Sigh, us real estate investors had a secret. Now it’s everywhere!
Marcel, what are you jabbering on about?!
Well, it’s becoming more and more well known that investing in foreclosures is an extremely lucrative venture. It’s like – left, right and center – investors are flocking to throw their money at foreclosures! Wow.
Thankfully, many of these newbies only have half of the story. Without the remaining half of the secret, most foreclosure investors will end up with duds that they’ll only break even on. Worse, some might even lose money!
In this article, I’ll get into the what the second half of the foreclosure secret is. But first, if you’re not already investing in foreclosures, then the next section is for you.
Should you invest in a foreclosure?
The short answer is, yes! If you’ve been in real estate investing for a while, and know what to look for in a property – the drivers of its value, and the costs required for various repairs etc. Then foreclosures are definitely for you.
Foreclosed homes can be good quality homes with great rental potential. Even those that have fallen into disrepair can be won at a decent price, done up and flipped for profit.
It used to be that foreclosure auctions didn’t attract such a large crowd. These days, it’s harder to get such a good deal. But honestly, opportunities still exist (especially if you’re up against newbies.)
Ok, ok – so what’s the second half of the secret that you promised?
Well, it’s actually very simple idea: investing in foreclosures ain’t easy. Okay, this revelation is not exactly mind blowing. I know.
But man, it just surprises me every single time I hear of someone going headlong into a foreclosure investment only to be left with a dud. Why do people do that?
I surmise that it’s because the general public sees a foreclosed home as:
The bank doesn’t want it. Therefore it’s 100% going to be cheaper than if I bought it off the normal market. Whatever I pay at the auction is okay, I’ll profit off it either way.
Totally wrong mentality!
The truth is – a foreclosure requires the same amount of due diligence and know-how as investing in any old regular property. Yes, the bank is eager to get rid of it. Yes, it could go for cheaper. But don’t underestimate the impact of savvy investors sitting in the crowd. They’re bidding against you and driving up the price.
Now, knowing a property’s potential is an art in and of itself. So I can’t go through everything in this article. However, I will talk about some things specific to foreclosures. Have these in the back of your head, and you’ll be on your way to success in foreclosure investing.
1. The stage of the foreclosure process is key
This is one nuance that most people overlook. Different stages bring with it different benefits and challenges.
Anyway, the different stages are:
- Sheriff’s Auction
- Reposessed/Owned by the Bank (aka Real Estate Owned/REO)
I’m going to assume that the home has already been repo’d. So let’s leave out pre-foreclosure for now.
Generally, a Sheriff’s auction usually goes for the lowest prices.
The houses sold here are not typically available for you to inspect. So it’s an “as is, where is” basis. Caveat emptor applies here.
I’d stay away from these because you never know what you’re getting into. You might end up losing an arm and a leg on repairs.
Bank-owned properties are generally the safest. At this point, the home wasn’t sold at auction, so you go through the typical buying process, except the seller is the bank.
You’re allowed to inspect the property. However, these deals are usually oversubscribed and have a lot of eyeballs on it. Prepare to pay more. But hey, I’d rather fork out a little more upfront so that I know what I’m getting into with both eyes open!
Sometimes, if the property has been on the market for too long, a bank might make repairs on the place. Additionally, they might be motivated to offer favorable financing terms to a buyer.
With less due diligence to do, and a reputable institutional seller on the other side, these transactions are typically safe and quick.
Man, what’s there not to love?
2. Inspect the home
Across my site, I’ve probably beaten the horse to death on home inspections. But I really have to emphasize it time and again because people just gloss over this bit in their eagerness to get their hands on a property.
The costs to doing a place can be significant. Get your trusted advisor – someone you’ve worked with in the past, or who has good testimonials from friend. These guys should give you a better idea of what repairs you need to undertake. Heck, I’d say add another 10% to the expected repair costs. You never know what could happen.
Listen, good investment opportunities come and go. If you don’t get a place the first time around. Don’t worry! Another one will come and take its place eventually. But, if you’re left with a lemon, you’re gunna be stuck with it for quite a long time.
Don’t skip the inspection!
3. Get into the right neighborhood
Always invest in homes that aren’t surrounded by other foreclosures. If you see many homes in that area up for sale by the bank, that should send off warning sirens in your head. Too many houses going down in the same area might lead to a drop in market value of the home that you’re going to buy.
This might present a fine opportunity to a real estate mogul looking to buy the entire cul-de-sac, but for Joe Schmoe off the street (aka you and me) I’d stay away from this one.
By all means, invest in foreclosures. But please, be aware of the risks involved and the nuances of making the right choice. As always get your financing in order before you buy. You need to be pre-approved by a lender so that you won’t get pushed to the back of the line.
I hope you found this article helpful, and I’ll look to revealing more about foreclosures in the future.
Let me know what other tips you might give someone looking at foreclosures. I look forward to reading your comments below!