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Why Invest In Foreclosures?
(c) Gerald Romine - All Rights reserved –
www.KickAssRealEstate.Com
Why Invest In Foreclosures?
For many, the word foreclosure has a negative connotation. People think that the house is in bad condition and that the folks who lived in it were horrible people but more times than not, that’s not the case at all. Usually, the owners just fell on hard times and the houses actually are in decent shape. So get the negative out of your mind. Think positive because you’re about to learn why buying a foreclosure can be a real estate investor’s best decision.
The main perk of investing in foreclosures, especially for new investors, is that it’s a practical way to get into investing if you have little or no capital to invest. Beyond that, foreclosures are also great buys because they rank right up there with ugly houses when talking about finding bargain homes that can generate a significant profit. And just like ugly houses, foreclosures come with their share of challenges so a word of caution: to get the thrill of the profit, you will have to endure a unpredictable thrill ride. Be ready.
Foreclosure Basics
Before I get into the ins and outs of investing in home foreclosures, let’s make sure that you fully understand what they are. The textbook definition of a foreclosure is: A legal process by which a mortgagee’s right to redeem a mortgage is taken away, usually because of failing to make payments. Simple enough, right? Maybe. But the circumstances that lead up to foreclosures rarely are.
Now by definition, foreclosure happens because of failure to pay. Sometimes it’s a failure to pay the mortgage—that’s called defaulting on a loan. Sometimes, a foreclosure is the result of a lien that can be put on the property by any creditor the homeowner may owe. In either situation, there are always multiple factors that play into the onset of the foreclosure. Maybe the homeowner never learned how to use credit responsibly and has gone crazy, running up credit card bills they never intend to pay and living beyond their means thinking it’ll never catch up to them. It happens.
But it may surprise you to know that that scenario is more of an exception than the standard. Unexpected unemployment, hospitalization, a death in the family—any of these could put most homeowners at risk for foreclosure. Think about it. How strained would your finances be if faced with any of these situations? Regardless of how the homeowner got to be in the situation that’s leading them to foreclosure, they often make it worse by keeping their financial troubles under wraps. Pride? Shame? Ignorance? There’s no telling why, but many don’t seek out help to decrease their debt until it’s too late and foreclosure proceedings are underway.
Now, I know what you’re thinking. You’re saying to yourself, it can’t be right for me to try to go in and make a profit off of someone else’s misfortunes. Am I right? Well don’t think of it that way. In actuality, you could be helping the homeowner out. Let me explain.
When a house goes into foreclosure, two major things happen to the homeowner and their family: (1) The family loses the home and (2) the foreclosure goes on the homeowner’s credit report, damaging their credit rating for years to come. Investors who find pre-foreclosure homes can help homeowners to avoid these to some degree. If the investor buys the home from the homeowner and brings it up to date with the mortgage company, for instance, no blemish will appear on the homeowner’s credit report. And in the rare case, some investors will allow the original homeowners to stay in the house for an additional month or two before selling it so the original owners can find adequate housing. Those possibilities make the idea of selling, pre-foreclosure, appealing to homeowners. I won’t go any further into how to progress with those types of foreclosure deals as they can be fairly complex but do keep them in mind as you become a more seasoned investor.
Once the process for a traditional foreclose has started, there’s really no stopping it. The homeowner, unless they can bring their accounts up to date, will lose their home. The mortgage company or bank will re-gain ownership and they will turn around and sell it to the highest bidder. Remember: Banks are in the business of making money, not holding real estate so they’re going to want to get the property off their hands as soon as possible and re-coup the money they lost. So what does that mean for you? You’ve got an opportunity to make a great profit. Let me break it down for you:
Say the original homeowner purchased the home for $150,000. During the time they were living in the home, they paid $30,000 to the mortgage company and it appreciated $15,000. As far as the bank is concerned, they just want the $120,000 still outstanding on the home plus interest due. So though the house is now worth $165,000, all the bank is asking is $125,000. You can try to negotiate for a lesser purchase price, and you should, but even if you paid the full $125,000 purchase price, you’d still stand to make a $40,000 profit when you sold the house. Sounds good doesn’t it? I can almost hear you grinning and I know it’s tempting but I don’t recommend you jump right into purchasing foreclosures. You’ve still got a few things to learn so read on.
Do You Have What It Takes?
College graduates to high school dropouts, teens to retirees. Anyone can be a real estate investor and buy into foreclosure homes but that doesn’t mean that everyone should. Nope. To be a successful investor, particularly when working with foreclosures, you’ve got to have some fundamental skills. You must:
1. Be a Great Communicator
Communication skills are important because of all the people that are involved in real estate deals. As an investor, you’ll need to stay in contact you’re your lenders, the buyer, the buyer’s lender, creditors and probably real estate agents too.
2. Learn Exceptional Negotiation Tactics
The importance of being a smart negotiator should be obvious. You’ve got to know how to put out the best deal for you that will also be enticing to the seller. Bad negotiation skills can make or break deals. Foreclosure sellers may be in a bad predicament when you find them but keep in mind that just as you know foreclosures are a good investment, so do other investors. So negotiate a fair deal. If you don’t someone else will.
3. Have Access to Reliable Legal Advice
With foreclosures come quite a few unique and unpredictable situations. Each one you attempt to purchase will differ slightly from the one before and you may have to be creative in the terms you create to make the deal work. Because of this, it’s important to have a basic knowledge of real estate law and to have a lawyer on stand-by just be sure you’re working within the boundaries of the law.
4. Seek Out Knowledge
By now, you know that I believe that educating yourself on anything you do is key to being a success. It’s no different with foreclosures. I’ve briefly described the process here but in the real world, there’s definitely more to it and if you don’t know what you’re doing, there are some pretty deep pitfalls into which you can fall. So before you invest, read and ask questions. Make sure you understand the process and the rules for foreclosing on homes and then use that knowledge to your advantage.
Finding Foreclosures
Once you have those skills down pat, you’re ready to start hunting for foreclosures. Fair warning: These properties are more difficult to find than ugly houses ... but certainly not impossible to locate.
As with any real estate investment, I recommend that you do your research. That means picking an area in which you’d like to buy foreclosures and finding out everything you can about it. As you’re thumbing though paperwork and trying to determine which properties to buy and the areas in which to buy them, remember your goal is to make money. Smart investments make money. Remember war zones? Well keep remembering them. You may find some seemingly great bargains on foreclosures in those areas but you have to ask yourself, will you be able to find a buyer to sell the property to who’s willing to pay the full value of the home? If the answer’s no, move on.
Okay, so now the research is done and you know were you want to buy. To find foreclosures, you’re going to have to network diligently. Keep business cards on you and make no secret of the fact that you’re interested in buying properties. You’d be surprised how much investors looking to buy foreclosures have to rely on referrals. In addition to passing out business cards, you can also use signage around the areas you’d like to purchase to solicit business.
Other tools you should have handy are a cell phone, a laptop computer and some sort of GPS system. The computer can be used to house any pertinent documents you may need access to while searching for properties. And with Wi-Fi technology, you can even stop at certain places to do Internet searches for properties or information on properties. Meanwhile, the GPS system is great for getting to more properties faster. Time is money and if you can’t find the properties you’re looking for, you’re potentially losing money. As for the cell phone, well you always want sellers to have access to you. Like I’ve said before, there’s no shortage of investors looking for foreclosures out there.
So let’s review. After all, that was a lot of information packed into a small space. First, foreclosures can make you a lot of money ... and fast ... but fast money does come with risks so be prepared. Secondly, foreclosures won’t just come to you, at least not right off. You’re going to have to network and put in some footwork to find prime properties. And just because the price is right doesn’t mean the property is a great deal. You can’t make money on a house you can’t sell. And finally, research and think before you buy any property-foreclosure or otherwise. The more you know and the more you’ve planned out, the better you’ll be off when you get to the closing table.
Note: This chapter is part Gerald Romine's Book Real Estate Magic 101 - How To Get Rich in Real Estate Even If You Are Dead Broke and was contributed by Dr. Al Lowry.
About Gerald Romine:
Gerald Romine is a nationally recognized real
estate expert that has been featured across North America
sharing the stage with political leaders, film stars, and
business leaders. Since 1989, Gerald has been involved with real
estate as a real estate agent, broker, rehabber, investor, and
builder and has been involved with everything from houses to
apartments. For more information about Gerald’s products or
services visit
www.KickAssRealEstate.Com
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