You want to develop a business that allows you to sell to BOTH Investors and Residents (End Users), but I believe that it’s better to start with one over the other.
Most newbie investors don’t care who they sell their properties to and will market and design their deals in whatever way seemseasiest and fastest.
I’m going to show you how to plan before you make the offer so that the deal you have to sell makes the most sense for the buyerit is intended for.
If you learn to think about your buyer and your exit strategy BEFORE you make a deal with the seller, you will be miles ahead of your competition.
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Read Transcript for “Will You Make More Money Selling To Investors Or Residents?”
What is the best exit strategy to make the most money when selling properties, selling to investors or selling to residents? Here’s some examples of how to analyze deals and figure out which one is the most profitable.
Joe: Are you selling this property to an investor or are you going to sell it to an end user (someone who’s going to live there as a resident)? I sell to both and I think that they both make a lot of sense, but you need to structure the deal based on that.
Joe: It’s easier to sell to somebody on terms who’s an end user. If you’re selling to an investor, it’s easier to sell an investment property if the property is cheaper and it has a good return on its investment. You could sell the property for $1,000 and there are people out there that’ll buy $1,000 properties, but it may cost them more money in the long run and it may not be a good return. So what I find is if you’re selling to an investor, you want to make it as cheap as possible for them so that there’s a high return on their investment. By as cheap as possible, what I mean is if you could stay under $35,000 to $40,000.
Joe: There’s an awful lot of people out there who have that much money in their 401k which isn’t performing and that may be making 2% or 3% returns on their investment in a money market account or a mutual fund, or maybe God forbid – I know this has happened to a lot of you – where you actually lost a big chunk of your pension funds or your retirement funds. So it makes a lot of sense if you can go to those folks and say , ‘Look, I can get you 10-18%.’
Joe: I try not to sell anything under 14-15% annual return cash on cash return on investments to people. And I also try to get them other things like depreciation, long term appreciation on the value of the property, and then also buying the property under market value. I try to sell them under market value. So it makes sense on a lot of different levels to the investor, first of all because it’s possible for them to do it because it’s lower price. Secondly, it makes a lot of sense because it’s getting a higher cash on cash return.
Joe: A lot of these folks that are buying are looking for their retirement, and if they’re getting this money coming in every month, especially from something like rental property, which also makes a lot of sense particularly if it’s professionally managed and you’ve got a good manager handling it. If you can provide that turnkey package to an investor, there’s going to be a lot more investors who will be willing to buy that kind of property. And those are the types of properties that I sell – and those are the types of properties that I suggest that you sell.
Joe: When you analyze these deals, look at them with that in mind – ‘Can I sell this property to an investor and where is it going to be difficult for them?’
Joe: Let’s say I have a property and it’s valued at $200,000 but I’m able to get it for $100,000. I can still probably sell that property, but if I have to buy it for cash then I need to find somebody who has $100,000 and those people are fewer. There are still a lot of them out there; there are still a lot of people that can do it. But if I’m just selling a fixer upper and they can get it for 100 and its worth 200, if they sell it (and maybe they need to put $10,000 into it) that’s a good deal and that’ll make sense for a lot of people but you still have to be an active investor to do that.
Joe: If you have $100,000 to invest, there’s probably some places that you could put the money that would give you a better return than that type of deal. You may be stuck with that deal and if you’re fixing it up and cleaning it up and selling it and you’re going to sell it at a discount, you have to find a buyer who’s going to pay top dollar for it and be able to get a loan for an end user.
Joe: All of these things create difficulties and lower the value and the return on your investment. So it’s going to be less likely that I would turn to my investors and say, ‘Here, come buy this $100,000 property. It’s worth $200,000.’
Joe: The other reason is because it’s hard to know what the real value is on properties right now. There’s some debate out there about whether or not comps are valid at this point, because there’s so many foreclosure comps out there that are skewing the market. So you need to look at the market and say, ‘What is selling for market value that’s selling to a real buyer rather than an investor or selling because it went into foreclosure?’
Joe: Those foreclosures are creating a lot of problems right now in valuing properties. I can’t tell you honestly how much any of my properties are really worth right now because the comps aren’t showing the real value. If I were to sell them right now for their current comparable market value, I’d have a hard time justifying that to myself because I know that I would be leaving money on the table. And I don’t suggest that you do it either if you can hold on to the properties.
Joe: But if you’re just setting up the deal so that you can sell it or if you’re just setting it up so that you can flip it quickly to another investor, you’ll want to make sure that that deal makes a lot of sense.
Joe: So are you selling to an investor or are you selling to an end user? I just talked about what investors are looking for. Let’s talk about what end users are looking for. They need properties that are in good condition, typically – properties that they can move into now, properties that the payment on is no higher than market rent, and that that payment doesn’t require good credit and doesn’t require very much down payment. So if you can provide all of these things, you can sell the property in just a couple of weeks.
Joe: If we sell on lease option, there are very few properties that we don’t sell in 30 days. If we don’t sell them in 30 days, and we do the marketing that I teach, then almost all of the time, it’s because the monthly payment that we’re asking for is too high. We can inflate the purchase price of the property quite a bit, 10% to 20%, and like I mentioned in one of the previous videos, we’ll go from $350,000 to $500,000 on the purchase price and we’ll still find buyers for it because it’ll make sense for their situation, but we can’t raise the monthly payment above market rent.
Joe: If you do that, it makes it very difficult to sell. So you want to stay on track with that and try to get your profits on the back end or make your profit through your lease option fee, because you usually get 1% to 10% on a lease option fee. Typically, 3% is probably average on a lease option fee (if I were to make such a bold statement).
Joe: Alright, that’s the next part of this exit strategy matter – decide whether or not it’s going to be sold to an investor or to an end user or to a resident. I hope that helps.