The new skill set every RE investor needs to learn in 2016

Reading through the forums on BP it seems that fix'n flip is getting tougher: too many people chasing too few deals. Buy-and-hold doesn't seem to work either. Home prices are going up faster than rents - so margins are getting squeezed. I'm down to my last 4 rentals and judging by the number of yellow letters I get, the wholesale community is starved of inventory. Through a stoke of pure luck, I managed to learn a few new skills and move upstream to a source of reliable deal-flow and higher margins. 

Here's how:

I stopped buying RE a few short years ago. It was just too hard to make money. From 2010 to 2011 I had been scooping up SFH's in Cape Coral, FL and Paradise Valley, AZ for $60/foot. I'd buy a 1400 sf 3/2 for $85k and rent it for $1300 per month. It was easy and profitable. But then the recovery happened! By 2013 the home prices had gone up ~2x but the rents hadn't kept pace. What was a 13 cap was now looking more like a 8 or 9 cap.

I'd love to say that it was my great financial skill and keen intellect that showed me the way forward....but no, it was the same blind luck that got me started on the FL and AZ investments in the first place.

One day out of the blue, I got a call from a nice lady at PNC Bank to tell me that my Short Sale was not approved. I had forgotten about an offer I made 5 months earlier - a nice duplex in PA for $49k. She told me she the bank had sold the note and the Short Sale wouldn't be going ahead. I was disappointed as it was a great deal. "Who did you sell it to" I asked? "An investor" she replied. "Why would he want it" I asked....."Not sure, but he is the new owner....I can give him your phone number if you like?"

A couple of phone calls and a 1 hour meeting later, not only had I saved my precious duplex but my mind had been blown. In 60 minutes this seasoned investor explained how he makes his living.

After handing over my $49k purchase price, he explained how it all worked:

First, he bought the note on the property for $20,000. Wait, how much? Yup, $20,000 

Second, he started foreclosure on the property. The owner didn't want a foreclosure on his credit so he agreed to pay the investor $14,000 and deed the property over if the investor agreed to report the mortgage as paid-in-full

Third, he sold the duplex to me for $49,000. 

So, he collected $63,000 on his $20,000 investment. 

I rehabbed the duplex, rented it and sold it within 5 months and made $20,000. Not bad but not great either! The note guy made a 300% in 3 months. I made 15% in 5.

My eyes had been opened: There was no future in buying SFH's and trying to get them to cashflow. 

There were too many people trying to do the same thing, prices were being bid up and I had no competitive advantage.

So, I started studying everything I could find about the note business, foreclosure, tax sales...anything I could put my hands on. 

I discovered that a little extra knowledge gave me a big competitive advantage:

1. I could buy homes before they went to foreclosure 

2. I could buy homes that nobody else knew were for sale 

3. I was bidding against other buyers who were much less aggressive than the fix and flip buyers - so prices were lower....much lower. 

I'd buy the note on a $90,000 home for about $60,000. I'd foreclose at a cost of $5,000 and be all in for ~30% below market value. On my second deal, I didn't even have to foreclose....the homeowner wanted to stay and agreed to start paying again. The homeowner is paying $800 per month (with 22 years left) on a note that we bought for $36,000. Even better, the loan servicing company does all the work and collects the payments for $30 per month. 

Within a year I had sold 90% of my SFH rentals and was buying notes at 40-60% of the asset value. About half the time, the homeowner wants to stay so we work out a payment plan with them. The other half of the time we foreclose or accept a deed-in-lieu of foreclosure and simply sell the property. We don't do rehabbing anymore. 

If you don't know about the note business, then 2016 is the year you need to learn about it. It solves two problems:

1. Lack of inventory in the market

2. Compressed margins on fix and flip/buy and hold

Is it easy? No, nothing worthwhile is easy. Can it be learned overnight? No, nothing significant can be learned overnight. Am I in the teaching business? No, but there are lots of places to learn. BP has some true experts who'll point you in the right direction. 

Expect to devote at least 6 months to truly understanding the business and start with a few small deals to perfect your understanding and systems. We grew from 10 loans to over 1200 in 2 years. 

We have several hundred first and second liens in just about every state and have just started a sales program. You can buy a single loan or a pool of loans. If you are struggling to find deals that work, you should consider doing what I did. Defaluted notes may be your answer. Here is a short video to explain how the business works