Foreclosures Primer
Foreclosures Primer Part II
While we love to point to hot real estate markets like Orange County, California or Las Vegas, Nevada as potential investment areas, in almost all cases a real estate investor is better of sticking with an area they are familiar with. There are many local dynamics that go into buying real estate, like school quality, weather patterns, employment rates, crime rates, whether values are going up or down, etc. that are difficult for an outsider to asses properly. This information is much easier to come by when you are researching homes in your own area. You certainly can’t count on a real estate agent to give you an honest opinion; after all, they’re looking for a payday.
While realtors can be very helpful with the technical and legal aspects of a sale, you can’t really rely on them for much more than that. They certainly are not capable of predicting the future of the market, anymore than a stockbroker can look into his crystal ball when picking stocks.
If there are no foreclosures in your area, it’s an indication that the real estate market is very healthy and you probably need to approach it differently. Sometimes sitting on the sidelines isn’t the worst thing that can happen to you.
People invest in real estate with different objectives, some long-term, some short- term. Obviously when the overall market trend is cooling, it makes it more different to make a short-term profit, if you intend to buy and flip the property. Buying foreclosures, fixing them up and reselling them at profit is still possible, but the cooler the market, the longer the investment cycle will be.
A better approach is the “Cash Flow” approach, where investors buy foreclosure property at a discount, then rent out the property so the rent they receive covers the cost of a mortgage. The obvious benefit is that the property pays for itself while you sit on it and it increases in value. Eventually rents go up and profit is made. We mentioned mortgage, even though most foreclosure property is bought with cash, because many people mortgage one piece of property to acquire the second by cash. The rent received from the new property can then be used to pay the mortgage on the first. Of course there may be tax advantages to refinancing so the mortgage is on the property that generates rental income, but you need consult with your accountant or other tax professional for tax advice because we cannot give tax advice here.
In the ultra hot market that we recently have gone through, cash flowing the property was difficult because prices were driven so high so quickly. In California, for example, it was almost impossible to cash flow a property with 20% down payment. Even with 20% down, the rents a house or condo or apartment could generate were typically thousands of dollars less than the mortgage payment, not a cash flow friendly position to say the least.
Now that the real estate market is decelerating, more foreclosure properties will cash flow. Keep in mind that cash flow from rent is not free money because you need to manage the property and there will be ongoing expenses as well as property taxes.
In our combined experience, we have met more people who have made money from cash flow positions and holding property long-term than those who made a quick buck from flipping a property. While we probably all know someone who has done it at one point or another, typically it is not a sustainable investment model. This points to real estate investing being a long-term investment.
Without a crystal ball to see the future, any investment is risky. Having said that, there are things you can do to minimize risk when investing in real estate. First and foremost, choose a desirable location. As we said before, you are more likely to have insight into good location in areas you are familiar with, so we recommend sticking with your local area, within 50 miles or so.
Second, avoid entering into flimsy financing such as ARM mortgages that will put you at risk if the payments go up dramatically. The answer to the question of how much will your mortgage payments be in five years shouldn’t be, “I don’t know.”
Avoid overextending yourself. To do this you have to consider how secure your employment or other sources of income are. If you are in a volatile industry and you can’t count on a steady paycheck, don’t stick your neck out for another mortgage; it’s a surefire way to get your head chopped off.
Look for foreclosure opportunities, many of which are found by using PoliceAuctions.com’s foreclosure section. If you can’t find enough in your area there, check out Foreclosure.com, which also lists pre-foreclosure notices. We don’t normally recommend other subscription sites, but this one is extremely useful for searching for foreclosure opportunities.
Look for government auctions, like tax-defaulted properties and IRS auctions. Be careful to check for all encumbrances at these sales because sometimes a mortgage holder can have a lien on the property, even though the IRS is auctioning it. That means the winning bidder has to pay the note-holder or forfeit the property, so bid accordingly.
At any given time there are between 40,000 and 60,000 foreclosure properties available on the American market. This represents a significant opportunity for investors who are patient enough to dig through the listings and wait for the property that best suits their investment strategy.
PoliceAuctions.com, the ultimate source for government auctions, remains committed to bringing you as much information on these opportunities as possible, so check their listings often for new foreclosure properties.
