OJ Simpson, the Real Estate Market and You

What does OJ Simpson have to do with the real estate market?

Absolutely nothing, but I just wanted to get your attention.

In the current real estate market, it's all about getting the attention. Let me tell you a quick story. I had an investor friend of mine, who had purchased a home in Riverside, California around December of 2006.

His intention was to bring it up to code and then sell for a $40,000 net profit after costs. Due to unforeseen, circumstances, he took longer than his usual 2 month-turnaround and was not ready to put his investment up for sale until 4 months later.

As you all know, 2007 has not been kind to sellers of homes and in particular investors. His house just sat for months, without any offers.To an investor, an idle home can eat up your profit in a hurry. By the time he called me, he profit had been mostly eaten up by holding costs and he was on the verge of going into the negative. Over lunch he asked for my advice.

I looked a his numbers and suggested he do two things. The first thing I told him to do, was to contact several of the top agents in his area and offer them 4% commission if they brought a buyer to them. (His home was not listed in the MLS)

After I helped him get back on his chair, I explained to him that agents are motivated to show homes that will pay them more. I also advice him to list on the MLS even if he did not want to be represented by anyone. He has been in investing for 3 years now and rarely used an agent, unlike me.

In any event, I also told him to offer full owner financing with only 5% down. He could then season the note for 3-6 months and then sell the note at roughly 92% of the face value of the note.

So after I helped him unlodge the food stuck in his throat, I expalined to him that due to the current "credit crunch", the pool of buyers was somewhat limited. By offering owner financing, he could increase the pool.

The strategy was to offer good terms, but this time the sales price was to be on the upper side of what the market was supporting. Initially, he had offered his home for $425,000, but we then raised the price to $475,000. The terms of the note was to be 5% at 8% interest only. He also decided to carry a 2nd straight note @12%. No payments due until the end of the term of the 2nd note, which would be 5 years. He opted to give any agent 3.5% if they would bring him a buyer.

Here is how the deal went:

• Sold home for $475,000 (Originally purchased for $337,000 plus $40,000 in renovations and holding costs)
• Commission of $16,625
• First TD of $400,000 sold institutional note buyer for $368,000.
• Second TD of $51,250 sold to buyer of home three months later for $35,000
• Total proceeds from sale $403,000Total costs of sale $393,625Total profit $9375

Granted he did not make the profit he had projected, he still managed to turn a loss into a profit and learned a good lesson.

Don't tell me you missed the lesson? Remember OJ Simpson? Remember I said in real estate it was all about getting your attention? Is it clear now? I hope so.

Happy selling.