and rent it, and he forgoes any profit on that house. He trades his potential profit for a guarantee that he will not be stuck with an empty house he cannot sell.

We have built four houses to date, and sold each one before it was completed. Eventually the market will slow down, or the house will not sell. When that happens, I will have a new house in inventory to rent.

When I say that I "arrange the loan", there are several alternatives. I could just go to a bank, qualify for and borrow the money needed to build the house. I would want a construction loan that could be converted to a permanent loan in the event we could not sell the house. 

As an alternative, I could approach a private investor. My favorite source of funds is small, self- directed pension trusts. Self-directed Roth IRAs will be great sources of loans.

An investor with an IRA (or many other types of pension plans) who is 50 today cannot withdraw any significant amount, without a penalty for another 9.5 years. A ten-year loan is a good fit for his plan. If you borrow for ten years and then have an opportunity to sell for a profit, buy another property and borrow the money again.

BUILDING KEEPER HOMES

Related to building spec houses is building houses to keep. Today's low interest rates make building houses feasible. Rates are low enough that you can borrow on terms that will allow you to immediately start making a profit.

The first step is locating lots in an area where you want to own property. If you find a new subdivision, you can often buy several lots at a time and negotiate a good discount. 

One of my first investors, Fred, taught me this technique when I was selling lots for a developer just after graduating from college. Fred liked driving around and finding a new subdivision which he thought had promise. He would then buy several lots, negotiating a good price because of his bulk purchasing power. 

Fred would then locate a local builder and contract with him to build on his lots. He would negotiate the best price he could, and simply borrow the money at a bank to build the houses. He would often resell the house before it was finished at a profit. The houses he did not sell, he would keep.

I began finding lots for Fred and contracting with builders to build more than one at a time at an even better price. I gave Fred the job of going to the bank and borrowing the money on the best terms he could get.

Fred would buy the lots, borrow the money from the bank with the best rate, and then sign the contract with the builder. The bank loan would be for enough to pay for the lot and build the house. He would have little or no money invested in the house and lot.

After the house was built and the permanent loan was in place, Fred would deed me an undivided one-half interest in the house. I would then manage the property and we would hold it indefinitely. I still own several of these houses, which have been outstanding investments.

Eventually, Fred decided to liquidate his interest. To get Fred cash, and allow me to stay invested without paying taxes, we exchanged tax-free our undivided half interest in half the houses we owned together for his undivided half interest in the other half. He then sold the houses he now owned by himself 

Building with investors works best when you have banks aggressively lending money at low interest rates, and investors interested in investing in a hot housing market. Today you can use it to acquire half interest in several new houses that should immediately make you and your investor money.

BUYING LOTS FROM DEVELOPERS

Related to this business of building houses is the buying of lots. In a hot housing market, lots tend to appreciate rapidly. You can build a house in most areas a lot quicker than you can develop a lot. When demand for new houses increases sharply, lot prices will jump in value.

When I sold properties for a developer, we knew this would happen. When we first opened a development, we would price lots on the low side to attract our first buyers and to get some momentum. We would make special deals with builders, who would immediately start building a house, because we wanted activity.

As lots began to sell, we would raise the prices. Every time we would sell 20% of the lots, we would raise the prices again. The last 20% of lots we sold for 150% of the price of the first 20%. Some of that increase was due to a hot market, and some just due to our planned increases.

Using this strategy, you can profit by buying lots in newer subdivisions. Fred and I bought six lots in a new subdivision cheap by agreeing to begin building immediately. We built the first six houses. The developer was less than thrilled to see my "for rent" sign in the front yards. However, we rented them quickly and my tenants looked as good as the rest of his buyers.

BUYING FORECLOSURES AND EMPTY HOUSES

Of the last four houses I bought, two were foreclosures. We have a strong sellers' market, and there are still bank foreclosures. I refer you to previous issues and special reports on buying foreclosures for details, but I want to make the point, even in strong sellers markets, people are in distress! 

Lenders are advertising 125% loans. They are making high risk, high interest rate loans to thousands of homeowners. They know that some won't make it. But like credit card borrowers, enough will pay the high interest to make it worth their investment. They are willing to write off a lot of bad debt to collect that high interest. Look for opportunities that they are creating. 

Note: The information offered in this letter is part of an ongoing series. This issue builds on the information given in previous issues. The author and publisher are not engaged in offering tax or legal advice. Laws are constantly changing and advice of a competent accountant and attorney should be obtained before implementing strategies suggested in this letter. 
Strategies and Solutions is published six times annually. Annual Subscription $47.00

Note: The information offered in this letter is part of an ongoing series. This issue builds on the information given in previous issues. The author and publisher are not engaged in offering tax or legal advice. Laws are constantly changing and advice of a competent accountant and attorney should be obtained before implementing strategies suggested in this letter. 

Strategies and Solutions is published six times annually. Annual Subscription $47.00. To subscribe or for information on John Schaub Seminar and tape courses call Dottie at 800-237-9222 Please have your Visa/ MC or Discover Card handy
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