Every investor wants real estate buying strategies that help them beat the market. Some of these are complicated and some are pretty simple. Oftentimes, it is the simple ones that work the best- but they also require capital.
As professional hard money lenders, we learn about all kinds of real estate investment strategies from our clients. Our clients invest in real estate development projects that cannot be financed by traditional banks but have significant upside potential. Below are some of the more common ways that our clients take advantage of hard money loans to develop property and quickly boost their equity.
Buy the smallest property in a neighborhood
Most home buyers are not up for a major home expansion for many reasons, including months of paying rent and mortgage at the same time and the aggravation of dealing with contractors. If you buy a house that is unusually small for the community, you can usually negotiate a below-market price.
In most communities, lots are sized similarly, but not all of the houses use the same percentage of the lot. Sometimes the area has been downzoned since the other surrounding houses were built. In that case, it’s not a great investment unless you can hold on for a variance, so it’s important to do your research. But if the zoning has stayed the same or been upzoned, you can knock the house down and build a brand new, much larger home at a substantial profit.
Buy the worst property in a neighborhood
There is an expression in real estate investing that you want to buy the worst house on the best block. After all, you can always rebuild or renovate a house, but you can’t move the property. So what many investors will do is look for a house that hasn’t been maintained in decades. Oftentimes the floors shake when you walk on them, the ceilings and walls are collapsing, the windows are boarded up, the house is filled with debris, and the property may be covered with weeds and litter. In short, the house may even be legally uninhabitable.
To your typical American family, this is a nightmare, but real estate investors understand that, for a price, anything is possible. If it’s a good block with otherwise nice-looking houses, a total gut job will generally have an easy payoff if money is spent strategically on the things buyers look for, such as nice kitchens and bathrooms, high ceilings, and an open floor plan.
Buy a property with good bones and horrible aesthetics
This is related to what was discussed above, but it is an even better situation. Perhaps the property and the house haven’t been very well maintained, but there are no serious structural issues with the house. If it has a strong foundation, decent plumbing, and evidence that the beams are in good shape, it could be that a few basic moves like garbage removal, new sheetrock, lots of white paint, exterior siding, and some help from the gardener can substantially raise the resale value without much of an investment. Something like this is a real opportunity if you get the right price on it.
Buy in an area that is transitioning
Flippers’ paradise is when you manage to not just get a good deal on a house but to also get a house in an area with rapidly rising property values. There are a lot of reasons why areas transition and gentrify, but the best way to find out what’s happening is to look at the statistics and forecasts for the area put out by real estate companies and websites, as well as speaking to local real estate professionals. It’s also helpful to drive around the area and see if other houses are being renovated.
Look at homes that have been on the market for an extended period
Many homes that are priced right and show well will sell quickly in California. If the home is overpriced and/or staged poorly, a buyer can take advantage of the situation by offering a lowball price. This is particularly effective when you have cash to make the purchase.
The way this works is as follows: When a house is first listed on the market, there is usually a surge of publicity. All the brokers in the area show it to their current clients, as well as anybody else who might be interested. The seller refuses many reasonable offers, believing that there is clearly a lot of interest and they can hold out for their asking price. Oftentimes the seller changes brokers multiple times and takes the house on and off the market (all of this history can easily be found on Zillow). Usually, there are a few very small price drops, sometimes mixed with price increases as the seller determines that the market has gone up.
Real estate agents consider the house a waste of time because the seller is not serious. The seller’s own agent stops marketing the property and other local real estate agents stop showing it to their clients because they feel it’s not worth their time. The seller begins to get concerned as the number of offers dwindles from several per week to only one every few months.
Finally, the seller decides they need the money, becomes concerned about the lack of offers, or just loses hope. At that point, they would love to get market price for their property, but they’re unlikely to find buyers if real estate agents aren’t marketing the property anymore. If an investor comes in and offers all-cash, immediate closing, and a price below market value, the seller just might cave. It doesn’t always happen, but it happens enough that if you see a house matching this profile, it’s worth a shot.
The key when investing is to remember that you aren’t looking at property through the same lens as a home-buyer. Sometimes, the very factors that make a house repellent to potential buyers are gold veins for the real estate investor, who can buy low and then sell high on a beautiful rehab.
Socotra Capital is a leading provider of equity-based loans in California. We specialize in helping investors, builders and developers secure hard money loans in a timely manner for a wide variety of projects including fix and flip homes, ground-up construction and rehabs.
Your real estate assets are your best investments for the future. At Socotra Capital, we’re proud to be the premier direct hard money lender for California real estate. Contact us today to learn more about how we can help.