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When Do you Make Money in Real Estate, When You Buy or When you Sell?

The Real Estate market is loaded with opportunities to make profitable investments.  However, buying and selling real estate requires knowledge and expertise.  Unfortunately, today the TV is loaded with shows that pretend to make viewers think that flipping homes is easy and you can always make a profit.  This is no true.  I have been in the real estate industry for a good number of years, worked with investors and flipped homes myself.   I have to tell you that you better work with a seasoned investor first before you try by yourself.  The TV shows that we see have a final goal …. make money.  Their business does not end up in making a profit from the advertisers on the show, they organize seminars all over the US and sell coaching that costs thousands of dollars.  Their presentations are very well put together, with professional speakers that have been hired to make you excited about the opportunity that they want you to buy, telling stories that are not true, most of them.  They will tell you everything you want to hear, how many deals they have made, and the deals that their close relatives have closed, and how much money they have made in the business.

Unfortunately, the market is loaded now with a bunch of motivated buyers who are going around buying homes in foreclosure auctions, tax deed auctions, REO’s.  The problem is that since there are so many people now trying this business, many new investors are buying these homes close to market value, not leaving any room to make improvements and profit.  I remember going to tax deed sales where the mortgage company had sent his own guy who started bidding on the house.  Another person at the auction, who wanted the house, started bidding also, creating a bidding war.  In the end, as you can imagine, the winner had brought the price close to market value.  When you buy a home in a tax deed sale auction, you, the buyer, cannot see the home on the inside, just on the outside.  There is risk involved and you don’t know what you will find when you open the door.  When I was leaving the auction, the person bidding for the bank was walking behind me laughing.

Overpaying for a homes does not happen just to investors.  Regular guys trying to buy a hose for their family also do it, especially when the market is hot and several buyers want the same house.

The matter of this article is to determine when we make money in Real Estate, when we buy or when we sell?  My answer is when we buy, but if you bought at a good price, it depends on what you do until the time you sell what will determine if you will make profit or not.

Case Study 1:  An investor bought a home located facing the intracostal waterway in a beach town.  The purchase price was $290,000 and at that time the market value for that home was $600,000.  Despite the fact that the house belonged to a hoarder, that there was a hole on the roof and mold, this was a great buy, an investor’s dream.  The investor had a partner and they started the renovation.  The partner knew how to do renovations and wanted to cut cost buying and doing the improvements himself.  Unfortunately, the city came to inspect the home and they found out that for them to do a major renovation they had to follow FEMA building codes and the house needed to be lifted from ground level, which would cost thousands of dollars.  Why did this happen?  because they did not want to hire an experienced contractor, who would have handled the renovation in a way that the city would not require for them to follow the FEMA building codes.  What was the final result?  This investor has owned this home for about two years and he is willing to lose the money he invested so far.  His partner is still trying to find a solution.  What about the profit?  They will be lucky if they just break even.

Case Study 2:  A buyer buys a home he fell in love with.  When his agent showed him the comparable sales in the area, before he made an offer on the house, it was clear that the house was overpriced.  Mr buyer went ahead and offered full price.  He had been trying to find a home for months, and he wanted that home and he was not going to let it go.   The seller accepted his offer and the new homeowner moved into the home.  I spoke with this buyer a few weeks ago, while walking the neighborhood.  Right now, after living in the house for more than a year and not having his emotions involved in the purchase, he regrets paying more than market value for his home.  We checked the comparable sales in the neighborhood and his home is worth the same price he bought it for.  What is it going to happen if home values decline?  Will he keep making payments on a home that is worth less than what he owes to the bank?  If he is able to make his payment, it is better for him to continue doing it, anyway, he loves his home and he wants to stay there, who wants to go through a foreclosure just because your home is underwater?

Case Study 3:  An investor bought a home in 2011 in a tax deed sale for $8,000.  The home has a living area of less than 1000 sqf, it is a frame home and it is located in a bad neighborhood.  After six years of not doing much to the house, he decided to fix it and resell it.  His contractor has found all kinds of problems, starting by the foundation.  I met with this investor and the market value of his home right now, after he fixes it, is around $120,000.  His total investment after renovations will be max $60,000.  Great buy, something that the average person would not buy, but the savvy investor knows where he can receive a good return on his investment.

In conclusion, you make money when you buy, not when you sell.  This applies mainly to investors who are looking around trying to find a good deal.  Investors look for profit, most of them are realistic about the market value of their homes and they want to sell fast.  On the other hand, homeowners are emotionally attached to their homes, they want to sell at the best possible price, having sometimes irrealistic expectations about the market value of their homes.  As a consequence, they hurt themselves in the process having their homes on the market for too long and at the end selling it for just market value or even less in some cases.

 

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