A Real Estate Formula

It was a simple real estate formula. The ads ran in our small-town newspaper for years before I realized exactly what was going on. They were always the same: A house for sale with 5% down and payments of 1% of the purchase price. Maybe a three bedroom home for $90,000, for example, with $4,500 down and $900 per month payments.

When a friend started doing the same thing he explained the process to me. It was a way to get a great return on capital, and it was the opposite of buying with no money down. There is no down payment at all when you buy, because you buy for cash.

The Simple Real Estate Formula

You probably know that when you buy for cash, you can often get a much better price. With no financing contingencies in the offer, and the promise of a faster closing, sellers are willing to sell for less. You can offer $95,000, for example, on a house that might be worth $108,000. If you can’t get it for less than, say, $99,000, you walk away - there are always other opportunities.

Once you buy the house, you put few thousand into high-return repairs and improvements. These might include paint, carpet, and maybe asphalt for a dirt driveway. For our example, we’ll say you spend $5,000. Let’s suppose the house is worth $116,000 now. You’re ready for the next important step in this real estate formula.

You put it up for sale, targeting buyers who can’t get financing easily. You provide the financing. Because you are making it easy for the buyer, you can get more than the $116,000 value for the home - and do it without paying a realtor’s commission. Let’s say you sell it for 123,000. The buyer needs a down payment of just 5%, or $6,150, and makes monthly payments of $1230 per month. You charge higher interest than the going rates at the banks, of course.

This is a win-win situation. Your buyer is able to buy a home instead of renting, and you get a capital gain of perhaps $16,000 after expenses, plus good interest. Your total rate of return will 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. Did you know that if you can get an average return of 18% on your money, you’ll turn $75,000 into more than one million dollars in about fifteen years? That’s the power of a good real estate formula.

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10 Tips to Buy Real Estate Without Breaking Your Budget

1. Get pre-approved for your home loan. This means, fill out a loan application and go through the
process of securing financing. That way, when youre ready to seriously evaluate real estate, youll
know exactly how much home you can afford. And you can prove to a seller that your offer is sincere.

2. Explore creative financing options. During the home loan pre-approval process, ask about ways to get creative with your financing. Low down payment options, first and second mortgage combinations and first time buyer programs might help you afford more funding. Many lenders are now offering interest-only home mortgages; just make sure you thoroughly evaluate the terms for this type of home loan. Down payment grants are also available in some instances and might be worth investigating or discussing with your realtor.

3. Sell your existing home first. Although selling your existing home before finding new real estate
to buy can be a little nerve wracking, any inconvenience will be offset by your ability to make an offer
with cash in hand. Contingent purchases are not the best when negotiating to buy a home. Having your
financing in order and your bags packed will give you the advantage in a competitive market.

4. Look for vacant real estate. Perhaps a sellers job has transferred him out of the area. Or maybe a
family purchased a new home before putting their existing one on the market. In any case, a vacant home could be just the deal for a savvy home buyer, so have your realtor look for vacant property in your preferred neighborhoods. And keep in mind, the longer a house stays empty, the greater your negotiating power will be.

5. Consider cosmetic fixers. If youre handy with a paintbrush, a toolset and gardening equipment,
consider buying real estate in need of cosmetic fixing. Property that lacks curb appeal needs minor
handiwork or the yard overhauled could end up being the home of your dreams for a price you can afford. You just need to look beyond the ho-hum to see the potential of a cosmetic fixer.

6. Buy a home thats a major remodel project. If you want to live on Lake Washington, but cant afford a $2M home mortgage, consider buying a dilapidated cottage on a fabulous lot with western exposure. In time youll need to gut the existing home and build from the ground up or contract significant home
improvements. But in the end your property value will skyrocket. And if your carpentry and other
construction skills are well-developed, you can save even more and accrue sweat equity during your
remodel by doing much of the work yourself.

7. Dont discount bank foreclosures. One persons loss could be your gain if you buy real estate in
foreclosure. Although the search for a decent foreclosure may take a while, your realtor should be able help. The U.S. Department of Housing and Urban Development (http://www.hud.gov/) can be an excellent resource for foreclosed properties. Because HUD houses are sold at market value, your best bet will be homes that need cosmetic work or even major repair.

8. Land with a manufactured home. Sometimes, to buy a home on a budget, you need to look beyond
convention. Even if your wish is to buy real estate, you may have to settle for a piece of property in
an outlying area with a mobile or manufactured home. Discuss this option with your real estate agent
and try to keep an open mind about this possibility.

9. An older, smaller home. Older homes are typically priced much less than newer construction and dont tend to create buyer bidding wars. If you can enjoy life in an older and smaller home in a neighborhood or suburb off the beaten path, this could be your ticket to real estate ownership.

10. The cheapest house in the best neighborhood. You have your heart set on a specific and expensive neighborhood. Maybe its the schools that youre interested in. Or perhaps its the close proximity to
downtown or the waterfront. In any case, a budget-savvy buyer will look for the least expensive home for sale in the neighborhood. If youre not in a hurry, you can even play the waiting game to see what
properties come on the market. Your real estate agent can be a real asset in this case by
investigating potential sellers.

Buying real estate without breaking your budget will require research and compromise. On moving day, however, youll have the satisfaction of knowing that your homework paid off!

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