Why buy foreclosures?
Because you can save or make money doing it!
- As an owner occupant, you can buy more house for your money, have instant equity, and build long-term wealth.
- As an investor, foreclosures offer the most target rich opportunities for making money in Real Estate.
If you spend any time researching the subject of foreclosures, you will undoubtedly see dozens of self help programs advertised. Surely there are lessons to be learned in those programs but don’t be duped by the “get rich quick” sales pitch. To make money in this business you need to be committed and you need the help of an experienced foreclosure Real Estate professional.
Buying and selling Real Estate for profit is a simple exercise in mathematics. It is no different than any other type of commerce where merchants acquire goods at a wholesale price, add in their handling costs and value-add enhancements, and sell them to a retail market for profit. To do this, you need to have sources of goods, purchase them at a wholesale price, and resell them in the retail market at a profit. Real Estate is a commodity and Foreclosure properties can be the wholesale supplier for you.
For investors and homebuyers alike the foreclosure market provides an abundant supply of properties. You will hear two types of foreclosure purchases discussed in today’s market, pre-foreclosures and post-foreclosures.
The pre-foreclosure strategy is to purchase someone’s home just prior to foreclosure. Unfortunately, rarely are deals found here. In reality, if the seller had any positive equity in the property they would be able to make arrangements to refinance their loans drawing equity out, or they would be able to offer the property at a price substantially under the market, in which case the home would sell quickly. Finding pre-foreclosures is a simple as reading your local newspaper and searching for postings. Advocates of this method will have you calling the owners and attempting to work out a deal to purchase the home before foreclosure. Sounds good, but even if you can get the owners to talk to you it is very difficult to sit across the table from someone who is losing their home and negotiate a deal. Remember, there probably is no positive equity in the house anyway.
The second pre-foreclosure strategy is to attend the “auction” on the courthouse steps every month. This is also difficult and risky, and it requires you to pay cash for the purchase at the time of the auction. In these purchases you may be acquiring a great deal of peripheral liability and in many cases encumbrances to a clear title on the property. Encumbrances such as back taxes and liens are often attached to the property. Also, in most cases you are not able to fully inspect the dwelling prior to purchasing it so rehabilitation costs may be much higher than anticipated leaving you with a costly mistake. Additionally, if the property is occupied at the time of purchase it is your responsibility to evict the occupants after the purchase, and that is not a pleasant experience. As well, upon their departure the occupants can do considerable damage to the property on the way out.
There is an easier and safer way.
These are properties that have been foreclosed on and reverted back to the lender. When you purchase these properties you are assured a clear and marketable title free of encumbrances or back taxes and you are provided the opportunity to inspect the property prior to purchasing it. In many cases these homes are actually sold for less than the combined loan amounts and significantly below market value. Here is where the real bargains exist.
How do I buy?
The most important decision you can make is choosing a Real Estate brokerage firm to help you. You need to work with a firm that hires and trains competent agents who specialize in finding great deals and understand the foreclosure market. There are many sites that you could use for your foreclosure search, but in order to have the most up-to-date & reliable source for finding deals on foreclosed Real Estate I recommend you check out this site. This website is the Internet arm of Jo McDaniel & Associates, LLC and provides clients the data they need stay in touch with the available foreclosure inventories. Jo McDaniel & Associates, LLC is a full service Real Estate brokerage firm that provides discount service options to those looking to sell real estate in Southeast Metro Atlanta. I specialize in listing Bank Owned (REO) properties and working with investors looking to buy and sell residential property. You must purchase some foreclosures through a Real Estate agent so it makes good sense to work with an agent and brokerage firm that specializes in this market. We hope you will choose us.
What is a foreclosure?
In the Real Estate market there are four basic categories of foreclosure properties.
- Government Owned
HUD – Housing and Urban Development – These are home loans that were backed (insured) by the US Government. When the loans go into default the properties are conveyed to HUD and they are made available to purchase through HUD certified brokers. HUD utilizes a special blind bid process for the sale of their inventories. Once a property is released for sale, bids are entered for purchasers by their HUD certified agent via a computer bid sheet. There is an initial offering period when bids are only collected but not considered. At the end of that period all Owner Occupant offers are reviewed. HUD does have some minimum acceptable prices they are willing to accept regardless of the bids so it is not simply a matter of the highest offer is accepted. HUD will also review all of the Owner Occupant bids before considering any of the investor bids. If no acceptable owner occupant bid is received then all investor bids received during the initial offer period are considered. If no acceptable bid is received at the conclusion of the initial offering period then additional bids will be reviewed and considered daily.
- VA – Veterans Administration – Much like HUD properties, these are special loans made available to US veterans and are backed by the US government. Once foreclosed on these properties are listed with a broker and marketed through traditional Real Estate channels.
- Secondary market foreclosures – These are usually Fannie Mae and Freddie Mac owned homes. Fannie Mae and Freddie Mac are portfolio home loan underwriters. These properties are placed with a listing broker and are marketed through traditional Real Estate marketing channels. In most cases the transaction is very similar to the traditional process of contract negotiations but require a host of additional addendums and exhibits to a standard Purchase and Sales contract. The buyer’s representative (selling agent) drafts an offer to purchase (Purchase and Sale Agreement) and presents it to the listing broker who represents the seller (the lender). This offer is reviewed by the portfolio manager or committee who will accept it or present a counter offer.
- Bank Owned homes – These are loans that are originated through local and national banks and are held “in-house” with the bank. These properties are typically listed with a listing broker and marketed through traditional methods. Although every bank will operate differently, the process is usually in line with the traditional “offer and counter offer” process.
In each of these processes there are a number of nuances not found in traditional Real Estate transactions. The process is usually complicated and requires the skills of a Real Estate professional with training and experience in foreclosures. If an agent is not experienced in placing bids and dealing with the government red tape the buyer is not likely to have a successful purchase. It is important that buyers utilize a foreclosure specialist when purchasing foreclosed properties.
How to buy foreclosures?
Owner Occupants - As an Owner Occupant, your goal is to buy your home for below market value. In many cases the home will need some work to make it right for you but if you can look through the cosmetic distress, you will find great deals. The reason most foreclosures are not being marketed at retail prices is because they need a little TLC (Tender Loving Care). If you are prepared to give the place a makeover you will end up with a real bargain and a great way to build instant equity and wealth.
Investors - As an investor, your goal is also to purchase houses below their market value. In there simplest forms there are three basic investment strategies for Real Estate. You can buy properties below market value, rehabilitate them and resell them at a retail price. You can purchase them and hold them in a rental portfolio while they appreciate. Or, you can wholesale properties. It is a cash now or cash later concept. In many cases we find investors will pick one or two strategies to implement in their investing business. Either way, the focus is on purchasing the property for under the market value.
- Rehabilitation Resale
Do not confuse this with the politically incorrect term and illegal actions of “Flipping”. “Flipping” is when people, usually the seller, a “straw buyer”, and an appraiser, collusively conspire to defraud lenders for loans only to default on the loans intentionally. This is not what you are doing. It is not illegal to purchase Real Estate under the market value and sell it for profit.
Purchasing foreclosures as properties to resell is a great business opportunity. Unlike the stock market, Real Estate is tangible and, with the access I, your real estate professional have to databases, the true market value is relatively easy to determine. As well, the Real Estate market is much less volatile and rarely declines in value. Therefore, it becomes a simple matter of finding the property and backing into the numbers. Here is a simplified model of how to work the numbers.
Purchase price of property = $150,000
Rehabilitation cost = $3,000
Holding costs (3 months interest on $153,000 @ 5%) = $1,913
Acquisition cost (closing costs) = $1,400
Total cost of project = $156,313
Market value of property = $170,000
Profit = $13,687
- Rental Properties
Much of the same model is applicable to purchasing rental properties but the one big difference is how you finance them. Although you still want to purchase rental property under market value, you may be inclined to pay a little more for them based on their location, rent ability, and potential future value. When working with rental models use what is called the Internal Rate of Return (IRR). Simply stated, this is the appreciation (future value), plus tax benefits and revenue from rents, less your costs of ownership. Even if a property breaks even on cash flow it may still be a very good long-term investment or retirement vehicle because of the other IRR factors.
- Wholesaling Properties
A wholesaler in a nut shell puts property (normally distressed property) under contract and assigns or resells the property to another investor. The investors either use cash, lines of credit, or hard money loans to close on the deal. This allows quick closings on properties that sometimes need extensive repairs. This can be a tricky strategy to use but one that can allow you to control real estate without ever owning it in most cases.
You can also purchase foreclosure properties using this method but you will have to have do a simultaneous closing because banks will not allow assignments. For reasons relating to mortgage fraud, some title companies will say that they can’t do a simultaneous closing, you can do a double closing which will call for “transactional funding.” This is money that companies let you borrow for a few hours or a few days to get your deal done.
Some general rules of thumb:
- If you can make $10,000 per transaction then make the buy. As you become more comfortable with the process you can incorporate a number of variables into your model such as total amount of purchase, amount of rehab needed, size of home, etc. But until then, you really cannot go wrong with this simple approach.
- Do your homework when it comes to banking. Mortgages are not intended for a short-term resale property. You should spend some time working with bankers building relationships. In the beginning you will not be offered the absolute best terms because bankers will not have a comfort level with your ability to follow through on this project. Remember, bankers are rarely recognized for the hundreds of good loans they make each year, but making just one bad loan can negatively affect their career. It is their neck they put on the line with every loan. If you build a proven track record and a solid relationship your terms will get more lucrative in time.
- Don’t expect to hit home runs with every deal. If you spend all of your time searching for the big score you will pass on ten deals where you could have made money. After all, five $10,000 deals are worth more than two $20,000 deals, and it will probably take you about the same amount of effort to find the two $20,000 deals as it would the five $10,000 deals.
- Stick to the numbers. Don’t get caught up in your own tastes in homes. It doesn’t matter if you would not live there. It is the perfect place for someone else. Look at the market value of the property, figure your costs and profits, and make your decision based on that.
- If you rehabilitate the property, don’t get carried away with customizing it. These projects have a way of becoming personal masterpieces. Get the property back into marketable shape and sell it. It’s nice to add little touches but only if it will provide a return on the investment of time and money and helps sell the property faster.
- Don’t be afraid of more expensive homes. There are fewer investors willing to reach for these therefore your purchasing competitors are fewer. Remember, there are retail buyers for almost every price point.
- Foreclosures have usually been mistreated cosmetically. They have good bones but bad skin. Look through this and simply plug your rehabilitation numbers into your model. The uglier they are cosmetically, the better the deal usually is. Remember, you are uncovering a diamond in the rough.
- Don’t try to do all of the work yourself. In many cases your time is better spent working with your Real Estate professional, your banker, and your primary income-producing source than it is pulling out carpets and painting walls. Unless you enjoy that kind of thing, in which case you can consider it therapy.
- Be patient but do not hesitate. Your patience will be tested, as you will not win every property you bid on. As well, don’t hesitate and miss out on good deals. Good deals move quickly and you are not the only buyer looking at them.
- Use a Real Estate professional. There are reasons why every state in the country requires licensing of Real Estate agents. Working without a Real Estate professional is like representing yourself in a legal trial - not a good idea. Plus, they have access to valuable information you do not.
- Have fun with it and do it honestly. Life is way too short to be miserable or dishonest.
Why use a foreclosure expert?
Regardless of what type of Real Estate transaction you do, it is highly recommended that you rely on a Real Estate professional for assistance. Real Estate transactions are more than just finding a home. Professional agents will help you find the home, provide market research, help you negotiate the best deal possible, and avoid all of the legal pitfalls that loom during the transaction. There are good reasons why every state in the nation requires licensing for Real Estate agents and brokers.
Why should you choose a Jo McDaniel & Associates, LLC professional? Most Real Estate agents live and work in a completely different arena and simply do not have the experience or training to help you make good purchasing decisions. Foreclosures are a unique segment of the Real Estate world. The purchase can be complicated and you can miss out on good deals if not handled properly. For investors and owner occupants alike, the ultimate goal is to buy for less and get what you want.
Jo McDaniel & Associates, LLC Real Estate professionals are experts and receive specialized training in foreclosure transactions. With their help, you will make better decisions, stay out of trouble, and make more money.
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