The subprime housing crisis, like all financial debacles, also has an upside–for the well prepared with money in the bank waiting to invest.
But if you think buying a foreclosed property is a sure highway to wealth, think again. It’s true–today represents a giant opportunity that may come around once in 20 years, but only for the wise and the prepared.
It is definitely not for everyone, folks. Before buying real estate investigate, investigate, investigate by doing the following:
1. Do a title search. Make sure you get a clear chain of title.
2. Never overpay.
3. Accurately estimate costs.
4. Get the seller out of the home.
5. Minimize cash to the former owner.
6. Insure the home properly.
7. Resell at full market value.
The above list is from my own experience and from Steve Berges excellent book, The Complete Guide To Investing In Foreclosures.
The first thing you MUST do is to make sure there are no liens on the house. And this is a big stumbling block for novices. Most people whose home hasn’t been taken care of for several months are likely to have gone to the bank for money to pay mortgage payments. The tipoff will be “how long has the house been empty?”
If you find there are no liens and decide to go ahead with the rest of the list of things to do before buying, you still need to be cautious. This “investigative phase” is just that, a time to look into it and pause. But as you go ahead and are about to purchase the home you must again run a title search. There could be last minute liens filed on the property. You can visit the County recorder’s office and examine an abstract, but make sure it is up to date. Abstracts show history of a property. Look for the dates. Steve Berges is an expert. His company, Symphony Homes, buys some 40 or more homes a year, fixes them up and resells at a profit.
I’ve participated in home auctions and have bought homes. Fortunately, there are usually only a few people there. But it is the well prepared buyer who wins out. Berges warns that the most difficult and risky times to invest is in the auction sale stage.
Before going to any auction, run a background report on the property(s) you would like to buy. Run the title search early on so you can correctly evaluate before auction time.
As late as possible before the auction run another title search to “foreclose” on any last minute liens that may have been filed by people like landscapers, repairmen, and personal ceditors trying to collect bills. If it’s a gated community and the yard has been unattended it is likely the Home Owners Association (HOA) has placed the owner on notice to clean it up and the county may have ordered a cleanup by a landscaper, which bill becomes a property lien. Talk to the HOA people.
This is critical. Failure to research things tightly can lead to financial disaster, even severe losses for you. Also mandatory–your purchase of a title insurance policy. Get the coverage in place. If you lose the auction you can quickly do a same-day cancellation which should not cost you a dime if you know your insurance agent well enough and clue him in on what you’re doing.
Don’t Pay Too Much
If you are not well-grounded in evaluating property values, don’t buy. Go to school and get the know-how or partner up with someone who can do evaluations–or hire the expertise. If you decide to go it alone, bcome an expert in certain neighborhoods. Don’t spread yourself too thin. Get to know this area of town by visiting the area and walking as many houses in the subdivision as possible. Then talk to realtors. What are those houses going for now? Form a mental and written record of those few houses on which you will concentrate. Also, talk to the officers of the HOA and others who live in the community.
Don’t try to be a Symphony Homes right away. Move slowly. Buy one house and then see what happens to the market. Above all, don’t overextend and get yourself in the same mess the owners got into.
Get Your Ducks On The Pond
Figure the costs:
1. Purchase price
2. Closing costs
3. Carrying costs. How much a month is it costing you in delay as you fix up the house for re-sale? That includes:
There is a fourth cost, and that is the fix-up and clean-up costs. For the sale of this discussion, we will leave that to you. However, often it can mount up to $30,000 to $40,000, depending on the age of the house and what needs to be done to make it a marketable property. If you don’t have that kind of cash in addition to your purchse money, concentrate on newer homes. Generally all they need is cleanup and new landscape.
For the sake of discussion, assume all of the first three items on the list amounts to $800 per month. Be sure to add a “fudge factor.” In six months you could be into it say $5,000. And don’t forget selling costs which could be 6 to 7 percent. This is what you pay the realtor (and I strongly suggest an agent. Don’t sell by owner. If you don’t understand my logic, read my new book SELLING FAST:We Sold Our House in One Day And You Can Too).
Don’t forget closing costs and that brings the selling cost up from say 7 percent to 8 percent. That includes transfer taxes, recording fees, and state stamp taxes.
Don’t You Dare Lease The House To The Former Owner
If you can’t be tough on this one, you shouldn’t become a foreclosure investor. Let’s, be sensible. This seller is going into foreclosure, right? There’s a reason. How good were his financials? Probably lousy. Experience has taught me not to rent even an apartment to someone like that if I could help it. True, there are a lot of rationalizations that can be made about this financial crisis. I’ve heard it before: “But this is different. Everybody–2.2 million of us–got caught in this buying panic before the roof fell into the buying spree and everyone got hurt.”
So you think these people are a special case? They aren’t so bad? ” Maybe, but don’t be so sure.
Believe me, I have been down that road and have lost big money in unpaid rents to people like these, and even had to hire attorneys at my expense to evict them. They always end up running away, leaving you holding the bag. Many times they get so disgusted with you hounding them for money that they wreck the place before they leave. We have friends who bought a foreclosure and the former owners were so upset when they learned they weren’t going to come out of it with anything that they trashed the home. They took all the light fixtures and landscaping–yes, shrubs and trees, which is almost unheard of–ruined the paint and carpet. Then you want to fix it up and re-rent to them? Get real. It’s your money, you can do what you want with it but I know I wouldn’t re-rent to the former owners.
Minimize Cash To Owner
The tendency for novice purchasers of repo houses is to feel sorry for the sellers or owners being evicted. If you have that mind set going in, you’ve lost some of the battle already. Try to divorce your feelings from what you are trying to accomplish financially. In the first place, because you are a buyer of either a potential foreclosure or of a home that sat vacant for a time, you are doing the former owner some benefit–and the subdivision a great deal of benefit.
You never want to give the seller–if you’re dealing directly with him–all the money before final inspections for obvious reasons.