The current spike in home foreclosures is spurring a new wave of real estate seminars on making money buying these distressed properties. The advertisements make it sound as if the investment opportunities were never better.
But a closer examination of the real estate market reveals that in both good times and bad times, foreclosures can be profitable for the experienced real estate investor and perilous to the neophyte. An abundance of foreclosures doesn’t change that.
The first thing to realize is that in many areas facing rising home defaults, there are more homes for sale than there are buyers. That’s why owners are defaulting – because they can’t sell their house for enough money to pay off their mortgages. When you take over from the defaulting owner, you’ve inherited the same problem.
Another notion the neophyte investor needs to dispel is that buying a house for $150,000 in a neighborhood of $200,000 homes doesn’t necessarily mean you’ve found a bargain. The homes that are not for sale may have been worth $200,000 a short while ago, but the houses that are actually changing hands now are truer indicators of the neighborhood’s present value.
Something else that may catch the inexperienced off-guard is the sizeable expense associated with the purchase, repairs, loan payments, and selling costs. Even if nice homes in the neighborhood actually do sell in the $200s, you could potentially have spent your entire expected windfall by the time you close escrow to liquidate your investment.
If you’d like to try your hand at residential real estate investing, here are some things you should know about how professional investors succeed with any type of property, including foreclosures.
Able to Evaluate Accurately
First is a keen sense of the local market and relative home values. The pros have looked at hundreds of homes, tracked selling prices in comparison to home size and features, and have disposed of many dozens of homes accumulating their share of mistakes and painful lessons learned in the process. They also know different neighborhoods have different rules. They tend to specialize in particular areas or types of neighborhoods.
Grounded in Reality
In a word, professional investors are realists. They don’t fall in love with the house, or the neighborhood and they don’t rely on the lofty pitches of the real estate agent. They do their own homework and make their offers based on past experience, current market data, and well-researched number crunching,
Prepared to Pounce
When submitting an offer, the professional can often win the bid with a lower offer because the pro already has a mortgage broker with financing lined up, is able to act quickly, and has a history of closing deals on time. Some sellers will take a lower price if they feel much more confident of getting their money sooner, compared to accepting a higher offer from someone who doesn’t have their financing yet, or who has to sell another home before closing, or who is an inexperienced investor who may get cold feet. The pro knows this and uses it against other bidders to win deals at better prices.
Know How to Showcase
Professionals usually have an edge when it comes to preparing the property for sale. They know where to spend the money and where not to waste it. They usually have their favorite contractors and suppliers (or they manage much of the work themselves). They know what needs to be done and how much it will cost to make the home marketable with the highest return on investment. And they generally turn the house around with less cash invested, and put it back on the market quickly to avoid making any more loan payments than they have to.
Do Their Own Marketing
Putting the prettiest face possible on the property is just one facet of marketing the professional has wired. When it comes time to actually list the home, the pro also doesn’t rely solely on the efforts of the real estate agent. In fact, it’s not difficult to make a deal with an agent who will put the property on the Multiple Listing Service and handle all of the paperwork of the sale for a very low commission in return for the owner handling all the advertising, print collateral, open houses, and showings. The pro is motivated to move the property quickly to minimize interest expenses.
The intent of this article is not to discourage you from pursuing foreclosed properties as potentially good real estate investments. Rather, it is meant to help open your eyes to all of the things necessary to avoid losing money at it.
If you have the chance, getting the advice of a pro before leaping on your first property is a great way to minimize costly mistakes.