ADVICE ON INVESTING IN FORECLOSED PROPERTIES

INVESTING IN FORECLOSED PROPERTIES So, you want to make a killing by buying homes that are in foreclosure---on the cheap---and flipping them for a quick profit. Such a deal---taking advantage of people who are losing their homes because they couldn’t make timely payments on their mortgages. Innumerable home loans (nicknamed “sub-prime”) are flooding the housing market. The banks/lenders have to take back the houses and try to sell them to recoup their losses on the defaulted loans (which probably shouldn’t have been made in the first place) Do the words “anxious seller” come to mind? And if so, might you be an anxious buyer, looking to grab sweetheart deals from overloaded lenders, and turn some quick profits? Buying and selling foreclosed properties has long been a favorite in the savvy real estate investors’ book of tricks. As with any kind of real estate investment, success requires skill, capital, patience and a keen knowledge of the local market. Know well the primary rule of investing in real estate: The Expert Profits at the Expense of the Novice. In foreclosure dealings much of the profit will go to those hucksters who offer you “free” seminars on Valuable Secret Ways To Make Huge Profits Buying and Selling Foreclosed Real Estate. Some of the ways they can profit: 1) After the free seminar they’ll sell you overpriced books and DVDs which repeat what they’ve already told you in the seminar. 2) They have already taken options to buy foreclosed profits from lenders, and will sell you the options at a nice profit to themselves. 3) They’re in cahoots with real estate people and lenders to generate sucker lists of possible buyers, for which they receive a fat finder’s fee, and a fatter commission if a deal goes through. 4) By attending the seminar you have put your name on a list of potential victims who will be invited to every “get rich quick” seminar on the planet. 5) Any combination of the above. Now ask yourself: “If the secrets they’re selling are so valuable, why are they willing to sell them? Must be that they can make more money by selling you the secrets than they can by using the secrets themselves. And if enough people buy the secrets, they’re not secrets anymore, and thereby no longer valuable. Suppose, though, that you bypass these seminars, which will be flourishing like the grass after a spring rain, and decide to try it on your own. Here is a checklist for would-be profiteers in the foreclosure market. Now Please Pay Close Attention A) It’s gospel in the lending business that people who don’t take care of their financial obligations often also don’t take care of their property. Call it human nature. Repossessed cars are in need of far more fix-up work than those with clean payment histories. Businesses that fail are riddled with problems you’d not likely find in a business with a good track record. Homes that have been foreclosed have been physically abused by their residents---abuse that can often be hidden and that can often be very expensive to fix. Just as you should hire a housing inspector before you buy a home to live in, you are hereby admonished to hire a housing inspector before you buy a foreclosed property. Yes, this will cost money. If you’re not willing to pay for this simple form of insurance then you should stay away from the foreclosure business. B) Don’t be so sure that the lender will let the house go cheaply. They are out for every penny they can squeeze from the property, and they, and their real estate agents, will use every trick in the book to get you to increase your bid. “Somebody else is is ready to pop for $10,000 more than you’ve offered….” And so on. Sound familiar? Yes, of course they are stupid for not taking the first decent offer that comes along. Every day that goes by means that many more dollars in interest they’re losing, and that much more costly manpower to administer a portfolio of bad loans. . But consider: if they were stupid enough to make the loan in the first place, who says they can’t be so stupid as to try to sell it for more than a weak and overloaded market dictates? If a foreclosed home needs major repairs, wouldn’t the lender take care of that to facilitate selling the house? Ever heard of throwing good money after bad. The lenders don’t think that way. They want cash, and they want it fast and trouble-free. Let the buyer deal with the troubles. C) How healthy are your supplies of capital, patience and luck? You’ll need plenty of each, maybe more than you think you have. Capital: Whatever cash you tie up to make a down payment is not earning a penny for you. Indeed, if you’re taken over the former owner’s IOU, you’ll have to be making regular payment on that loan. How about paying for needed repairs, which often can be hidden and beyond guesstimating as to cost? Then there are the costs of advertising, paying a real estate commission if you sell through a broker, capital gains taxes if you are lucky enough to turn a profit, and hazard insurance. If you need to borrow to cover any of these costs, can you do so quickly and at a reasonable price? A second mortgage or a home equity loan on a foreclosed property can be tough to come by. Do you have the credit capacity to borrow without interfering with other credit needs you might have? There are a lot of numbers to crunch before you know whether you’re looking at a good deal or a bad deal. Failure to crunch can mean failure to profit. Patience How long is it taking to sell comparable houses? Check with your local Real Estate Board to get some ballpark figures. How saturated with foreclosed homes is the area likely to become? Check with a few mortgage lenders to get a sense of what lies ahead in that regard. (All you’ll get is a “sense.” They might not know have a clue as to how many loans in their portfolio will be going bad.) What prices are comparable homes selling for? Note that the price you might be able to get will definitely depend what the competition is today as well as months from now. Money aside, how long can you wait until you find a buyer---how long before your anxiety affects your work and family life and emotional stability? If you answered, “I haven’t the foggiest idea because I’ve never done anything like this before,” you are being honest and wise. Unless you can answer that question, and live with the answer, speculating in foreclosures could prove disastrous. Luck This is the great unknown. The bigger the foreclosure market, the more competition you’ll be facing---other speculators who don’t know what they’re doing; investors who really do know what they’re doing; lenders themselves whose strategies for dumping foreclosed properties are kept close to their vests; insiders who can get non-public information from lenders as to what those strategies might be. Other unknown factors include how quickly your locality can absorb new foreclosures coming on line; what direction interest rates on home loans are going; and what underlying economic realities might come into play in your community, such as a major industry leaving, or a new one arriving, either of which will affect the job market and the housing market, for better or for worse. So, roll the dice. Put the quarter in the slot. Drop a chip on odd or even, red or black. Raise the stakes while you’re hold a pair of twos. Use your kids’ ages to bet big on the trifecta. Take a hit on 16. And then pray. You’ve just been reading the counsel of a conservative and successful real estate investor, who has seen it all, coming and going, through the ups and downs and over many years. You’re on your own. Don’t say you weren’t warned. This article supplements Chapter 16, pages 432-442 in Personal Finance. Access the textbook by clicking on the box in the right column.