The “Creative Real Estate” advice market has become so filled with hype and downright shady techniques to take advantage of people who sign over the title to their homes while thinking it’s a strategy to keep the home from foreclosure, you begin to wonder if regular people can make money in real estate.
Of course, when most people begin to doubt that “regular folk” can make any money in a particular field, that reduces competition in that field for real bargains.
Here’s how one person found a real bargain.
I’ve put the highights here but really suggest reading the whole article if real estate is your bag… he invested quite a bit in rehabbing and got the lead from a mailing done 2 years earlier! Talk about planting seeds today for a future harvest!
From Real Estate Journal …
Paul Galasso, 40. Mr. Galasso worked until 2005 as a manager at Costco’s corporate headquarters in Issaquah, Wash., outside Seattle. He began investing in property three years ago and left his job last year to focus on his real-estate career full-time.
Purchased: October 2005 for $266,000
Sold: April 2006 for $416,000
Gain: $72,560, or just over 27%
Mr. Galasso bought the house directly from the seller, also an investor, in October 2005. He located the homeowner via a direct mailing he sent in 2003 to a list of investors who own property in metro Seattle. The owner, who was retiring, saved Mr. Galasso’s mailing and contacted him when he was ready to sell.
The strategy: He uses a mix of investment strategies, Mr. Galasso says. Most of his “buy-and-hold” properties are out-of-state and bring in rental income, he says. Because in the Bellevue area it’s too expensive to buy homes solely for rental income, he has adopted a fix-and-sell strategy for local properties, he says. He quickly rehabs homes by assembling in advance a list of readily available contractors and standard supplies. He then can assess what work needs to be done and arrange for contractors and supplies before closing. He was able to negotiate a good price with the seller and secure favorable financing by locating the residence before it hit the market, he says. He employed a “creative” borrowing strategy to fund the purchase, one that didn’t tie up his cash, he says. He financed the home using a $219,000 first mortgage from the original seller (at a 6% interest rate) that required no payment the first six months. He also arranged a $75,000 second mortgage from a private lender (at a 12% interest rate) that needed no payments for a year. Because he renovated and sold the property in less than six months, he only paid interest (but no principal) on the loans while rehabbing the property. The house listed at $400,000 and sold in April (after multiple bids) for $416,000 — $16,000 above the listing price.
The math works this way. The home sold in April 2006 for $416,000. The home’s sale price ($416,000) minus its purchase price ($266,000) and purchase closing costs ($3,500) comes to $146,500. Renovation expenditures ($36,550) reduce his profit to $109,950, while holding and interest fees ($11,950) bring it down to $98,000. Closing costs on the sale came to $25,440 (including a $12,700 commission paid to the buyer’s agent, and a $6,000 transfer tax), bringing the figure to $72,560. Short-term capital gains taxes on the sale were negligible due to offsets elsewhere in his real-estate portfolio, Mr. Galasso says. He didn’t pay a full broker commission because he earned a real-estate agent’s license in the past year and listed the property independently with a multiple listing service.
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