Investing in Real Estate: Understanding Foreclosures

Investing in real estate can be a great opportunity, but what options are right for you? In Investing in Real Estate: Understand Pre-foreclosures, we talked about the opportunities in pre-foreclosures and what they meant for you, the investor. Now it’s time to learn about the second opportunity for real estate investor: foreclosures. Foreclosures are a great way to find a property priced below fair market value. In this article we will cover the pros and cons of investing in foreclosures, and also where to find all the information you need to see if investing in foreclosures is right for you.

Foreclosures are homes where the homeowner stopped making payments to the bank. In order to recoup the money they have invested, the bank needs to make money on this property. Although the bank wants to recover some of its investment, it does not actually want to take ownership of the property. So what does the bank do? They offer the home through an auction that is known as a “sheriff’s sale.” In essence, your local county sheriff’s department acts as the auctioneer for the bank. This is great news because it can be a great opportunity for a savvy and well informed investor.

To find homes that are up for foreclosure auction, type your county name plus “sheriff’s office” in a search engine like Yahoo or Google. This should bring you to your sheriff’s web page. By clicking on the column that says “sheriff sale” you will have a ton of information at your fingertips, including the dates of sales, addresses of properties up for auction, and a list of appraisal prices (and possible opening bids or deposit amounts). .

First notice the date of the sale. Most counties have weekly or monthly auctions on specific days at specific times. Visit a few auctions to see how many people attend and how stiff the competition is. Are there a lot of bids? In my area, there is very small interest in these types of investments. While there are many people in attendance, few actually bid. Often the property sells for opening bid (it hardly ever crosses the appraisal price).

The address is also listed so that you can drive by and inspect the property. This is where things can get a little tricky. When investing in pre-foreclosures, you have the opportunity to meet the homeowner or real estate agent and walk around and inspect the property. With foreclosures, this is a little more delicate. The homeowners are losing their home and can be bitter, upset, or frustrated. In some cases they have already moved out and the property is empty. Drive by the property to see which is the case. Generally you can tell by a quick peak. Is the lawn overgrown? Does the home look abandoned or in disrepair? Again, be careful here. Just because the home looks decayed or has not had normal upkeep, it does not necessarily mean it’s empty. People who don’t have money for their house payment may not have money to take care of the lawn or fix leaky gutters.

The next information you will need is the price of the home, or what the sheriff’s office has assessed as this particular property’s value. To determine a starting bid the sheriff’s department does its own appraisal. This is just a drive by of the property. Appraisers do not have keys (since the home owner left in a hurry or is still in the home) and do not enter the property. Therefore, these appraisals are significantly lower than the actually value of the property. Since this is what value the auction goes by, this is great news for the investor.

In most areas, the starting bid is a percentage of the appraisal price. In Ohio, the opening bid can not be less than 2/3 of the appraisal price. (Every state and every county have different rules so make sure and research your specific area). What does this mean in a practical sense? Let’s say you find a home in an area that you believe is worth $100,000 dollars. The sheriff has the property listed at $75,000. This means that the opening bid will be $50,000. You potentially have the opportunity to get a $100,000 dollar home for $50,000! If this is so easy, why doesn’t everyone do it?

For starters, most auctions require a down payment. This is a serious business and is not for those who may have problems getting financed. In fact, most investors only invest in foreclosures when they know they have cash. Most auctions require at least 10% of your winning bid. In larger cities, the requirement may be as high as 50% or more. Winning a bid is considered very serious business. Not following through is very expensive and can have legal ramifications. This is not something you want to take lightly!

The last thing to consider is the condition of the property. While the home may be worth $100,000 in top condition, you don’t always know what type of condition the property is actually in. This is why due diligence is so important. Visit the property and take the time to walk around the perimeter. Peek in windows if the property is empty. Talk to neighbors. (Especially in affluent areas, neighbors are anxious to see the property occupied. An unkempt property can lower neighborhood property values so neighbors will often talk to potential buyers). Be forewarned that even after any amount of work you could still be in for some surprises. Remember the homeowners didn’t have money for proper care so the home may be in bad shape. Has the septic tank been emptied? Does the roof or basement leak? A roof repair is expensive enough, but with leaks left unchecked the inside damage may be just as costly. Also, items that come standard in regular transactions (like appliances) may be missing (occupants will take everything they can to recoup their own losses, from appliances to light bulbs, ceiling fans, and light fixtures).

There are a lot of variables in foreclosures, so investing in this area is not for the faint of heart. Since you can never fully inspect the property, you can’t know the condition of the property or the amount of money you will need to invest in the property. However, foreclosures attract many investors because, since the price is so cheap, the potential for profit can be huge. Even if you have to invest a large chunk of money into the property, if you can get the property cheap enough there is still room for a nice profit. If you are lucky enough to find a property that doesn’t need work, then you are on your way to an awesome investment!

Make Money on Real Estate During a Recession by Avoiding the Mistakes Everyone Else Makes

You’ve seen the television shows on “house-flipping.” I don’t see as many shows on this subject, probably because of the recession. The recession has scared away a lot of potential real-estate investors. However, there are ways of making money on real estate during a recession.

The biggest problem that a real estate investor faces during a recession is that the real estate investor has less room to make mistakes. Every dollar counts and, it’s harder to get the dollar back that you lost. Before the recession, the “house-flippers” on television were able to make stupid mistakes with their money and end up with a profit from “flipping” the house. Today, you can’t afford to make those kinds of mistakes. So, if you are serious about investing money in real estate, I’ll show you some common mistakes that a lot of beginning real estate investors make so you can avoid them and make money.

The first mistake a lot of beginning real estate investors make is that they are unrealistic. Skilled real estate investors make a modest return on their money. Investing in real estate is not a “get rich quick” scheme. If you want to make a million dollars from an investment of one dollar, buy a lottery ticket. If you invest in real estate with the idea that you will get rich quick, you will make all kinds of bad decisions that will cost you a lot of money.

The second mistake a lot of beginning real estate investors make is that they are not financially secure before investing in real estate. In order to invest in real estate, you have to have money, or, at the very least, access to credit. If you are “flipping” properties, you need money to buy the property, you need money to improve the property in order to sell it at a profit, and, you need money to pay the property taxes if the property doesn’t sell right away. If you are an aspiring landlord, you need money to buy the property, you need money to improve the property if so needed, you need money to maintain and make needed repairs to the property, and, you need money to pay property taxes. In a recession, if you need to borrow money to invest in real estate, you are not investing, you are gambling. Keep this in mind.

The third mistake a lot of beginning real estate investors make is something I call “do-yourselfitis”. This mistake is usually related to the second mistake, because, a lot of wanna-be investors don’t have enough money to pay professionals to do the needed repairs to the property. There’s nothing wrong with a real estate investor that chooses to do simple home improvement tasks. Doing simple things, like painting, will save the real estate investor money. More complex tasks, however, are best left to the professionals. Hiring a professional to do the work saves time. In the real estate business, time is money. If you are “flipping” properties, the longer it takes you to rehabilitate a property, the more money it will cost you in the end. This also applies to real estate investors who insist on marketing their own properties. You don’t need a realtor to sell a house, but, if you don’t hire a realtor, it may take a lot longer for you to sell the property. If you are using borrowed money to invest in real estate, sitting on a property for a long time is a guaranteed disaster, particularly in a recession.

The last mistake that I would like to talk about is not doing research on the market you plan to invest in. If you are going to buy real estate in a certain area, the most important thing you should know is how much the homes sell for. This tells you how much money you can invest in a property before you run the chance of losing money. Look at what the average home in the area sells for. If you have to sell the property for more money than the average home in the area to make money, you’re taking a very big chance. In a recession, this might turn into a very expensive mistake. People who aspire to become landlords should pay attention to the going rate for rental properties in the area that they plan to invest, so they have a realistic idea of what they can charge for rent.

It is possible to make money in real estate, but, you have to do your homework and be objective. You want to make money. That is your goal. Don’t lose sight of that.

Real Estate: Volume Over Service

One common expense that goes along with selling a home is paying real estate commissions. While real estate commission rates are hardly “set in stone”, they average is 6 percent of the sales price in a typical sale. However, many sellers in a down market will try to maximize their net profit and negotiate commission down with an agent. In fact, I know many agents willing to reduce commissions down to 4 percent, giving a buyer’s agent the standard 3 percent and taking only 1 percent for themselves. Yet, in all of my conversations with seller and with agents, reducing commissions can come with a price all its own.

Volume

Professional real estate agents take their careers seriously. If your agent is willing to reduce his commission, it is likely because you are family or because he specializes in volume. The trouble is that even if the agent has a team in place to assist him with each transaction, your customer service experience with your agent is going to suffer. The fact is that it’s not only impossible for an agent with high volume to give you the same level of service that an agent charging the full percentage would, but it’s bad business to boot.

Consider this: If you were making less than half of your normal salary over a period of 30 to 45 days, would you do the best possible job for your employer? The answer is, most likely not. You know what you are worth, and you know that you are worth more than what you are being paid, this leads to resentment and ill will on both sides.

Sellers want it all

It has been my experience, with sellers and fellow agents that most sellers want it all. They want the customized reports, the agent who answers the phone at all hours and who sells their house for a reduced commission. While sellers might want it all, the likelihood of them getting it “all” is slim to none when the number one goal is paying less in commissions. In the end, this leaves sellers and their agent with a bad taste in their mouths, happy to be rid of one another once the transaction is concluded.

The added stress and complications that come up when weighing volume suppliers over service centric transactions, often costs sellers and agents time and money. Due to sheer volume, these transactions often result in less-than-the-best sales terms for the seller, and they certainly do not revolve in the best scenario for the agent.

For me, as an agent, I insisted to be paid what I was worth. The only instances where I would reduce a commission on a sale is if that person was a close friend or family member. The best advice I can give to a seller, from personal experience, is that when you sacrifice that commission, you sacrifice services you need to account for a smooth and customer centric transaction. At the end of the day, volume discounts over service really do not measure up to making much sense, and truly don’t save you much money.

More from this Contributor:

Questions You Need to Ask a Realtor when Selling Your Home

Real Estate Buyer’s Agent: Questions and Answers

What Realtor.com Can (And Can’t) Do for You

 

Finding Hot Real Estate to Flip

As most developers know, earning top dollar for developed residential properties means buying the right property at the right time, making some improvements, then selling the property at a profit. Known as flipping, this strategy can be very lucrative, if care is taken when selecting real estate. Here are a few clues that can help you identify property that is likely to appreciate in value by the time you have the property ready to resell.

Check for revitalization. Older neighborhoods where a few people have moved in and begun to restore houses may prove to be the next big thing in your town. If the trend is solid, you can purchase properties cheap today, put a minimal investment in making basic repairs, and sell the properties at a hefty profit.

Follow the franchises. Big name fast food and motel chains spend millions in projecting where expansion will take place, and then build in the area. Save yourself a few bucks and make note of any flurry of building activity involving motels, restaurants and similar new construction and buy acreage before the prices begin to rise.

Note where employers are building plants, office buildings, and similar facilities. Securing property nearby could put you in the driver’s seat for developing a new housing section, condos, or just holding on to the property until a big name hotel chain offers you top dollar for your land.

Look for nearby sports arenas and other types of entertainment venues. Chances are that part of town is expected to grow. Purchase nearby properties and build your own housing or wait for a buyer willing to pay up to twice what you paid for it.

Tips  amp; Warnings

Don’t purchase on the strength of one single factor. Affirm the potential by evaluating several signs of future growth, then make an offer on the property if you are reasonably sure you can at least recoup your investment and any related expenses.

Always seek professional advice in your real estate dealings. Instinct is nice, but talking with someone who knows the market well could turn up some question or factor you had not considered previously.

Obtaining a Job in Real Estate

The realty business isn’t doing very well these days. However, the field is still an exceptional area to invest your time. It may seem futile to invest your career in an industry that seems to be going only downhill, but the fact of the matter is this: eventually, the market will rebound. It may take quite some time, but even while the market is lukewarm, there is plenty of business to be had. People will always need a place of residence, regardless of the current economical state. Somewhere, someone is buying a home. That said person could be in your immediate area, and you could be their realtor, mortgage broker, appraiser, or home inspector.

The wonderful thing about the real estate industry is that it is an industry of necessity. People don’t buy, sell, or have their homes inspected as an impulse. Homes are necessary things in life that people will undoubtedly spend money on. The market is one in which the public will need to invest money at some point, which means that, for the most part, you can find a secure real estate job. Currently, investing in a real estate position may seem like a bad turn of events for your career – however, in a few years things will pick up again, and you may realize that you have made the greatest decision of your life. Obtaining a career in sales is most likely a bad career move in current times. However, a position in any other branch of the real estate industry is as good an investment of your time as any.

If you’re considering a career in title insurance, home inspection, mortgage lending, title insurance, or even as a real estate sales representative, the market shouldn’t daunt you. There are still a plethora of consumers who require these services, even if the market is not quite as bolstering as it once was. A wonderful way to wedge yourself into the current markets is to start a business, working independently, and undercut the competition for your area. You will undoubtedly lure in more clients with your low rates, and business will grow as details of your services spreads by word of mouth. This equation can apply to any of the niches in the market – mortgage loan fees, home inspection rates, realtor fees, and title insurance services. Keep your mind open, and your new choice of career may become a bit more alluring.

How to Get All the Money You Need to Invest in Real Estate

Let’s face it; we have all seen the reality TV shows and have probably gotten countless emails about how real estate “flipping” is a great way to earn a living. Let me tell you from experience, it is never as easy as it looks or as easy as they are going to tell you.

One of the largest hurdles most new real estate investors face is where exactly can they get the money to do all this. Notice that most of the so called “gurus” out there will tell you just about everything you need to know about flipping properties except where to get the money. This is because it is a very closely guarded secret that they want you to pay a lot of money to find out; preferably to them.

So as a former mortgage banker let me tell you one of the best ways to get all the money you need to become a real estate investor.

Quite simply, it is your family and friends! I know sounds way to simple to believe but let me map this out for you so you can see how this is done with minimal risk to your “investors.”

First of all you will need to set up a real estate investment trust which is known as a REIT. Take the time to set this up correctly. Now, your “beneficiaries” are going to be your investors. They get the “benefit of the trust.” You are going to be the “trustee” and manage the trust. Believe it or not you really do not need a lot of money to make this happen.

If you only get 20 people and each can contribute only $2,500 that is $50,000 and that will be about all you need. But if you can get up to $100K you are doing fantastic!Now, you have a trust that is worth $50K. Honestly, it could be less and if it is you just have to start with a smaller home. Don’t go for the big win on your first time out of the gate. You are going to learn a lot of hard lessons along the way and you don’t want to lose. So start small, make small mistakes.

With a $50K trust you can very easily leverage the assets of the trust along with the value of the home to secure a loan. You can do this one of two ways. First, if you have enough cash is to find a hard money lender and get him to give you a three month contract. That gives you 90 days to fix up the home, stage it and sell it. Time, in any real estate adventure, is your enemy. The second option, which takes a lot longer is to go the traditional route.

If you are a renter, now might be a good time to mention the FHA 203K program. This is a government sponsored program that will guarantee your loan and provide you with a cash account in order to pay for the improvements and renovations of the home. The caveat is that it has to be your primary place of residence. However, last time I checked it made no specification as to how long you actually had to live in the house. Double check with applicable laws but it is a great option for your first home.

So here is how a typical real estate transaction can occur.

You first get the trust set up, then you find a home that based on your knowledge and opinion of the market would make a great property to buy, renovate and then flip. Let’s call the sale price $189,000. It happens to be a foreclosure property that the bank had been sitting on for a while and the property is now distressed. In other words, the bank is desperate to sell because the property is deteriorated. Now most hard money lenders will work with you and to a 60% to 70% LTV. Well, what is 30% of $189,000? It would be a little over $56,000. So what do you do?

Well, here is what I do. I go to a bank. I ask for a $100,000 loan. I pledge the assets of the trust against the loan along with a promissory note against the home I want to purchase. Notice, this is not a mortgage. It is a short term “bridge loan.” It may take some work but eventually you can find a bank willing to do this. Now, go back to the hard money lender, he will give you the 70% of the sales price, take $60,000 from your $100,000 loan to buy the house and to cover closing. That leaves you $40,000 to renovate and cover expenses if you have to float the note for a month or two.

Renovate, update and then sell the house. Say you can sell it at market value of about $249,000. Ok, so now you have $249,000. You need to pay back the hard money lender his $132,300 then you need to pay the bank back their $100,000 for a grand total of $232,300. $249,000 less the $232,300 in outstanding loans leaves a total gross profit of $16,700 plus whatever was left of the $40K you had to renovate. Make sure to pay your taxes and expenses.

The remaining profit MUST go into the trust. At which point you as the trustee start paying back your investors. Let’s say you promised a 10% rate of return. That means you need to pay $250 to each investor. That means $5,000. Call it another $6,700 for taxes and expenses. Oh yes, before I forget, the most important part; don’t forget to pay yourself for all the work you did as the trustee with the remaining $5,000.

So now you know a great way to get the money you need to start real estate investing and all in all it is not a bad return on their investment or your hard work.

More from this contributor:

Should I get an Annuity?

http://www.associatedcontent.com/article/6184036/should_i_get_an_annuity.html?cat=3

First Person: Common Questions and Answers about Health Savings Accounts

http://finance.yahoo.com/news/First-Person-Common-Questions-ac-4017799821.html?x=0

Retirement Plan Not Working? Here may be why.

http://www.associatedcontent.com/article/6068516/retierment_plan_not_working_heres_why.html?cat=3

Islands for Sale Follow Cave Home onto Real Estate Oddities Market

First it was a cave house that was auctioned off on eBay; now there are private islands for sale. Would you buy an island right now? What is more, would you buy a private island on Second Life?

First it is a Cave Foreclosure that Threatens a Cave Home

Private islands for sale aside, there currently is a unique cave home listed on eBay while a balloon note threatens a cave foreclosure. The eBay cave home auction is scheduled to go until 03-11-09 and for only $300,000 the cave could be yours; unfortunately, even though the story generated much interest, there are no bidders thus far. Will those holding private islands for sale have better luck?

Now it is Islands for Sale

Take for example Burnt Island. Private Islands Online is listing the five acres off the coast of Alaska for $1 million. This is one of the private islands that was discovered by Captain James Cook back in 1778, and is said to only have had one owner. It mentions a private retreat cabin that is built in the unspoiled beauty and Burnt Island sounds like a nice treat for anyone ready to buy an island on the cheap. Or does it?

Private Islands for Sale Are Not Always All They’re Cracked up To Be

Back in 2004 the webmaster Tim Kelley of Crust Outlook Alaska featured a ski trip to Burnt Island. Providing copious photos – among them a moose brought down by a pack of wolves – he details that the picturesque cabin mentioned in the “islands for sale” listing is really little more than a rotted shack that has not been maintained in over 40 years. What is more, he mentioned that if you want to buy an island, this one was only appraised at $10,000, a far cry from the $1,000,000 for which it is currently on the market.

Sometimes These Islands for Sale Are Not Even Real

There is an eBay auction that features a Second Life 4096 square meters of private island property which is rated commercial or residential. This auction, too, is scheduled to go until 03-11 and thus far there are no bidders, even though this virtual private island parcel is attractively priced at $1. Second Life, as you may want to know before bidding, is a virtual world. Is the recession now hitting make belief real estate?

Sources

http://www.associatedcontent.com/article/1499716/unique_cave_home_listed_on_ebay_as.html?cat=54; http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem item;=330306913609; http://www.privateislandsonline.com/burnt-island-alaska.htm; http://crust.outlookalaska.com/IslandSki/IslandSki.htm; http://cgi.ebay.com/Second-Life-Land-4096sqm-with-937prim-private-island_W0QQitemZ280319489291QQcmdZViewItemQQptZVideo_Games_Games?hash=item280319489291 amp;_trksid=p3286.c0.m14 amp;_trkparms=72%3A1205%7C66%3A2%7C65%3A12%7C39%3A1%7C240%3A1318%7C301%3A0%7C293%3A1%7C294%3A50