If you’re looking for bargains, even super-bargains,
you ought to be looking for either equity at a discount
or cash flow at a discount.
That’s it!
This is the “E” in P.E.T.I.O., the acronym that I use to
set up and organize virtually every deal that I look at.
While I think there are other types of equity, here is an
Overview of the major types that I commonly see:
• Found
• Negotiated
• Created
• Debt reduction
• Appreciation
Here are a few thoughts on each of these points:
Negotiated equity – When you buy right, taking into
consideration the expenses related to reselling, say 10%
for our purposes, buying a property with a $300,000 after-
repaired value for $250,000, sounds like a reasonably good
bargain. However, if you intend to sell in the short term,
that won’t leave you with enough profit to pay your holding
costs. You’ll need to either find a better deal or more ways
to extract additional profits.
Found equity is simple: When you acquire a property, really
any asset, for free or nearly free, that would appear to be a
super-bargain. Yet, there are scores of properties that their
owners are willing to give you, but are they really bargains?
Not if they have large mortgage loans on them.
Not if they need major, extensive renovation, cash out of pocket
and your budget is blown by a multiple of two or three times what
you had allowed for. I’ve actually had this experience occur to me
not just once, but several times.
Created equity can be realized when you add value. While most of
us think in terms of improvement as in renovation, it might be
something that makes it more functional or just appealing to your
target end user (buyer or tenant).
Several friends of mine have developed skillsets that they’ve
Monetized in an unusual ways.
One investor focuses on buying fire damaged houses.
Another has a knack for houses with cracked slabs and bad
foundations.
A close friend of mine, a spec home builder, has an uncanny
eye for land use and can see where lots can be built from either
existing larger lots, splitting them into smaller lots or even buying
raw land and obtaining the entitlements (zoning changes, etc.).
Influencing city building officials is not how I want to make my living
or add value
Debt reduction or elimination – This is really all a short sale is.
However, I’ve done well by using my skills as a title technician to
Either clear title of debt or get reductions by other secured lenders
or lienholders. There’s nothing like making money by moving a few
pieces of paper around
Equity created by time – This is can be the most difficult equity to
obtain because it requires both patience and the staying power of
making payments when cash flow may be low or non-existent.
I think most people understand both the concepts of appreciation
and amortization. However, have you ever thought about buying
someone else’s resulting appreciation and/or amortization? That’s
what you do when you acquire a property subject to an existing
mortgage with a well-seasoned, rapidly amortizing mortgage.
Hope your perspectives are challenged by these thoughts.
Stay hungry but feed your mind.
