A recent conversation with a new investor got me thinking about starting out. It has been a long time since I was a newbie, and while things have changed a whole lot, some things will always be the same. If you aren’t going to do the rehab work yourself, you will need to find a contractor. This is only slightly easier than finding Jimmy Hoffa. Unless you have a pile of cash sitting around, you will need to secure funding.
7 Productive Actions to Take While Searching For Your Next Property
1. Find an investor-friendly agent.
A residential real estate agent is typically working with retail buyers. They may not understand your focus or your criteria. Finding an investor-friendly agent can help you build your business because they may have a network of clients who are investors and are always looking for the next deal. An investor-friendly agent will build a reputation of being able to sell properties that others can’t and may even be able to help connect you to another client for things like joint ventures. At the very least, an investor-friendly agent won’t balk at writing up lower offers and making offers on numerous properties.
Remember, you can have more than one agent bringing you deals. If your agent doesn’t understand investors, find one who does.
2. Drive for dollars.
When you are first starting out, having a small, specific area to target can help you get a grasp of what is going on in that market. Rather than learning all the neighborhoods of your town/county/state, you can focus on one area and really learn the ins and outs. One of the best ways to get started is to “drive for dollars,” or drive around and look at the houses in your target area. Even better than driving is getting out of your car and walking. Yes, it takes longer to walk a neighborhood, but you get a more in-depth understanding of the properties and their location. Talking to the neighbors can yield an enormous amount of information.
Look for things like tall weeds or grass, weathered door hangers, and stickers on the door informing of code violations or utilities that have been turned off. Check out the status of the roof, siding and window panes. Old windows, metal siding and curling shingles can indicate a lack of interest in the property.
3. Write an amazing yellow letter.
Driving for dollars is a technique you can use to identify properties that may fit your criteria. But what do you do once you find a property you like? You send them a letter, telling them you want to buy their house. Do you have an amazing letter that conveys your interest?
I have seen recommendations for yellow letters. Some people take an offensive approach: “Your property is ugly and outdated. Here is a list of all the things wrong with it, and you should sell it to me at 60% of its value.” I don’t recommend this approach or use it myself. I have a disconnect to real estate — I have never lived in one home for more than 5 years in my entire life. A house is just a place to sleep. But there are people who have lived in one house their entire lives, and it is hard for them to sell. They see emotional value rather than monetary value. By telling them their house is gross, you are offending them from the outset, and you will have to fight an uphill battle to buy their home.
I tailor my yellow letter to each individual house. I mention what I like about the property and spell out how I can save them real estate agent commission, even though I am a licensed agent. I offer generous move-out terms and put the ball in their court.
The area I target has a lot of older homeowners, so I make sure I give every conceivable way to contact me. Phone, email and street address. I have had phone call responses, and one couple who lives about 12 houses down from me even walked over to my house to talk to me about their home. It turns out they built the house, have lived in it since 1968 and raised all their kids in that house. How do you think they would have reacted to a letter telling them how ugly and outdated it is? They don’t really have plans to sell right now, but they are keeping my letter for when they do.
4. Build up your credit score.
Like I said earlier, unless you have a giant pile of cash sitting around, you will probably need a loan. Lenders are happy to give you a loan, provided they feel you will pay it back on time. Your credit score is built on your past financial experiences, and the higher your score, the more confident a lender is that you will give them their money back.
When was the last time you looked at your credit score? You are entitled to one free copy of your credit report every calendar year from each of the three credit reporting agencies. They are required by law to give this to you and have set up a website to comply with this law. You can choose to get the reports from all three agencies at once, or space them out every 4 months to continually monitor your credit. Either way, it is a good idea to comb through the report, making sure all information is correct.
If there is any incorrect information, dispute it immediately. Stay on top of the process to ensure than the information is removed from your report.
Look at your open lines of credit. Do you have a good mix of credit lines, like mortgage, car loans and credit cards? If you have a significant amount of credit card lines open, you may appear like a higher risk. Do you have cards that you don’t use? Close them out. One exception is to keep the card you have had the longest, as it establishes the length of credit history. A longer history makes you look better, as long as that history is positive.
5. Establish relationships with lenders.
Most mortgages are sold as investment vehicles called mortgage-backed securities. Every mortgage that is sold has to comply with Fannie Mae/Freddie Mac regulations. But not all mortgages are sold. Sometimes a smaller lender will keep a loan in-house, known as a portfolio loan. Portfolio loans have different criteria — pretty much anything the lender wants. Having a relationship with a local lender who offers portfolio loans can be a huge asset to your business, but that relationship doesn’t happen overnight. Start by opening a simple account with the lender: checking, savings or both. Sign up for every free program they offer, like bill-pay and direct deposit.
Not everyone invests in real estate through a business entity like an LLC, but if you have one or are considering creating one, get a business account at your local bank as well. Talk to your business banker, and let them know what you do and what you are looking for.
6. Find a contractor/property manager.
If you are purchasing properties that need to be renovated, start looking now for a good contractor. Tell absolutely everyone you come across what you are looking for. There are good contractors out there who do good work, don’t cut corners and deliver what they say they will deliver. They are just very difficult to find. Start looking now, and you may actually be able to find one before you need them. The same thing goes for a good property manager. They are only slightly easier to find than a good contractor.
7. Join a local REI group or meet up.
Nothing can replace the personal connections you make at a face-to-face meeting. Find a local real estate investment group, and attend a meeting or two. Network with other investors in your area. They may have recommendations for you regarding agents, contractors, title companies, etc.
There are many steps that are transaction-specific and cannot be done until you are under contract on a property. But there are lots of things you can do while you are looking for your next deal.