Is creative real estate right for you or should you go the traditional route? You’ll discover the differences, the pros and the cons of both approaches and which one is right for you.
First let’s take a look at what each one looks like:
With traditional real estate, an investor…
- Buys investment properties on the MLS.
- Finds deals by calling up a real estate agent.
- Buys foreclosures that are listed on the MLS.
- Buys foreclosures at the foreclosure auction sale.
- Buys properties from wholesalers.
- Gets into bidding wars with other buyers.
- Uses big earnest money checks to get properties under contract.
- Puts down big down payments.
- Applies for investor bank loans.
- Gives loan underwriters their proverbial first born child.
- Makes tons of offers to get a few accepted.
- Constantly looks at deals, on the web and in person.
- Negotiates deals based on price.
With creative real estate, an investor…
- Finds deals by marketing for motivated sellers.
- Gets to the deals before anyone else knows about them.
- Has little or no competition.
- Works with sellers directly without agents involved in the purchase.
- Usually puts up very little earnest money (i.e. $10).
- Rarely needs down payments.
- Doesn’t fill out loan applications.
- Buys properties with owner financing.
- Takes over existing mortgages subject to.
- Makes several offers on the same property.
- Creates bidding wars when selling their deals to others.
- Turns every lead into money by assigning the bad ones to agents.
- Uses transactional funding, hard and private money.
- Rarely looks at properties unless to get it under contract.
- Negotiates deals based on terms, price or both.
The biggest challenge to creative real estate is acquiring the education. First, you have to get access to the right education. As usual, you get what you pay for so typically there is a cost associated with acquiring the right education. Second, having the right mentor or coach to help you along the way is critical to acquiring the right education. Third, you must carve out the time out of your busy life and take the action to actually learn from the education. This is where many people fall short. They want the amazing results creative real estate can give them but they aren’t able to follow through with acquiring the education (even if they have invested in the right materials and are working with the right mentor).
Another important point about creative real estate is that having just a little bit of money can go a long way. This can sound like conflicting information since a creative investor can oftentimes buy real estate without cash or credit, but there are costs associated with setting up and operating a small business. When I first got started, I ended up going homeless. Being in such financial dire straights made everything difficult. I couldn’t accept incoming faxes because I didn’t have a fax line. I couldn’t make long drives because of my lack of gas money. I couldn’t get motivated sellers calling me because I couldn’t put any money into marketing. Certainly the amount of money needed to successfully launch a creative real estate endeavor is not nearly as much as even the down payment required on just one traditional investing deal, but it is helpful for you to know that having a few bucks to invest in your fledgling creative real estate operation can make all the different in the world. In fact, for those who are in the financial situation I was in when I first got started (can’t rub two nickels together), I strongly recommend those people put creative real estate on hold for a short period of time and save up some money and then go back at real estate. Otherwise, it will feel like trying to walk down the street in a hurricane. Instead, patiently wait for the storm to pass before you begin your trek.
The biggest challenge to traditional real estate is getting access to the money; money for earnest money checks, money for down payments, borrowing money from banks and in some cases, the money to conduct renovations on purchased property. Although it is possible to get access to money through private individuals, most use the money they have accumulated over their lifetime, such as in a retirement fund or the selling of a business or an inheritance, along with leveraging their good credit and strong financial position to borrow money from banks. Although there is some education required to be effective with traditional investing, the traditional formula is relatively simple; hire a real estate agent to find potential deals, make tons of low offers, get one accepted, buy the property, fix it up & resell it or rent it out. Then, repeat. Creative real estate isn’t quite as simple and has many, many different facets so the education required is substantially more involved.
Which one is better?
In full transparency, I am a bit biased toward creative real estate because when I got started, I was homeless so I didn’t have much of a choice, I had to go the creative route. So I am a creative guy from the onset. But the traditional approach is powerful as well. For example, the traditional way allows an investor to buy a whole lot of property very quickly. A very recent trend in the marketplace involves Wall Street (large hedge funds and private equity firms) buying up single family homes at a very rapid pace. They are buying foreclosures in bulk as well as listed properties. Since now is the perfect time to be buying real estate (most experts agree that we have hit the bottom of the market), for those organizations that have a whole lot of cash, taking the traditional route allows them to buy thousands of properties very quickly.
In addition, when you go the traditional route, you can buy property for long term wealth building purposes at a lower amount than the creative approaches of owner financing or subject to. The reason is that typically, a seller will either give up favorable terms for you as the investor in exchange for a higher sales price or the seller will take a lower price in exchange for all cash in their hand quickly.
Also, with absolute auctions, there are cases where a traditional investor can get a tremendous deal by being the high bidder when there are little or no other bidders.
Creative real estate has its own set of benefits too. Most importantly, you can make a whole lot of money and build a fortune with very little money and/or no credit. But also helpful is that creative real estate is consistent whereas traditional investing ebbs and flows with the changes in the marketplace. When the market is booming, there are less traditional deals. When the market is depressed, there are tons of traditional deals. With the creative approach, the source of deals is this customer called a motivated seller. A motivated seller is created by extenuating circumstances that are typically external to real estate; life challenges such as divorce, illness, financial problems, death, job transfer, downsizing, upgrading, and so on. These are things that humans will be dealing with in good times and bad for centuries to come.
Also worthy of note is competition. There is very little competition in the creative real estate realm unlike the traditional arena. Interestingly enough, traditional investor competition benefits creative investors because they can sell their deals to the traditional investors. For example, while traditional investors are panicking that the sky is falling because Wall Street has entered the game, creative real estate investors benefit from the hedge funds getting in the market because they can flip their deals to them. (Now if all the traditional investors figured out how the creative investors were doing what they were doing, then those creative ones would be in trouble!)
Ironically, now that I am in a financial position to be a traditional investor, I still prefer investing in real estate creatively. I would rather pay a little more for a long term hold property than put my name on a loan. Andrew Carnegie said in his autobiography written over 100 years ago that you should never personally guarantee a business loan. I consider a mortgage on an investment property a business loan so applying Carnegie’s rule, I avoid getting bank loans for the properties I purchase. And as you will learn from my discussion on Flipping Houses, I would rather wholesale rather than rehab and resell.
Which one are you (or which one do you want to be)? And which one do think is better?