5 Magic Paths to Making a Fortune in Real Estate

337 Pages·2004·2.22 MB·English

by  James E. A. Lumley

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5 Magic Paths to
Making a Fortune
Real Estate
in
S E C O N D E D I T I O N
J A M E S E. A. L U M L E Y
John Wiley & Sons, Inc.
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Copyright © 2000, 2004 by James Lumley. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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The advice and strategies contained herein may not be suitable for your situation. The
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Library of Congress Cataloging-in-Publication Data:
Lumley, James E. A.
Five magic paths to making a fortune in real estate / James Lumley.—2nd ed.
p. cm.
Includes index.
ISBN 0-471-54825-1
1. Real estate investment—United States. 2. Real estate business—United States.
I. Title: 5 magic paths to making a fortune in real estate. II. Title.
HD255.L86 2004
332.63'24—dc22 2003070172
Printed in the United States of America.
10 9 8 7 6 5 4 3 2 1
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CONTENTS
Preface xiii
Acknowledgments xv
Introduction xvii
Introduction to the Second Edition xxi
CHAPTER
1 Five Magic Paths to Making a Fortune
in Real Estate 1
The Five Magic Ways to Wealth 1
Now It’s Time to Make Real Money 5
Guidelines for Getting Started 6
Combine Techniques to Ensure Success 6
Before You Roll Up Your Sleeves 7
Take Some Measurements of Your Market 8
Magic Paths FAQs 9
CHAPTER
2 Making Money with Fixer-Uppers 12
The Fix-Up-and-Sell Strategy 12
Buying a Fixer-Upper 13
Seek Fixer-Uppers in All Price Levels 15
You May Wish to Live in Your Investment 16
Eight-Point Checklist for Making Money
with Fixer-Uppers 17
Some Bargaining Ideas 19
Rehabbing: Frequently Asked Questions 20
iii
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CHAPTER
3 Finding the Fixer-Upper Bargain 25
Mining for Gold: Target a Neighborhood 25
Find Sellers with Neglected Properties 27
Screen the Seller’s Motivation—Using
the Telephone to Advantage 28
Ways to Find Sellers 30
Don’t Overlook Out-of-State Owners 33
You’re Ready to Meet the Seller at the
Property 33
Seek Houses through MLS or the Internet 34
Get Agents to Bird Dog Property for You 37
Have a Contact System for Agents and
Prospects 37
When You’re Offered a Group of Houses 38
It’s All about Prospecting 39
CHAPTER
4 Finding Foreclosed, Repossessed,
or Condemned Property 40
The Perils and Rewards of Buying at
Foreclosure 40
Finding Properties before Actual
Foreclosure 42
Step In and Negotiate before the
Foreclosure 43
Solving the Problems of a Homeowner
Facing Foreclosure 43
Taking Over a Qualifying Foreclosure 44
Getting Started with Your First Auction
Foreclosure 45
Deciding Whether a Deal Is Good 46
Some Reminders on Foreclosures 48
When the IRS Has a Lien on Property
Being Foreclosed 48
Get Acquainted with Auction
Procedure 49
Getting an REO from the Bank 50
Use Your Repair Estimate to Drive the
Price Down 51
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Contents v
Find Condemned Houses in
Respectable Neighborhoods 54
CHAPTER
5 Repairs That Make You the Most Money 57
Start by Getting Accurate Estimates 58
Four Broad Areas of Repairs 58
Six Major Areas of Inspection and Repair 59
From Preliminary Outline to Finalized List 60
A First Priority: Arranging Time for the
Repair Estimation 64
Early Inspections Avoid Problems Later 64
Typical Repairs You May Encounter 65
What Repairs to Avoid 66
Always Solve Code Violations 66
Getting to Know the Bricks and Mortar,
or, The More You Know, the More
You’ll Earn 67
Special Problem of Dealing with a
Cracked Foundation 69
Another Common Rehab Problem:
Fire Damage 72
Six-Point Checklist for Fixing Up 72
CHAPTER
6 Valuing Properties Is the Key to Profits 74
Judging the “After Repairs” Value 74
Repair Costs Lead to Finding Value 75
Getting Started in Valuing Houses 76
You Start by Finding Comparable
Properties with Recent Sales 77
Doing a Mini-Appraisal 78
What to Consider in Determining Value 79
Making Adjustments to Equalize Value 80
Features to Adjust in the Mini-Appraisal 83
Pricing Adjustments Accurately
Improves with Experience 85
Make Sure Comparable Sales Are
Arm’s-Length Transactions 85
Neighborhood Prices Tend to Cluster 86
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CHAPTER
7 Negotiate to Get Your Offers Accepted 87
How Much Profit Do You Take? 87
How to Determine Maximum Offer Price 89
Now That You Know Your Limit,
Where Do You Start? 91
Use Repair Costs to Convince the Seller 94
Be Ready to Walk Away If No Solution 97
Make Offers on a Regular Basis 97
Seven-Point Strategy to Get Your
Offers Approved 98
Always Use “Contingent on Financing”
Clause 101
CHAPTER
8 Wholesale Property for Steady Gains 103
What Are the Basics of Wholesaling,
or Flipping, a Property? 103
Getting Started with Wholesaling 104
Advice for a Newbie! 107
Searching for a Property to Flip 108
To Whom Do You Wholesale? 109
Run an Ad to Attract Investor-Buyers 110
Make Sure Your Wholesale Buyers
Have Cash or Credit Line 110
Finding Cash Buyers for Wholesale
Property 111
It’s All about Establishing Relationships 112
Why a 3% to 8% Profit in Wholesaling
Fixer-Uppers? 113
Contract Provisions for Wholesaling 113
Using Two Contracts to Separate
Seller and Buyer 115
Problems and Solutions in Wholesaling 116
CHAPTER
9 Financing I:Working through
Conventional Lenders 119
The Differences between Home and
Investment Mortgages 119
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Contents vii
Down Payment and Closing Costs 120
Shop for Mortgage Loans 120
What Types of Mortgages Are Available? 121
Comparing Different Mortgages 122
Two Ways to Qualify for Fixed Rate
Loans 123
Second Mortgage Financing from a
Conventional Lender 123
Cash from a Home Equity Credit Line 126
Be Prudent in Risking the Equity in
Your Home 129
Using a Blanket Mortgage to Cover
the Down Payment 129
Consider a Construction Loan to
Finance Repairs 130
Credit with a Commercial Bank Is
Better than Gold 131
Rehabbing through the FHA 203(k) Loan 131
Fannie Mae HomeStyle Loan 135
CHAPTER
10 Financing II:Help from the Seller 136
Secondary Financing from the Seller 136
Seller Financing with Second Mortgage 137
When Seller Financing Is All That’s
Available 138
What “No Money Down” Really Means 138
Buying “Subject to” and “Assuming”
an Existing Mortgage 139
Problems of Buying “Subject to” 141
Takeover with Management Agreement
and Escrowed Deed 143
Using a Land Trust 143
Using Credit Cards to Help with Down
Payment 144
Word of Warning 145
Title I Loan Guarantee 145
Questions and Answers on Financing 146
A Final Note 148
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CHAPTER
11 Lease/Options I:Arranging
Rent-to-Own with Tenant-Buyers 150
Be a Matchmaker 152
Owner’s Reasons to Participate in
Lease/Option Are Varied 155
Make the Lease/Option Appeal to the
Seller 155
Making a Lease/Option Offer 156
Doing the Typical Lease/Option Deal 158
Your First Lease/Option Deal 161
Making Sure You’ve Got a Great Deal 162
Five Ways to Find Tenant-Buyers 165
Use a Lease/Option to Take a House
with Little Equity 166
A Final Note: Keep a Working
Relationship with Your Agent 167
CHAPTER
12 Lease/Options II:Arranging Contracts
and Closings with Tenant-Buyers 168
Structuring a Safe Lease/Option 168
Advanced Techniques—Use Lease/
Purchase/Option to Sell Fixer-Uppers
for Best Price 169
What Is the Difference between an Option
and an Agreement to Purchase? 172
What Should Be in Lease/Option
and Lease/Purchase
Agreements 174
Keep Your Right to Assign Contract
with Owner 176
Whom Do You Make Responsible for
Repairs? 177
When Your Tenant-Buyer Wants to
Change the Terms 177
Making Sure the Lender Accepts Rent
Credits 178
Does a Lease/Option Trigger a Due-on-Sale
Clause in the Mortgage? 179
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Contents ix
Working Out a Simultaneous Closing 180
With Sellers You’ve Got More than One
Arrow in Your Quiver 181
CHAPTER
13 Buy-and-Hold I:The Single-Family 182
Buy and Sell, or Buy and Hold 182
The Buy-and-Hold Strategy 183
Buying and Renting Out the Single-Family 183
Using Quick Ratios to Value the
Single-Family Rental 184
The Five Tools That Lead to Wealth 187
A Capital Gains Tax Review 189
Maintaining Investor Status with the IRS 190
Exchange of Property to Preserve
Long-Term Gains 191
One Indispensable Tool—The Financial
Calculator 192
Example A: The Time Value of Money 193
Example B: Accumulated Interest and
Loan Balance after a Specified
Payment 195
Example C: Buying a Rental House 195
The Present Value of an Investment 197
CHAPTER
14 Buy-and-Hold II:The Multifamily 198
Why the Multifamily Is a Great
Long-Term Investment 198
Target Properties That Throw Off Cash 200
Create an Accurate Income and Expense
Statement 201
Start by Researching Rents, Vacancy
Rate, and Expenses 201
Net Operating Income Is Basis for
Establishing Value 208
Working with the Capitalization Rate 208
Cap Rate Is a Function of Building’s
Age and Condition 210