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How to Get Started with Foreclosures

January 21, 2010

Getting involved with foreclosures can be a profitable venture because in almost any area of the United States there is an ample inventory of real estate foreclosures—in some areas more than an ample inventory, maybe even a glut As a result, of course, some real estate investors are having a field day buying and selling these properties at a profit.

Like any real estate investing decision, however, the ability to make money on foreclosed real estate requires more than locating a property and buying it. It requires hard work and some knowledge. To help you get started, here are a couple things you should consider if you are thinking about buying and selling bank foreclosures as a real estate investing business.

1) Determine your own value of the foreclosure – Banks typically price the REO (real estate owned) properties at a listing price that may not be the best value for the property. To combat this, some real estate investors simply reduce the price by 20-30% when they make their offer. But this method can be faulty because the bank’s listing price may or may not have anything to do with the value of the home. Here’s a better method: do your own due diligence to analyze the deal. Perform a market analysis to see what similar properties in the area have recently sold for, how long it took to sell them, then account for any repairs needed and build in your profit. Bear in mind, that no foreclosure, regardless what you might otherwise think, provides a good real estate investing opportunity unless it satisfies all aspects of the deal: resale price and costs, repairs, holding time, risk and profit.

2) Don’t rely on a single source to find you foreclosures – Although real estate agents are an excellent source for finding foreclosure listings (especially if you’re a newbie), working with a typical agent, or for that matter, just one agent, is not a good idea. In this case, look for multiple agents that actually get REO listings directly from the bank (not simply off the MLS). And the more brokers you work with willing to feed you the foreclosure listings they personally control, the better.

3) Settle on a sales strategy – The type of property you are looking for will vary greatly depending on whether you plan to fix and sell it, fix and rent it, fix and lease-option it, or wholesale it to another investor. So determine your sales objective and then narrow your search and choose only the foreclosures that are right for you.

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How to Handle Tenants Who Demand Lower Rents

January 18, 2010

Many tenants are approaching their landlord and threatening to vacate the rental property unless the landlord lowers the rent. Fair enough. Tenants after all, cannot be blamed for using this volatile economy as an opportunity to try and lower their costs.

Given, however, the adverse effect it would have on the real estate investor’s investment—such as cash flow, present and future value of the property, and the investor’s ability to borrow against the property—to merely cave-in to tenant demands and lower the rents would not be a prudent real estate investing decision. The smarter approach for income property owners would be to do some research in order to determine if the tenant is really in as strong a bargaining position as they think.

1) See what sort of properties and offers are actually out there. Tenants commonly make assumptions about what they can get elsewhere without really understanding the details. What they deem to be a better deal elsewhere may in fact be a misconception. Always stay current with your market so you can overcome tenant objections as they arise without harming your investment.

2) Understand the motivation behind tenant unrest. What are your competitors offering that has caught the eye of your tenant? In this case, ask them. But here again be preemptive. Perform a couple of comparisons on competing properties to understand what sorts of terms and discounts or incentives are being offered so you aren’t caught flatfooted and can work it out with your tenant reasonably.

3) Work out the numbers. Be aware of what it will cost you if your tenant vacates, the time it is likely to take to find a new tenant, what it could cost to get the unit rent-ready, the incentives you may need to provide to be competitive in the market, the difference between the rent you are getting now and this potential new rent, and all other costs you might incur to re-rent the unit such as agents fees and marketing expenditures.

4) Recognize why a tenant might not want to move. In addition to the other negotiating strategies, bear in mind that tenants are generally aware that moving is expensive, and like most us, don’t relish the idea unless it really is necessary or the savings outweigh the true costs of the move.

5) Establish an acceptable negotiation range. Use your market research to determine what would give you a great, fair, and poor result. This way you can come to the negotiating table prepared, informed, and confident when a tenant demands lower rent.

Preparation and information is the key to making good real estate investing decisions and crucial to a more favorable outcome with tenants seeking a rent reduction.

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Calculating the Value of Foreclosures

January 15, 2010

Any real estate investor who wants to purchase foreclosures should bear in mind that banks don’t necessarily list their REO (real estate owned) property at discounted prices, and in fact, could be asking too much.

It’s important, therefore, that the real estate investor make his own calculation of value to be sure the foreclosed property meets with his or her own real estate investing objective.

Here are three things investors can do to evaluate the worth of a foreclosure property in order to avoid missing out on a good deal, and at the same time avoid from over paying for a property.

1) Estimate Repair Costs – Bear in mind that repair estimates computed by the banks may not be complete. For example, whereas they may add the cost of replacing a broken HVAC unit or appliance, they may not add the cost of new paint, carpet, or updating an outdated kitchen. You want to be sure what it will cost to repair a property so you can sell it for top dollar.

2) Do a Comparative Market Analysis – Be sure you know the sale prices other similar real estate in the area sold. Include recent sales (perhaps within the past six months), generally within the same neighborhood, with the same number of beds, baths and square footage, and in a similar condition. If created with meaningful numbers, this will give you an idea of what you can expect to sell your foreclosure.

3) Tailor Your Profit – You don’t want to take the risks without making an adequate profit and rate of return. Whether you plan to sell the property quickly for a profit or keep it as a rental property, remember that the foreclosure has little value to you unless you profit.

Complete all three steps for each foreclosure you preview and don’t hesitate to use your documentation to negotiate a deal with the banks. The banks could yield to reason and accept an offer less than what they expected and more consistent your real estate investing objective.

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