Considering whether or not to invest in real estate foreclosures? Curious about how to buy them and how to realize a profit?
Foreclosures can be a good place to invest but can also involve significant risks. There are some deals out there for little or no money down, but do your research before jumping in.
There are various ways to invest in foreclosure properties, the most popular being to purchase a property, fix it up and then rent it out. The goal here is to create a positive monthly cash flow. You do need to be prepared to become a landlord with all the responsibilities of an investment property owner.
Another way to invest in foreclosure properties is to seek out “handyman” specials, buy them, invest some money to fix them up and then sell them, hopefully for a profit. This requires some smart planning to know the neighborhood and be sure of the ability to net a profit after all related costs.
Another approach in purchasing a foreclosure is making sure it is underpriced and then immediately selling it at a higher value. Here is how you can sell a home for a higher value by taking back a mortgage:
Consider a house worth $100,000, sold at a foreclosure to an investor for $50,000. The investor puts down 10 percent ($5000) and secures a mortgage for $45,000. He/she then advertises the property at a discount (let’s say $80,000) and offers 100-percent seller financing.
The owner hopes to create buyer urgency by underpricing the house. If successful, he/she will take a promissory note from the new purchaser for $80,000. The difference between the $80,000 sale price and the original $45,000 mortgage nets him the equivalent of a $35,000 loan. The new buyer makes payments to the investor for the $80,000 loan and the investor makes payments on the original loan for $45,000. In real numbers, here’s what it would look like.
If the original loan is for $45,000 at 8 percent for a 30-year term, the principal and interest will be $366.88. When the second buyer takes on the note for $80,000, the investor may charge a bit higher interest with 100 percent financing. Let’s say he offers the buyer an $80,000 loan at an interest rate of 9.5 percent over 30 years. The monthly payment will be $672.68. This will create a positive cash flow to the investor of about $306 per month.
If the borrower stays in the house for 30 years, the investor will make $88,295 in interest. After paying his own interest on the $45,000 loan and netting $30,000 in capital gains, he will realize a total return of $118,295. Not bad for a small $5,000 down payment!
Before you go out, checkbook in hand, ready to bid, do your due diligence and seek some expert advice first. If you’re deciding to invest in foreclosure properties with a spouse or other investors, be sure that everyone understands the plan. You are about to enter a world of high finance, property management, calls at unreasonable hours from tenants, and other risks that regular homeowners never experience.
Be sure to get educated. Visit the bookstore for guides by reputable authors who know investment intricacies.
Most importantly, be realistic.
Not all foreclosures are good deals so be sure the one you are considering is.
Not all foreclosed properties are available at a discount. Make sure you are not overpaying and will find yourself in a deficit down the road.
If you take back a loan, your buyer could default and you will be out that monthly payment.
Most loans today prohibit wraparound financing so investigate this option if you are considering it.
Repairs could be far more than you expect so be sure to consult with some experts for pricing.
Not all tenants pay their rent on time; some don’t pay at all. Be prepared should this happen to you.
Some renters damage the property and you will be the one to have to fix it again.
Changing interest rates could impact your bottom line so know the current rates before entering into a contract with someone.
It may not be possible to re-sell the property without extensive, costly repairs. Again, consult with a contractor or other professional for pricing estimates.
Not every deal yields a profit so be sure your deal will before signing on the dotted line.
If you have a profit you may face paying some additional taxes.
It is advisable not to only look at foreclosures but to also keep an open mind to other investment opportunities.
Consider this: If making money with foreclosures was both easy and a sure bet every time, there would be more people doing it without question.
It is not likely that foreclosure properties will ever disappear. Along with the ebb and flow of the real estate market and the mortgage industry, there is always the unfortunate circumstance for some homeowners to default on their loans and become foreclosed on by their banks. Smart investors can take full advantage of these opportunities and turn them into big profits.