“How To Buy Foreclosed Homes”.pdf

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There's A Fortune To Be Made Buying Foreclosed Homes If You

Follow This Simple GuideSimone Foxman | Mar. 13, 2012, 11:54 AM | 23,099 | 12

Investors everywhere are bubbling about the money to be made buying foreclosed houses and

flipping them or renting them out. Even Warren Buffett thinks this is a great idea.

But the distressed home market can be a minefield to the amateur

investor.

For advice we turned to New Jersey real estate developer Lester

Argus.

First, there are three different types of distressed home purchases ...

And they have very important differences for the buyer.

1) Short sale: "A short sale means that the owner still owns the

property and the bank has said, you owe us $100,000, you're not

going to be able to put any money in your pocket, but if you show

us a diligent effort to sell your property for $80,000 because our

broker price opinion says that's all it's worth...[we'll] release [you]

from this mortgage and you can just get out of this thing...if we

approve [the deal]."

2) Purchase directly from the bank: This takes place when a

bank has already closed foreclosure proceedings and now owns

a property, or when the past owner has offered the bank a deed

in lieu of foreclosure.

3) Sheriff's sale: Usually, a foreclosure auction is a Sheriff's sale, and occurs when the U.S. government steps in

to satisfy a judgment made by the court system, or to liquidate a mortgage or tax violation.

Argus elaborates, "Usually [foreclosures] are not defended because there's no reason to defend it. The person who

owes the money owes it. It's cut and dry." But when it's not or the occupant fights the foreclosure, the bank (or a tax

authority) seeks the help of the state, "to go through the removal process to take possession, and that's where the

sheriff sale comes in."

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How To Buy Foreclosed Homes http://www.businessinsider.com/how-to-buy-foreclosed-hom

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"Purchasing directly from a bank is pretty safe if the property has already been foreclosed on."

"As far as buying from banks, it's just like purchasing from a private seller.

"Now you may do a closed bid [where potential buyers will offer

bids blindly and the bank will choose the best one], which means

they'll say, 'We don't want to get into a negotiation. We don't want

to spend a lot of time. Here's our minimum bid, everybody gives

their best bid. And most of the time, those will be sold through a

real estate company ...

"If the average Joe came in off the street ... he would walk in[to

this kind of arrangement] and probably get his best deal. But

invariably it's going to be competitive, and it's going to be a

situation where an investor will have to know what his maximum

dollar is and doesn't get sucked up above his potential to

purchase."

Short sales can be frustrating, but are straightforward."If you see an advertisement that says, 'Asking 299K, subject to lender approval,' that

means that the owner actually owes more than what they're asking for the property ...

It's important to remember that when you make a contract, you're

making a contract with the seller not the bank, so it is contingent

upon lender approval. Different banks are taking a really long time

to approve short sales," and they don't approve every offer.

However, a foreclosure auction is NOT a place for amateurs.


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Arlington County/Leslie E. Kossoff

Eliana M via Flickr

"I've heard some horror stories regarding Sheriff's sales ...

"That is a much more sophisticated buyers' arena. Now people

would argue with me on that, but I've seen people go in there and

get hurt. So the average Joe needs to have some type of

professional representation, someone he can hold

accountable if he gets basically screwed. Either a Realtor or a

lawyer—someone he can turn to, to protect himself ...

"Let's say a bank owes $100,000 on a property, and the bank will

bid $100,000 which is what they're owed. Now you can walk in

and bid $101,000 and the bank will usually say fine, that's our

money, see you later. [In the best of circumstances] everyone gets

their money and you walk away with the Sheriff's deed ...

"In most counties—especially in New Jersey—the owners of the property can get automatic extensions to buy time. So

you may get ready to go into a sheriff sale three times and never get to bid on the property. Secondly, a lot of the

properties will go to sale before the sheriff sale.

"Third, the property may have had a lien on it and the taxes might not be current, and some third party may have

purchased the tax lien. Remember, tax liens take precedent over mortgages—they were there first; the United

States was here before the bank deal ever happened. So it's dangerous. There could be unknown liens [beyond

the purchase price of the property] ...

"The sheriff's sale industry is probably not your best idea unless you go in with a pretty smart tax lawyer ."

Distressed properties—particularly foreclosures—are typically in bad shape.

"They're usually pretty beat up. They usually need a renovation and repairs. Accumulated

maintenance has been building up over the last few years because people don't tend to

pour money back into their properties—carpets, appliances, paintings. Christ, I go into

properties that don't have a working light bulb."

So do a thorough assessment of the condition of the property.


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YouTube/AdFreakNine

"Inspections are key ... Foreclosed homes are invariably sold in 'as is' condition—no

guarantees or warranties. Definitely get a pre-inspection ... have all your inspectors in line

so that they can go through the front door and walk through [the property] with you.

The best person to get is a builder, who might be the person

you'll have come in and make any repairs or changes to it

later."

Know the area.

"Do your homework about the rental market in the area, in regards to what homes are going

for, what the rate is for different apartments, for houses if it's a multi-family property versus

a single family home. Go through what the rents are, what your capitalization is going to be

on the property, just like anything else. What are you going to get as a return on your

money if you invest a higher sum?"

It's often worth spending money to make money.

"You still have to do your homework, as in anything, and that is local in nature. Talk to local

Realtors and talk to the Realtors about value, and get a valuation. If it's worth it to you, get

an appraisal of that property ahead of time.

"You can get an appraiser to do a drive-by appraisal and/or ask

the bank you're purchasing [the property] from if they have a

current broker price opinion or appraisal on hand and they would

show [it to you to] start the negotiation process. A lot of banks will

cooperate with you in that case."

Know the state of your own accounts.


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Flickr/roebot

Brendan Wood

nozomiiqel on flickr

"The most important point [for a potential buyer] is to have your financial accounts already

arranged before you go in and start making deals. You want to know what your maximum dollar

is going to be so you don't get in to trouble. Because, hey, it doesn't do you any good to buy

somebody else's problem."

There are three ways investors should value a property.

Comparative sales: "You have five houses, they sell, you take an average, and that's what

they're worth."

Replacement value: "How much would it cost if you bought thelot and had to replace the house brick for brick, step for step?"

Gross rent multiplier : The ratio of a price of a real estate

investment to the rental income it generates annually before

expenses. This "was out of whack for the last several years with

inflating [home] prices, but now ... rents are coming in line with the

value of the properties."

Argus adds, "I wouldn't touch anything where I wasn't going to

make a 6 to 8 percent return."

Other ways of calculating value are just speculation.

"People use a very, very long prep sheet to calculate five-year appreciation schedules, but

let's face it—that's why they call it speculation. If it were me and I were purchasing, it would

be a home run if ... I invested $100,000 and, after everything was said and done, I could put

6 percent in my pocket. Anything above that is a bonus.

"My tax bonuses, my appreciative benefit? I would rate that

as my gravy, as my cream on top. But my base line, bottom

line, is that ... if I take $100,000 cash, I want—after taxes are

paid, insurance is paid, and everything else—I want the rent

to produce a net profit of approximately 5-6% minimum."

The old rules still apply.


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herzingonline.files.wordpress.com

"As far as purchasing is concerned, you're looking at the same exact standards as you

have all through the years. You still need to have good credit. You need to have the ability

to borrow. Structurally, the sales haven't changed—it's just the mood that's changed.

Home values have come down and it's more difficult to find a funding source."

It all depends on getting the right financing and the right deal.

"With investment properties you're going to be looking at 20 percent down, maybe 25

percent, and/or you're going to make cash purchases...

"It is a wonderful time to buy. There are programs now with

interest rates below 4%. You can get interest rates, you can get

fixed rate mortgages, and as long as you are patient—that's the

key ... Right now, there are 3.5% down, 3% interest programs out

there."

You need to have the ability to close quickly.


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Colin Harvey via Flickr

"Cash is king. If you're walking into any of these banks, they want to turn these properties

into cash and get rid of the holding costs—for instance, insurance, taxes, maintenance,

utilities if they're operating, the security issues that come into play with a vacant property.

They want to get rid of that as quickly as possible."

"That doesn't necessarily mean that you can't follow Buffett's

advice and use leverage to finance your investments. It just

means that you need to be able to close a deal without having to

wait on bank financing.

"For example, banks will extend lines of credit to creditworthy

customers (often based on existing home equity), allowing them to

access large sums of money quickly. An investor who buys a

property under such an arrangement can go back to a bank later

and get a mortgage on their investment property, or even a new home equity line on their rental property.

"You are going to get your best deal if you go in with cash and settle as fast as possible ... If a bank is out for

$100,000 [on a property] and a guy walks in and says, '80K and we'll settle in two weeks,' and then another guy

walks in and says, '90K but subject to mortgage approvals, appraisals and all that,' the bank might take the

80K. They may not wait for the 90K because carrying the property is costing the bank money, and there's a risk

of both deals falling through. They're looking to liquidate their portfolios."

Be patient.

"Don't look at the first hurdle in the 100 meter dash, you want to look at the last

hurdle: 'How am I getting out of this property?'

"Out of it can also include getting it to the point where it's rented

and you're now creating an income."

Don't underestimate the value of professional advice—and professional help.


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Daniel Goodman / Business Insider

By soundfromwayout on Flickr

Michael Baird via Flickr

"Any Realtor will always sit and talk to people about these kinds of things. You can always

go to different Realtors and find out what's selling in the area ... and they'll tell you.

Let's face it; nine out of ten times [a property] is listed with the Realtor.

So if you go in and talk to a Realtor that way, the Realtor will

[often] wind up working with you as an agent. Usually, people get

a better price using an agent than buying directly [on their

own] because they're not as sophisticated about working out

the deal, and they're safer that way. They should work with a

professional who they can hold accountable if something goes

wrong."

It's a wonderful time to buy distressed homes ... as long as you don't get in over your head.

"Just because you can buy it doesn't mean you should buy it," Argus points out. "The big

problem with Warren Buffett's advice [that this is the #1 investment right now] is that a lot of

people who did this the last time got into trouble. They took out home equity loans and ran

that all the way up, got a mortgage on the new property for a higher [interest] financing, and

then they ran into a glitch and got themselves knee-deep in a bear trap."

That said, he thinks it's a wonderful time to invest in distressed

homes—if you do so intelligently.

"Rents are starting to [rise] again where they didn't before," he

told Business Insider. "You also have the added advantage that a

lot of people can't purchase right now, a lot of people have had

issues with their credit because of the economic crisis, so a lot of

people aren't buying, they're becoming renters, which is making

the landlord business fairly strong right now."

Now that you know what you're doing ...

These Are The Best 10 Cities To

Buy Bank-Owned Properties

Tags: Housing, Warren Buffett, Foreclosure, Foreclosure Deals, Short Sales | Get Alerts for these topics »


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The Water Cooler 12 Comments

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quraina on Mar 13, 12:03 PM said:

You've bought a foreclosed home, you've renovated it. Now, who can you sell it to?

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imdwightgooden on Mar 13, 12:21 PM said:

@quraina: you don't need to... you can rent it out... i'm doing this very thing right now

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Conservative View on Mar 13, 12:25 PM said:

@quraina: Who will you sell to? Is that a trick question?

The Feds, of course.

Just make sure to be completely irresponsible and put no money down, nor make any payments. Soon enough, Uncle Sam will come in and make you wholeagain.

The best part? It doesn't cost you a cent. Your property will be bought and paid for by us fools who were responsible with our money and by the Feds mortgagingour children's future.

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Beltway Greg on Mar 13, 12:46 PM said:

@imdwightgooden: Look who it is. The infamous goldtarded right wing sycophant of the neocon right wingnuts.

Hey look it's a pot of gold! Gotcha...


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Apple to $1000 in short order. I backed up the truck into today's gains and will celebrate tomorrow's spoils with the rest of the DC insiders who know a good buywhen they see one.

Want me to buy you a beer Dwight? This bar doesn't take gold.....

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@Beltway Greg: yeah, i'm sure you did all of that... and while you were backing up the truck i was brushing the mane of my petunicorn

does it make you feel good to act like you're a somebody on here? does it help take away the pain of the reality of your loserdom existence? does it change thefact that when you put your head on the pillow at night, all of you're left with is your mediocrity and insignificance? does a life without accomplishment go awaywhen you type your lies about a hotshot lifestyle that you wish you had?

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@Beltway Greg: btw maggot, as mentioned above i just bought two properties... i guess i'm a house bug now too.... i guessthey're not worth anything as if i can't buy a beer with the house now, right?

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Beltway Greg on Mar 13, 1:52 PM said:

@imdwightgooden: Ha. And I'm Ja Rule. Listen child I ain't got time fo dis no mo. I AINT GOT TIME FO DIS NO MO!

Wake up when you sniff reality smackin ya in the face. I'm out for now. Gettin an ipad 3 with AAPL profits. No big deal.

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@Beltway Greg: where do you think i was for those couple weeks fool?

but yes, i'm sure you're profits in apple are about the same as the cost of an ipad 3... 10 shares that you bought around 500... that's $500 profit

trust me, i know what small person you are just through your posts... you reek of middling insignificance

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Gary Anderson (URL) on Mar 13, 12:10 PM said:

Nice article about warnings. Only problem I see is that in places where there are a lot of foreclosures, you could end up with a glut of rentals. Holding an illiquid asset with no one to rent to is a nightmare.

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STAN on Mar 13, 1:03 PM said:

Once I would like to see a discussion of business without someone injecting their petty (and incorrect) political views into it, but on a whole theadvice give here was spot on. Before you buy a distressed property (which simply means any property where the owner owes more money onthe property than it is worth), you should ask yourself: Am I using this property as a home or as an investment? For many years here recently, too many Americanswere using their home AS an investment and forgetting the true benefit of home ownership--it provides you with a space where you can lawfully exist on this spacemarble without beings subject to unlawful ouster. So many peoplein the US take this fact as a given because of our history here. This is the only place on the planet

that protects the landowner as much.

If you are using the property as your home, then your considerations for purchasing are slightly different than if you are using it as an investment.

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TOO SOON WAIT TO BUY on Mar 13, 1:03 PM said:

The timing is way too soon. Houses will go down much much more,You'll see after the election every thing will go down even more. Except unemployment, which is about 17 % reality math. Wait till thedepression, then wait some more then buy houses. Do not listen to Buffet... p.r. man for Obozo...all b.s. Check out 1930.


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GUH on Mar 13, 1:38 PM said:

Looks like Tom Vu just got out of prison

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Moazzem Hossain · Dhaka, Bangladesh

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“How To Buy Foreclosed Homes”.pdf