First, understand that there is inherent risks in real estate investing. A wise investor will do everything possible to manage, avoid and transfer their risks when buying investment property to minimize the risks. There is only one way to have no risk…..don’t take any chances!
“The biggest risk is not taking any risk… In a world that’s changing really quickly, the only strategy that is guaranteed to fail is not taking risks.”
The Risk Level Diagram
The greatest risk with real investing is when you buy, rather than when you sell. This Risk Level Diagram list the real estate investment risk levels when buying properties. It is arranged with the lowest risk at the top which is to use a Realtor. The highest risk is at the bottom, buying government surplus properties which can be among the most risky real estate purchase one can make.
Generally the least risk is buying retail from a Realtor™. Most agents are paid on straight commission so they are trying to sell properties at 100%, or more, of the properties retail value. This pays them the highest sales commission, and it leaves little or no room to profit as an investor – unless your plan is to rent and hold for future appreciation. The exceptions, are Realtors that specialize in bank owned foreclosures and working with real estate investors. You can view a previous post on how to work with Realtors as an investor. You also access a nationwide database of foreclosures here.
The next higher risk would be to buy directly from the owner – “For Sale By Owner” (FSBO). There are many FSBO’s who are seeking full retail price and will only discount the 6% agents fee for selling it themselves. Where there are other FSBO’s who are motivated to sell at a discount.
The next and a greater risk, are the bank owned properties known as REO’s (real estate owned). Properties become REO’s as a result of a foreclosure for non-payment of the mortgage. The majority of these properties are being sold by real estate agents who specialize in these types of properties. Many are also sold at public auction. A term you will hear often is “short sale“. This is where the bank has agreed to sell for less than what they are owed. Short sales can take a while for banks to accept and finalize. They can be quite profitable some deals as much as 50% off the market value. If this is your area of focus, it’s important that you learn the ins and outs of this type of investing. Also be prepared for the process taking a while.
I would group”wholesale” properties being offered by other real estate investors into this category. Only because they are more risky than buying a FSBO and less risky than the next category tax sale properties.