Are you an investor or thinking of becoming an investor? Buying distressed properties to fix & flip or rent out?
THINKING OF BUYING A FORECLOSURE?
Foreclosure, foreclosed property, REO, bank owned… Pretty much all the same thing. It means that a property owner/borrower stopped making the monthly loan payment on his/her home loan and the lender or their representative took back ownership by various legal means (depending on the State the property was located in). By the time the lender has taken back the property it has been vacated.
The lender does not like doing this. It doesn’t want the inventory of homes that it needs to turn around and sell. Given the current state of the economy and the real estate market, there is a huge inventory of foreclosed homes. Not all are on the market. When on the market they tend to be priced below what market value should be for their location, thereby causing neighborhoods and the real estate market itself to decline.
Further, these foreclosed properties are often ‘distressed’, either from deliberate trashing by the former owner or through lack of upkeep. The lender frequently shuts off utilities, and this can be a disaster during the hot humid months of the summer when shut-up homes become habitats for mold. The values of these homes continues to drop until they are priced so low they attract investors who buy them up cheap, do fix up, and either rents them out or ‘flips’ (sells) them.
If you are thinking of buying a foreclosure there are some things to keep in mind: your purchase offer needs to be very ‘clean’ and straightforward, and you need to be pre-qualified for the loan you plan to apply for. Keep in mind that if you are going to use a conventional loan to purchase the home, the home itself will need to ‘qualify’. It cannot be so distressed that the lender will refuse to make a loan on it. You can buy a distressed property by using an FHA 203K loan, which has renovation funds built into the loan. The 203K loan process requires patience as there are some hoops to jump through, but it does may possible purchasing a sadly distressed property in a good location for a great (low) price, and at the end of the process have a great home worth more than what you have into it.
Banks, their representative, HUD, the VA, Fannie Mae, Freddie Mac… all of them are not interested in purchase offers that have ‘contingencies’ such as the purchaser needing to sell or rent their current home. Make your offer very clean. Some of these sellers, Fannie Mae in particular, sometimes offers to pay closing costs for the purchaser (depending on the agreed upon sales price) or to include renovation funding.
Good luck! This is a time of great opportunity for potential home buyers. Home prices can be very low, interest rates are low, and there is a huge amount of inventory to choose from. A few years from now a lot of people will look back at this time and think “Geez, I wish I had bought property back then when I had the chance.”
THE TIME FOR INVESTORS
Yesterday a story on NPR related the activities of two investors in Baltimore. These investors enthusiastically spoke of their purchasing as many properties as possible at discounted prices, distressed properties which the investors were renovating and then renting out. By doing so they are providing needed decent rental homes. Eventually when the real estate market turns around they plan to sell some of these homes. It isn’t lost on them that while home prices have declined, rents have gone up.
Much the same is true here in central Virginia. Foreclosures and Short Sales have made many homes very affordable. They are sometimes in distressed condition. There are investors who have made a profitable business buying up homes cheaply, renovating, and then selling those newly made nice homes at an affordable price that is still very competitive and profitable in the current market. Some of those newly renovated homes are being held by the investor to be rented out and will later be sold when the market turns around.
In these sad economic times opportunity presents itself. Why not seize it?
When a homeowner stops making payments on their home loan, the lender will make several inquiries to see why and try to remedy the situation. However, if the homeowner is still not making their monthly payments the lender will begin foreclosure proceedings. Shortly thereafter the owners will be instructed by the sheriff’s department to leave the property, and depending on what ‘device’ is utilized to foreclose, the lender either sells it on the open market or auctions it off on the courthouse steps. The lender may still seek recovery of the balance of the loan from the now former owner. The former owner’s credit record will be affected adversely. I have helped many people, both those seeking a home and investors, purchase foreclosed, REO and bank owned properties.
Why would a foreclosed property be of interest to an investor? Such properties are frequently priced well below what their market value should be. In other words, such a purchase represents a potentially very good deal for the purchaser/investor.
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When a homeowner is no longer able to make the payments on the loan for his/her home and therefore sells it, but what they net from the sale of the home is not enough to pay off that loan. This situation is called a Short Sale, and because the price the home sells for does not cover the amount still owed, the lender can approve or disapprove the sale. In other words the lender gets to decide how much money it is going to lose as a result of the sale. A Short Sale can take a long time to get from contract signing to settlement, sometimes many months, and both purchasers and sellers need to be patient. After the sale, the lender may still seek recovery of the balance of the loan from the now former owner. In any event, the former owner’s credit record will be affected adversely.
Why is this of interest to the real estate investor? Short Sale prices can be low and therefore offer a good deal.
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And standard sales (where the property is not in jeopardy of being foreclosed upon and is not a short sale) can be advantageous too. People who purchased their home before the housing bubble may have a lot of equity in that home. When putting it on the market for sale they can price it competitively with distressed sales. Knowing the market is what helps to discern these good buys.