As a hobby I dabble in real estate. It is quite different than day-trading stocks in many respects but it shares some important characteristics, the most important of which is that to consistently make money you need to have some edge. I wrote about the importance of having an edge in my classic blog post So You want to be a trader? The potential edges you can have in real estate are similar to the potential edges in trading. Here are the most important:
- Be able to buy when others are not able or willing to buy.
- Know what others don’t know
- Have some special skill or combination of skills that others don’t have
The key to making money in real estate is to buy low — every other way you can make money in real estate is a lot harder. Over the last 8 years it has been possible to buy lots of houses / condos at distressed prices from banks that just wanted to get rid of the properties. To buy many of these properties, you need to be able to act fast and often you need to be able to pay cash. Also, a bank may not want to deal with the hassle of evicting the borrower they foreclosed upon so the buyer needs to be willing to evict that person if necessary. Also, buying a property that is occupied means not being able to inspect the property, which increases risk. There may be title issues with the property. Many bank-owned properties are auctioned on websites such as Auction.com or Homesearch.com.
The first house I bought for speculative purposes I purchased last May. The house had had only one owner and the former owner was still living in the house. The house was sold in a cash-only auction. The bank selling the house was not a local bank so it did not know the local market. Furthermore, the auction incorrectly listed the square footage of the house and omitted the completely finished daylight basement which easily added $15,000 to the value of the house. Everything went right with the house, including the bank paying the former owner to leave just days before I closed on the purchase. The interior was in great shape except for worn-out carpets. I ended up renting out the house for most of a year, having it fixed up (with me doing some of the simple work and paying contractors to replace all the carpet, install a granite countertop in the kitchen, and do some landscaping).
After everything went right, I ended up selling the house just over a year after I purchased it for a profit of about $15,000 to $20,000. That is not bad but the house also sucked up a good chunk of my free time and I probably could have made more money just spending the time working on improving my trading.
One good thing about buying such distressed bank-owned properties is that there is minimal due diligence possible and it can easily be done online — so there is little cost to investigate and put in lowball bids on many properties. And while lowball bids will fail most of the time, they will occasionally work, especially if the person in charge of selling the property is motivated to just sell the property as quickly as possible. In fact, my winning bid on the house I flipped was below the reserve price in the auction.
The same thing that can lead to getting a good price can also lead to large losses — just like in trading those without skills or who take too much risk will lose money.I came upon a few interesting condos in Chicago that are being auctioned off this weekend so I started my due diligence. One property I came across was