Know your options! Image by thinkpanama

Real estate investors have a saying: “You make your money when you buy.”

If that’s true, you better know which options you have to buy under.

Buying a property using the correct method for your needs can reduce the amount of risk involved.

This is an important idea to remember that most people, not even Realtors, ever fully realize.

Buying under good terms often times outweigh buying at a reduced price.

That will probably be my opening line when it comes time to write that post.

In general, the greater the risk, the better your reward should be. But this doesn’t always have to be the case if you buy correctly.

Example How Buying Real Estate Correctly Reduces Risk

Let’s say you want to flip a property. You buy the house for $200,000 with terms of the seller will pay half your closing costs and you obtained 100% financing - so you don’t have to put any money down.

Your 2 big costs aside from repairs would look something like this:

• Closing costs = $3000 (assuming 3% closing costs and you only pay half)
• Mortgage payment of around $1400/month

Let’s say it takes you 2 months to fix up the house for the flip and then another 3 months to sell it. That would equal $7000 in mortgage payments and $3000 in closing costs when you purchased the property, and about another $1500 in seller’s closing costs when you actually sell the property (assuming you don’t pay any buyer’s closing costs as well).

Total money you spent and is at risk in this example minus repairs and utilities: $10,000 plus your $1500 cost to sell the house.

Are you still with me?

Now let’s say Jen the investor comes along and finds the same property offered at $200,000. She knows she wants to fix and flip the house while reducing the amount of money she puts up at risk.

She decides to buy the house differently and focus more on the way in which she buys the house to make money.

She offers the seller $205,000 for the house (more than asking price) and for the seller to pay half the closing costs. Furthermore, she agrees with the seller that she will have the exclusive right to buy this property for 6 months in which time she will be required to repair the property (what she would have done anyway) and then in 6 months she must either decide to buy the house or walk away.

The seller likes this because he can get $5000 more for the house and if the investor decides to walk away from the property, he gets his property back fixed up and worth more money.

Jen then comes in, fixes up the house, and sells it in 5 months. Total spent on closing costs and mortgage payments: $0.

Wait, what? Did I say $0?

Yup! Because she didn’t actually buy the house in the beginning (she used an option to buy), she didn’t have to apply for a mortgage and pay closing costs - so her upfront costs were $0 (actually, closing costs are irrelevant). It gets better.

After she fixes up the house in 2 months and finds a buyer in 3 months, she can now buy the house from her seller and sell the house to her buyer at the same time.

But wait!

Her seller agreed to pay half the buyer’s closing costs. If her buyer pays half . . . and her seller pays half, she pays none!

Total money you put up for risk to fix and flip this property (minus repairs and utilities): $10,000 plus your seller’s closing costs = $11,500.

Total money Jen put up for risk (minus repairs and utilities): $0.

Did your light bulb click on yet?

Do you see what the advantages are in knowing the different options to buy real estate under can be?

In another way, if you weren’t looking to fix and flip but rather buy, fix, and live in, you could have purchased under a lease-option and agree the repairs you made will go toward your down payment. The repairs can be made by you over time, thus resulting in saved labor costs. If the market goes real bad quickly and the house loses equity, you’re not locked into an equity loser.

Whether you decide to go into real estate investing or simply want to buy a personal residence, remember this: knowledge is power. Knowing your options and knowing when to apply them are integral in success in real estate.

Up next we’ll talk about the different options you can buy under and the advantages / disadvantages of each.

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