Real Estate Systems
By Dale Osborn
All real estate investors have heard that in order to be successful, they need to discover and use a system to put the day-to-day operations on auto pilot. Then the word SYSTEM is used as an acronym for Save Yourself Time Energy & Money. You are then asked to picture what would make an ideal system. IDEAL is used as an acronym for Income, Depreciation, Equity build up, Appreciation, Legal or Loan Decreases. These are the items that make it a good deal for the investor. It should also have the following characteristics: Zero cash, zero risk, zero time involvement, zero management by you, and zero energy loss.
A real estate investing system works with many different factors. First there are discounts. This can be where the seller is forced to sell in order to resolve a cash need. It can also involve a mortgage holder who is anxious to liquidate the note at a discount. Either way it benefits the investor by allowing the available cash involved to buy more. Discounts along with leverage of you funds make it profitable to be a real estate investor.
Second, there are distressed properties. A property owner may be anxious to sell due to problem tenants, natural disasters, floods, fires, etc. This category would probably fall under the term burnt out property owner. Another form of distressed properties are those needing a lot of work to make them habitable. Rather than doing the required work, the owner sells and lets the buyer fix up the property. There is also bank owned properties or REO's. These are properties the bank needs to take off of their books as quickly as possible as they do not want to get into trouble with the Federal Deposit Insurance Corporation (FDIC) for not having a large enough reserve in place. The FDIC could close them down.
Third, there are conversions. You buy a property that is zoned for one type of property and convert it to a higher and better use. One example is to take a single family residence and divide it into two or three separate units allowing for higher rental income. Another example would be to buy a house with extra land. You subdivide the house from the extra land and sell off the land or sell the house. Converting the zoning from single family residence to commercial would command a higher price for the property also.
Many investors feel there are only several different systems in play. These all involve how you buy the property and how you sell the property. The fourth system is buy high - sell higher. This plan works best when there is high inflation.
The fifth system is the ultimate goal of buy low - sell high. You buy at wholesale and then resell at retail prices. This works best if you only buy properties within 50 miles of your home. Your profit is made by buying at a discount. Pick an area about one mile square and become THE EXPERT there and do about 3-10 deals each year in this area. Locate the motivated don't wanter sellers in this area. Again we use an acronym to jar our memory as to what we are looking for. MOTIVATED: Management or money problems, Out of area, out of work, luck, time or money, Transfer, Illness, inheritance or just ignorant, Vacancy, Area in decline, attorney problems (Lawsuits, liens, bankruptcies), Tax problems, Estate & probate problems, Emergency or early retirement, Delinquent payments, divorce, death, debts, or a dissolution of a partnership. The above items all constitute motivated sellers.
The sixth system is buy low - don't sell. This works well in a market with no appreciation. Some also refer to this as the Buy and hold strategy of investing.
The seventh system is buy high - fix up higher. This system is only for those who have the needed skills to do the repairs. If you have to hire contractors to do the work, it would be too expensive to do.
The eighth system is buy high - don't sell. This was a method used during the depression and may be something to use in the emerging market place now. Buy this using zero interest loans from the seller.
The ninth system is don't buy - do a lease option. This is one way to make money in real estate and you do not even own the property. The strategy of lease options has many different ways so I will not get into those in this article.
The tenth system is to buy high sell high. You buy with zero down - remarket the property for a larger down payment and interest rate. You then profit from the difference. This is basically how a bank is supposed to operate using loans.
The eleventh system is buy high sell low. You use discounted mortgages to get into the property and then sell at a lower discount. You again make your profit on the difference between the amount you buy at and the amount you sell the note at.
If you do not already have a system in place - take a look at these eleven options for you to implement so you do not have to reinvent the wheel all over again. Should you feel there are additional systems that can be used - feel free to send me feedback as I am always looking to add to my real estate education.