This is the first of a multi-part article on outside of the box real estate and real estate related investments. This month will describe a specific investment strategy, and next month will cover how to find these deals.
One of the perceived problems in real estate investing is that it takes a lot of money to be a participant. It is true that having a lot of money, or at least having access to it, is a distinct advantage. However, just like there are many opportunities available for traders and investors that don’t require a lot of money, such as Wholesaling, there are also opportunities for real estate investors, such as property tax auctions.
Real Estate Auctions are a little used but very profitable small money real estate investing strategy that focuses on old mobile homes, sometimes called Wobbly Boxes (WB). This is an investment strategy (not a trading strategy) that is short term and ideal for small self-directed IRAs, investors who are building their investment accounts, or any situation in which small amounts of money are idle.
In addition to the small capital requirement, there are several other reasons why investing in Wobbly Boxes can be attractive:
- The principal invested is recovered very quickly … typically within 3 – 6 months. This reduces risk because of the short time period in which your principal is exposed.
- Because of the quick capital turnaround, the principal is available for other investments. It’s a great way to keep money active.
- The interest earned, or yield, is (deceptively) huge, often in excess of 100%. Put into perspective, without busting out the HP10b, it is common for these deals to double your money in less than a year.
- There is no competition. None!
- It is almost impossible to find institutional financing for WBs, so you will be the only bank in your community. Without a WB investor, a potential Wobbly Box buyer must have cash.
- We can use the Deal Board to locate customers
- These deals are simple to understand and there is no third party closing agent. When a buyer is found for your WB, you can close the same day without any overhead such as title insurance, appraisals, etc.
- You can assess a small late fee, increasing your profitability
- You can charge a small fee for closing costs, which increase the profitability of the deal.
Here is a typical deal. You, the WB investor, purchases a 1983 14 x 52 wobbly box for $2500 cash. You resell the WB for $5000, but carry the paper (AKA: Owner Finance, or Tote the Note). Typical terms of the sale from you to a buyer are: $500 monthly payment, 0% interest and $500 down payment.
For the above example, the numbers play out like this: the WB investor paid $2500 for the property. At closing, she gets $500 as down payment. That leaves her investment in the WB at $2000. In addition to the down payment, she also owns a promissory note in the amount of $4500. At $500 per month, the note will take 9 payments to pay off. Beginning one month after closing, the monthly payments of $500 begin. Therefore, within 5 months of the sale, 100% of the invested capital is recovered, after which there are 4 payments remaining ($2000 total). Add it all up, and within 10 months of the sale, the WB investor has $5000 in her account. She doubled her money!
Anytime someone proposes to you an investment strategy that doubles your money in a year, you should be immediately skeptical, and that applies here. All investments have risk, and WB investments are no different. The risk to the WB investor in this example is $2000. The worst case is a loss of $2000. A reasonable question to ask is: “Am I willing to risk $2000 to double my money in 10 months”? If the answer is no, then this strategy is not for you. My experience with these deals is that first payment defaults are very rare. More typically, if there are defaults they come after 3 payments. Further, in the event of default, you get the WB back to resell. If the buyer doesn’t totally trash it, you can do it over again. If you take a total loss on one deal, you can be back to breakeven on the next deal. Regardless, from a risk-reward standpoint, you have to consider the worst case.
In my next installment, I will put these deals in context with OTA Real Estate’s Find-Analyze-Close process. Until then, keep finding!