Epic Real Estate Investing - How Do I Make Money on Low Equity and Underwater Properties? | 3rd Degree Thursday

Episode Date: September 4, 2014

There is no shortage of gurus willing to sell you their proprietary course on how to make money on underwater properties!  From short sales to reverse wholesaling, they’ve all got their own formulas for cashing in on this niche. The problem is that few of these methods, if any, will provide consistent and reliable profits in today’s real estate climate.  And those that do, require more time and work than are necessary. Today Matt is tackling the issue of how to deal with low equity and underwater properties.  Enjoy!   What is the best strategy for investing in properties where there is little equity or the property owners are underwater on their mortgage?  Is there money to be made in those situations?   -         Gabriel Hullet in Florida --------------   The free course is getting a facelift and the new version will be released soon!  To access to the two fastest and easiest strategies to a paycheck in real estate, go to FreeRealEstateInvestingCourse.com or text “FreeCourse” to 55678. What interests you most?   E ducation P roperties  I ncome C oaching     Learn more about your ad choices. Visit megaphone.fm/adchoices

Hello and welcome to third degree Thursdays, the show where I subject myself to you giving me the third degree. All right. So I got a question via email from Gabriel Hullet or Hewlett. And Gabe wants to know what is the best strategy for investing in properties where there is little equity or the property owners are underwater on their mortgage. I live in Florida and I've been looking through this pendants in the official records and it looks like that is often the situation in this area. Is there money to be made in those situations? All righty. So short answer, yeah, sure.

There's money to be made in those situations. But I've got a few things, three things that I can comment on right away, when it comes to investing in small equity or underwater properties. And what that means is properties of which the owner owes more on the property than what the property can be sold for. That's what it means by underwater. They owe more on the property than what it can be sold for. So how do you make money on these things?

if there's more debt on the property than there is value. So good question. Comes up frequently. And I think it comes up frequently because typically this is where you find a lot of motivated sellers. They're in a situation that they just can't get out of. And that's where the motivation comes from is because they can't sell their property to get out from underneath their debt.

So my first comment is, you know, there have been books and courses and webinars and workshops, on creative ways of making money on underwater properties or little to know equity properties. And I could present you with, just as all of these other sources already have, multiple theories that would work on paper. It's like, yep, in theory, that absolutely would work. And I'm just not even going to run down the list, though. I'm not even going to, for two real big reasons. First, in the real world when it comes to getting all of the variables and moving parts in sync, not to mention all the people in sync. It's a ton of work with minimal payout.

I mean, there's little equity or they're underwater. There's not a huge upside to be made, not a big profit there. So it's a lot of work for a little reward. I mean, I'm sure someone could point out some huge victory where they got creative and made a ton of money without getting the lender involved. but that would be the exception. I promise you that would be the exception. And it would certainly not be anything of which a predictable and consistent business could be built from.

Now, the second reason I'm not going to share multiple creative strategies on how to make money from an underwater property is there are just easier ways to make money in real estate, much easier ways. And not only easier ways, but more profitable ways, significantly more profitable ways. So whatever you've heard, whether it was about lease options or just options and just options, general or reverse wholesaling, whatever fancy word the strategy may carry on underwater properties, none of those ultra-creative strategies are going to work in the real world consistently, not with these types of properties. They're good strategies, but because they've been modified in some unique way and some investor figured out a secret, that's just not going to work in the real world consistently.

And should you figure out a way to get them to work consistently, God bless you, God bless the person that figured it out, I just have to say, even if you do have it figured out, you're working way too hard for too little money. There are easier, more profitable ways to do this. Okay, so that's one condition of which I wouldn't even look at an underwater property. I'm not going to get ultra creative with it. First reason, as I mentioned, it's a ton of work. Second reason is the percentage of the percentage rate of closing the ultra creative strategies consistently to build a business out of it. It's just way too low for my taste. And third reason, of which, which I didn't mention is if there's more owed on a property than what it can be sold for,

and typically that would be a bank that holds the debt on that property, your possibility of consistent success with this strategy, with these creative strategies, is even less should you have to get the bank involved. Banks don't like creativity, okay? They simply won't play if anything falls outside of their box of normal practice. All right, so that's why I tend to shy away from these almost all the time. now. Now, there is one strategy of which many people, including myself, have had great success with underwater properties, and that is by dealing directly with the bank to negotiate a reduction

in the amount owed on the property. And should the bank agree, that's what would be called a short sale. The bank agreed to sell the property short of what was owed on it. Now, in 2010, 2011, Mercedes and myself, where we really ramped up our real estate investing, and, you know, we successfully completed 60 plus short sale transactions of which we negotiated a discount price with the bank. And while we were negotiating that discount, we searched for a buyer. And then when we found that buyer, we got them prepared to purchase the property as soon as the bank's discount approval came through.

Now, this was a very lucrative strategy for us here, especially in Los Angeles. And it was very lucrative for a couple of years of which we earned on the low end $20,000 dollars per deal and as much as $100,000 per deal. We did really well until more and more banks started to get hit. They started to see the type of money that the people like us were making. And so they started to issue deed restrictions with these short sale approvals of which required the new owner, which would have been Mercedes and myself, it required us to hold the property for it started out as 15 days or 30 days and I went to 60 days.

And it was just like 90 days inside of the deed. We could not sell that property. So that was the major de-distriction that got in the way of that strategy. And also, the amount of discounts being approved got smaller and smaller. You know, when the short sales first hit the market with the deluge of short sales, banks really were clueless around real estate. But the more short sales that they negotiated, the more short sales that were transacted, the more hip they got to real estate.

And they saw how much money they were leaving on the table by granting investors like myself a discount. So those discounts, they got smaller and smaller in dollar amount, and they also got fewer, the approvals got fewer and further between, you know, with regard to those approvals. So we stopped doing short sales with the banks and began just dealing directly with private homeowners, of which is still our primary business today. So much easier, way easier, and much more lucrative as well. And the volume is easier to do too. It's easier to scale. It's just easier. And it makes more money. So I still know, though, of investors that negotiate short sales with the banks.

But it's still a side business for them now. It's not their primary business. I mean, they know it can take six to 12 months to get the approval. So they have someone in their office of which that's all that they do. It's just someone on the side who shuffles paper, keeps everything organized, and makes a lot of phone calls to make sure that the bank follows through. And there's a lot of phone calls involved. You know, and some get approved, some don't. Now, in most cases, it can be lucrative enough to where it's worth having one person dedicated to just that, and that's why they do it.

But it really does take a special person to be able to wait that long. I mean, it can be three months, six months a year before short sale gets approved if it ever gets approved. And as well, you know, dealing with the bank bureaucracy that takes a special skill as well, because that will frustrate the crap out of you. I promise. I've been there. So one other strategy, though. So, okay, so that's one way. just dealing in directly with the bank.

So the other strategy, what I would consider is, would be taking over the property subject to the existing mortgage if. Now, this is a big if, if the property was in an area that I felt had a promising future, or at the very least a stable future, and that the property could be rented for more than the existing mortgage payment. It has to cash flow. Okay?

So it'd have to be in a stable economy, stable environment, and it would have to be able to cash flow with the existing mortgage payment. I mean, this is the scenario of which I would consider it. But I have yet to do so to execute a transaction like this because typically the owner is so far behind on payments and likely the taxes as well that I would have to bring too much money to the table

to bring the loan current before I ever took over the property before even executed the subject two deal. I'd have to put too much money in it. And if it's already underwater, I don't want to put a bunch of money in it. Make sense? So, Gabe, underwater properties, it's a niche, and it's a smaller niche, and it's a shrinking niche. And really in today's market, it's a side niche even.

A lot of work, a lot of paper pushing, and a lot of patience. You know, also, if you're finding in your area that this is often the situation, and in Florida, I'm not surprised. It would probably be that situation in Florida and, say, Las Vegas and Phoenix, Arizona. but the market, it's done a considerable amount of bouncing back the last few years. So I'm a little bit concerned if that's all that you're finding. I mean, I would consider how and where you're sourcing your leads from. And here's why, you know, even at the peak of underwater properties, only a third of all

the homes in America were underwater. Now, it sounds like a lot. And it is a lot. A third is a lot of the homes. But it's two thirds of the homes were not. In fact, a third of those homes, or excuse me, a third of all the homes in America, were owned free and clear. Had no debt on them at all. And I think that number's up to 42, 43 percent, something crazy.

So here are the most recent numbers that I've found. And this is from Zillow. 30 percent of homes in the bottom price tier are in negative equity. So your lower income, I guess you'd call it your C and D class neighborhoods are in negative equity, 30 percent. While only 18 percent of homes in that middle tier, here, the middle class homes, the median price range, only 18% of those are underwater, and only 10% of your luxury homes, your top tier homes, are underwater. Now, that's what Zillow said. But if you go to CoreLogic, the numbers are way, way lower. And I think the reason there is because Zillow is

typically a little high on estimating their price. However, their algorithm works. They're typically a little high. Typically. But CoreLogic is even less. It's way less. So I don't even know if it really can be considered we're in a short sale market anymore. You know, and our little operation here last year, we did more than 100 deals, and not one of them was a short sale. And in my mastermind group, of which I've talked about a couple times here on the show now, that equates to 60 plus of the most successful real estate investors in the country. And of those 60, I believe less than a handful work short sales, of which means 50 of them, or more, absolutely crush it without doing short sales. And I share this with you, Gabe, and anyone that may be experiencing the same issue

is if you're only finding short sales, there's probably a reason why. And it's not because that's all that's out there. That's the first, that's the knee-jerk reaction to assume that, boy, all there are short sales. I don't want to work pre-foreclosures anymore because they're all underwater. No, it's just the ones that are underwater, the ones that are calling you more frequently or the most often. So if you're only finding, short sales, one, be honest with yourself. Be honest with yourself. You can lie to me all you want. You can lie to everyone else all you want, but you can't lie to yourself. Okay, that's when the problem begins is when you're lying to yourself. So be honest with yourself. How many have you really found?

How many short sales have you really found? You know, was it the first 20 calls? Well, come on, 20 calls out of the hundreds and hundreds you should receive before you ever make any type of decision like that. Okay, so be honest with yourself. How many have you really found? And the other part of that is how long have you really been looking? How long have you really been trying? I mean, is it just this is your first month and your first 20 calls were short sales?

Yeah, you got a lot more calls to generate. You got a lot more people to talk to before you can say the whole market in your area is short sales. Very well may be. Gabe very well, maybe you know your market better than I do. But before you jump there, go ahead and be really truthful with the answers to yourself through those questions. How many of you really found and how long have you really been trying? The second thing is, what market sector are you targeting?

So maybe there's a time for an adjustment there. If you are looking for the lower income properties based on the statistics that I found today through Zillow and CoreLogic, the higher percentage of short sales are in the lower sector, the lower tier properties. Okay, so maybe there's time for an adjustment there. And then the third thing you want to look at, and what do your marketing material say? And who are you actually sending them to? Okay.

And I've never pulled property from the list pendants. That means that there's some sort of lean on the property. And it's usually some sort of dispute there. And those things can last forever. So maybe those short sales, you know, or those properties are, been there for years, which is very possible. So that might be a higher percentage of short sales you find under that specific target. But, you know, if you shifted over to, say, like, absentee owners, out-of-state absentee owners,

you know, you're probably not going to find those types of numbers. So maybe just kind of change or you start going to, you know, you're working the for rents. Or you're working, obviously, if you're working homes on free and clear, you're not going to find any short sales there. But that might be the difference, sir, you just might want to get real with yourself on what are your marketing materials say and who are you actually sending them to? What's your message? Maybe it's really just resonating with people that have tried everything else. And now that I guess my house just isn't worth what I thought it was and I need someone to come here and buy it and save me from this debt.

You know, if that's, I mean, that's not what your marketing is actually going to say, but maybe the message in your marketing really resonates with the person in that situation. So look there. Look at all those places. as I think your answer lies in one of or even a combination of all three of those questions. All right. So how many have you really found? How long have you really been trying? What market sector are you targeting?

And who are you sending them to? Okay. What type of people in that market sector? So good. Great. Yes. In summary, money can be made by working underwater properties, low equity properties. However, it appears that the opportunity to do so is waning.

and the work is getting harder. If it's an issue for you, it's not going to be an issue too much longer. I mean, you can work them if you want, but I think there are many easier and more profitable ways to work your real estate investing business. That's the point I really want to drive home. You might find a lot of short sales out there, a lot of properties underwater. You might find a lot of properties that are just break even or just have an itsy, bitty amount of equity in there.

You might find a ton of those. But it would be much easier for you to go out and look for ones that had equity in them. and work those. That would be much easier and you'd make more money doing it. That's my real point. Okay. So Gabe, thanks for the question. And should you have a question, comment, or concern that you'd like me to address here live on the show, go ahead and send it to me at Matt at epic real estate.com and type third degree in the subject line or leave me a voicemail on the epic hotline at 1-88-891-7203. All righty. I will see you tomorrow for a new episode of Financial Freedom Friday. is a part of the C-suite radio network.

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