Is there any way to assure real estate success, to purchase real estate at the bottom of the market, sell at the top and face no risk in between? It would be great to say that the answer is yes, and greater still to have such knowledge, but the central reality of investing is that such certainty does not exist. There’s always risk, including the risk of not doing anything and missing an opportunity.
But if it’s true no form of investing is risk-free, then it’s equally true that there are steps which can be taken to reduce marketplace perils, especially when considering foreclosures, short sales and distressed properties in general.
So what are the keys to foreclosure investing success?
“Each local market is unique and always changing,” says Jim Saccacio, Chairman and CEO at RealtyTrac.com. “While history is a guide, it does not guarantee how markets will perform down the road. The best way to profit as a real estate investor is to first identify the markets you think are best for you and your finances, do as much research as possible; and then look at such factors as pricing, rental rates, financing, population and job trends.”
Are there specifics to help you identify a potentially good deal? While we make no guarantees, here are 20 key factors to consider:
1. Property must be available at a substantial discount relative to like properties in the immediate area. Otherwise why bother?
2. In a practical sense, expenses to repair a distressed property to make it salable or rentable should be seen as part of the acquisition cost, even if such expenses are made well after closing. The same is true of the cost to hold property in the face of vacancies. In all cases you must have substantial cash or credit for vacancies and repairs. More is always better than less.
3. The market is huge and it’s important to consider a wide variety of options. Most properties won’t work for one reason or another, the trick is find the very few that will. Use a foreclosure listing service such as RealtyTrac to locate and compare local distressed properties.
4. Use the term “foreclosure” in a general sense. It should mean not only homes which have been foreclosed and are now being sold by lenders, but also short sales and properties facing foreclosure.
5. Have financing in hand. You must be able to finance the property for cash or get long-term financing from a regular lender. In the case of bank-owned properties, the lender may have a program in place to finance their real estate owned properties (REOs).
6. Buy where you live. Why? You already “know” much about the local market, you have marketplace intelligence just from the local news media, brokers and conversations with friends and neighbors. Buy 700 miles away and you lose these advantages.
7. For many years HUD has had a so-called anti-flipping rule, a standard which said most properties could not be financed with an FHA loan if they had been sold during the past 90 days. As of February 1, 2010 the rule has been suspended for one year, a suspension which might continue into the future. The good news here is that it will be easier for at least the coming few months to quickly buy and sell distressed properties.
8. A viable real estate marketplace must be in place if you expect to quickly re-sell the property. There’s no sense buying in a down market with an intention to sell if the market is so slow that a profitable sale is unlikely even for homes bought at discount.
9. The local area must have a stable or growing population and a stable or growing job base. This is necessary to assure demand for the property. For specifics, speak with the local business development office. Ask for hard statistics, do not rely on puffery.
10. Establish reasonable definitions for success. Yes, it would be great to make $500,000 on every property, but making $10,000 is not so terrible, especially if you learn things which will help with the next investment.
11. If it’s your intent to quickly buy and re-sell property then always practice good investing technique: Make a photographic record of the property inside and out on the day of closing. Make another set of photographs once the property is fixed up and repaired. Why? For tax and insurance records, to show the condition of the property if it’s rented and the tenants later cause damage, and to have evidence of the improvements you made.
12. Have a written ownership agreement in place before purchasing with others. Such agreements outline the division of profits, show who is responsible for what, explain what happens if one owner wants to sell and the others do not (and vice versa). Written agreements are especially important if buying with friends and family — if friendships erode or someone gets divorced you don’t want to have your investment compromised.
13. Surround yourself with professionals such as brokers, attorneys and home inspectors. Yes, there’s a cost to such services, but that cost in advance is minimal compared to the expenses one can face if preventable problems are ignored.
14. Know the rules. For instance, if you contact an owner facing foreclosure will you be regarded as a foreclosure rescue specialist? Many states now have broadly written laws to prevent fraud and abuse, be sure to speak with attorneys and brokers before entering the marketplace.
15. Buy in the path of future growth. This means you want to look for properties in areas where new roads, stores, offices and schools are being built and rebuilt, where there’s some excitement and verve.
16. A reasonable and obtainable rental rate for the property should at least cover cash costs for principal, interest, taxes, insurance, condo fees (if any) and brokerage fees (if you use a broker to rent the property). Alternatively, a monthly loss — negative cashflow — may be acceptable if you have sufficient reserves to carry the property and the end result is a profitable sale or a higher future rental rate.
17. Be aware of tax issues. Tax claims come before private claims such as first mortgages, something to consider if you’re providing seller financing for units you fix up and sell.
18. Be careful with condo and co-op units. In a property with a large number of bank-owned or nonpaying units, you could be hit with a huge special assessment if other owners are not paying their fees.
19. Spend time with local real estate brokers, attorneys, lenders and investors. What do they think? Where are they investing? What have been their biggest successes — and their biggest mistakes. You can sometimes meet such folks at real estate auctions, open houses, closings, etc.
20. Don’t be afraid to say no. There’s risk in real estate investing. If you can’t find the right property with the right advantages, if the risk is not right for you, then don’t enter the marketplace. Real estate investing is a business activity so forget about ego and status, keep your eye on the money (everyone else does), work with brokers and lawyers and always do what’s best for you.
Peter G. Miller is syndicated in more than 100 newspapers and operates the consumer real estate site, OurBroker.com.