Are foreclosure properties a good investment? That was the question I was recently asked by a reporter for Investor’s Business Daily in New York. She was doing an article on alternatives to the stock market because, let’s face it, there are other investments out there besides stocks and bonds, right? The subject was profitably investing in foreclosures.
We talked about what it takes to make money in this segment of the market and where the land mines are. Based on an investor’s risk tolerance and experience, I shared the fact that there are basically three ways to buy foreclosure properties:
1. Before the final judgment – any time between the filing of the lis pendens (initial notice of the foreclosure action) and the final judgment whereby the property will be offered for sale at public auction. The most common way this is done these days is via a short sale whereby the banks accept less than the face value of the mortgage. These transactions sometimes involve a realtor and are relatively safe transactions because the investors get to thoroughly inspect the property and also receive a title insurance policy at closing. They still have to know their numbers but get to do their due diligence in evaluating the investment opportunity.
2. At Public Auction (aka Sheriff Sale) – also referred to as buying at the courthouse steps. This is usually the most risky way to buy because frequently the properties are boarded up or otherwise inaccessible so completing a thorough property inspection can be a real challenge. Additionally, the utilities are rarely on if the property has been abandoned. Last but not least the successful bidder is only issued a certificate of title. You get no title insurance and there could be title defects that will need to be cured before the property can be resold.
3. After the Auction as a REO – The acronym REO stands for Real Estate Owned. As in, owned by the bank. These properties were reclaimed by the bank at the foreclosure auction or taken back via a Deed in Lieu of Foreclosure. REOs can be good deals because you can inspect the property before making your offer or once it has been accepted. The buyer also gets title insurance at closing. Depending on your market REOs can be a bargain or sell close to retail so just because it says bank owned doesn’t make it a good deal. Always check comps, repair estimates and know your exit strategy before jumping in to any real estate investment.
In addition we talked about the value of discipline when investing. We use a formulaic approach to evaluate properties in terms of purchase price, repairs and holding costs. If the numbers don’t work, we keep looking. We also look at the location of the property as well as and potential impediments to our ability to sell such as neighbors, commercial areas near residential properties, traffic and noise. We want to maximize the salability of the properties because the one downside of foreclosure investing is the lack of creativity when it comes to buying. When it comes to the foreclosure auction method or buying REOs cash is the only language for buying and that usually limits our exit strategy.
Our exit strategy on deals where we can’t get terms and have to pay all cash is usually to retail the property. With cash transactions we typically buy, fix and sell. This allows us to turn our cash over and produce profits with each turn. It is not my favorite form of investing buy it is a good way to produce chunks of cash.
I was only one of a number of the people interviewed for the article but I have to say it was an honor to be asked and included. I was interviewed on behalf of Homeowner Resource, alongside Sand Dollar Realty and Realty Trac. Thank you Investor’s Business Daily.
I wonder if I could talk them into a sister publication…Creative Real Estate Investor’s Business Daily! What do you think?
You can check out the whole article at: Foreclosure Market Gives Savvy Investors Big Profits