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What is the Difference?
Instant equity is, quite simply, purchasing a property for less than the open market would pay for that same property. Instant equity is not, as is reported at times, purchasing a house that was at one time worth $400,000 for $200,000. In an extreme downturn in the market such as 2008 in the US, many properties lost half their value. A property previously worth $400,000 may be worth even less than $200,000 in this kind of downturn. To truly realize instant equity an investor must spend less than a property is currently worth. Meaning that a property is, today, worth $400,000 on the open market and the investor purchases this property for less than $400,000. While some believe this impossible and others believe it in some way deceitful or wrong, it is neither... I will explain later in my tips section.
Forced equity is when by the end of effecting some degree of change, small or large, to a property that property is worth more than before the change. An example is if you have a house that has had a lady with 30 cats who has lived in the house for some time without cleaning or having enough kitty litter and the investor purchases that house and cleans it up by simply shoveling out the mess, pulling up and redoing the flooring, and repainting the interior. That investor has probably spent less than 10-15k on the clean up but can probably sell the property for at least 30k more than what s/he bought the property for because people are now willing to live in it and it looks and smells good without any extra effort. In this example using imaginary numbers pulled from a hat the forced equity would be 30k with 15k of that being out of your own pocket.
I'll give a quick tip for each category of equity. There are many more, but these are tips anyone can use instantly in their investing. For instant equity the best tip I can give is to meet the sellers and get to know them. Once you have an in depth understanding of why someone is selling and what that individual or couple most needs you can often meet those needs and receive income (a drop in purchase price) for doing your job well. An example is when an older person wants to downsize and needs help moving because s/he doesn't have any family in town. By simply offering to help move this individual the seller will both trust you more and may be willing to lower the sale price of the property. Is this taking advantage of the individual? In my opinion you are doing quite the opposite of something deceitful or underhanded. You have offered a service very few others would be willing to offer (giving this individual what they believe they most need) for a price. This is simply good business, but the secret to doing great business is listening well. If you don't know how to truly listen to someone, you can never fully meet their needs.
The second tip is for forced equity. I already mentioned the cat lady previously in this post (it happens more often than you think) and how new paint and flooring can greatly help with reselling a property. Another way to force equity is doing other quick cosmetic touch-ups. Cosmetics in a house are often the biggest selling point for families who do not want to deal with anything that may require someone who is 'handy'. Other ideas: add a suite to the property, add parking stalls for a multi-unit property or add laundry or storage space all of which can bring in more money month to month as well. These ideas are off the top of my head but hopefully start everyone thinking on how to plan property acquisition in a different way. What types of property will I be looking to purchase myself? Properties that need simple cosmetic upgrades and can easily profit from upgrades that also bring in cash flow. While extremely simply, don't overlook these ways to manage risk by building equity in your property.
A quick summary of this dimension is that if you purchase a property with low demand and, for just a few dollars, transform it into a property in higher demand, you are forcing equity. If you listen to people's hearts and perceive their needs and then meet those needs, you will also be paid more for your services in the form of lower purchase prices for properties. Put in this way, rather than being deceitful or underhanded you are actually simply providing better quality business and being paid for that service.
Forced equity is when by the end of effecting some degree of change, small or large, to a property that property is worth more than before the change. An example is if you have a house that has had a lady with 30 cats who has lived in the house for some time without cleaning or having enough kitty litter and the investor purchases that house and cleans it up by simply shoveling out the mess, pulling up and redoing the flooring, and repainting the interior. That investor has probably spent less than 10-15k on the clean up but can probably sell the property for at least 30k more than what s/he bought the property for because people are now willing to live in it and it looks and smells good without any extra effort. In this example using imaginary numbers pulled from a hat the forced equity would be 30k with 15k of that being out of your own pocket.
Tips on Instant/Forced Equity
I'll give a quick tip for each category of equity. There are many more, but these are tips anyone can use instantly in their investing. For instant equity the best tip I can give is to meet the sellers and get to know them. Once you have an in depth understanding of why someone is selling and what that individual or couple most needs you can often meet those needs and receive income (a drop in purchase price) for doing your job well. An example is when an older person wants to downsize and needs help moving because s/he doesn't have any family in town. By simply offering to help move this individual the seller will both trust you more and may be willing to lower the sale price of the property. Is this taking advantage of the individual? In my opinion you are doing quite the opposite of something deceitful or underhanded. You have offered a service very few others would be willing to offer (giving this individual what they believe they most need) for a price. This is simply good business, but the secret to doing great business is listening well. If you don't know how to truly listen to someone, you can never fully meet their needs.
The second tip is for forced equity. I already mentioned the cat lady previously in this post (it happens more often than you think) and how new paint and flooring can greatly help with reselling a property. Another way to force equity is doing other quick cosmetic touch-ups. Cosmetics in a house are often the biggest selling point for families who do not want to deal with anything that may require someone who is 'handy'. Other ideas: add a suite to the property, add parking stalls for a multi-unit property or add laundry or storage space all of which can bring in more money month to month as well. These ideas are off the top of my head but hopefully start everyone thinking on how to plan property acquisition in a different way. What types of property will I be looking to purchase myself? Properties that need simple cosmetic upgrades and can easily profit from upgrades that also bring in cash flow. While extremely simply, don't overlook these ways to manage risk by building equity in your property.
A quick summary of this dimension is that if you purchase a property with low demand and, for just a few dollars, transform it into a property in higher demand, you are forcing equity. If you listen to people's hearts and perceive their needs and then meet those needs, you will also be paid more for your services in the form of lower purchase prices for properties. Put in this way, rather than being deceitful or underhanded you are actually simply providing better quality business and being paid for that service.
'You Can't Touch This'
Please bring another investment class that can do what real estate can do. I actually implore anyone to find something similar because I would love to diversify in other investment classes. Yes, purchasing and selling businesses does have the same benefit, but other than business I don't know of anything else. This is an area where real estate really does start leaving other investment classes in the dust. So far I have covered 8 dimensions of real estate and, if you remember my original premise, while some investment classes can appear to compete in some of these dimensions there really isn't anything that an 'average joe' can get into with just a little bit of cash and knowledge and set up a retirement that will outdo all of their colleague's and friends' retirements by touching on each one of the 8 dimensions covered so far. This isn't even the end! We haven't covered another three that immediately jump to mind and there may be more before I'm finished this series. Stay tuned for the last few blogs in this series and go back to previous dimensions if you've missed something.
Here's to your future of risk-averse investing!
If you would like to learn more about investing in real estate please
contact me at the email address listed at the beginning of this article
or go to my website at: www.akerahomes.com/investing-in-real-estate.html
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