Foreclosure investing is not as glamorous or as easy as the late-night infomercials claimed to be. Successful foreclosure investors treat it more seriously than any 9-5 job. They also have chests of cash for investment, as well as strong networks to facilitate deals. As depicted in the critically acclaimed Hollywood movie 99 Homes, foreclosure investing can be cut-throat competitive, but also extremely lucrative. In recent years, this strategy has gained more popularity from professional money manager and reputable Real Estate Investment Trust (REITS). Since we are not an infomercial and we don’t sell any books, we will present you the hard truth of foreclosure investing.
What is Foreclosure investing
Once a mortgagor defaults on his/her loans, the lender will exercise the contractual power and take ownership of the property then sell it to the highest bidder at a public foreclosure auction. Proceeds from the sale are used to pay off the bank or other lenders with claims on the property. Any remaining amount will be allocated to the mortgagor.
The participants of these auctions range from the average Joe to the most sophisticated real estate mogul. Many people are attracted to the opportunity of picking up a property that is often significantly below market price. The most common reason for foreclosure is the dissolution of a marriage, while others could be a failed business venture leading to a default or financial difficulty due to other circumstances.
Foreclosure Investing is a highly sophisticated real estate investing strategy that requires more due-diligence and skills than most people are aware of. It is definitely not a get-rich-quick scheme. The investor will need to spot a undervalue property with potential, close the deal, then work hard to turnaround and sell it at higher value.
Investment and Acquisition Strategies
Timing and location are everything. Investing in any market requires a well-researched battle plan that specifies the investment’s strategy, entry point, exit point, holding period, etc.. Similar to other real estate investments, investors need to research the targeted market for its future demand outlook. The demand of any real estate market is attributed to the local population growth, job growth, demographic, income level, infrastructure projects, and etc.. For foreclosure investments, the investor also needs to understand why the property is in default. He / she has to determine whether the foreclosure occurred as a result of isolated instances such as divorce, or due to a trend that may affect the local market in general.
A good place to look for deals can be the local newspaper publications that feature the properties for upcoming auctions. Traditionally, the courthouse has been a good place to find properties that are in the process of foreclosure. The county’s record gallery should also provide such valuable information. Another way to look for deals is to utilize the local real estate network. Speak to different agents and lenders to fish out any distressed properties before they default. Engage with the owner on a personal level before the foreclosure can help the investor to discover any hidden values or pitfall. In recent years, beyond residential properties, distressed commercial real estate and farm land are becoming more popular takeover targets for foreclosure investors.
Instead of buying the distressed property, another acquisition strategy is to purchase the distressed mortgage loan at a steep discount from the lender. Banks and most lending firms are in the business of profiting from the interest spread on the loans they issue. They are not in the business of taking over and selling foreclosed properties, which burdens them with appraisal, legal, accounting and administrative fees. Therefore, many financial institution simply liquidate the non-performing loans from their book at discount. The buyer or investor of those non-performing loan, can use their network in the market, try to negotiate with all parties and come up with more favorable terms for the struggling homeowner, in the process converting the non-performing loan into a performing one. At the end of the day, when the loans start to perform, the investor can either hold it out for the interest income, or they can sell the performing loan at a premium. However, the entire process is much easier said than done. Seasoned investors require strong network, as well as unparalleled negotiation skills to make a deal work. If no deal can be reached to improve the performance of the loan, the investor can still foreclose the property and gain ownership without going through auction.
Holding Period and Exit Strategy To hold or not to hold? Investors need to decide either to renovate and quickly “flip” it back to market, or rent it out while waiting for the long-term price appreciation. If you are considering foreclosure investing as a short-term investment, you should seek ways to effectively improve the appeal of the property, for this will significantly increase the value of it. If you are operating under a tight budget, please check out these 10 cost effective ways to increase the property values.
The rental strategy is ideal for owners who can handle the time and the stress of being a landlord. It is also good for owner to receive income while waiting for a major development news or event that could trigger a surge in the local property value. It makes business sense as long as the rental income can cover the carrying cost of the property such as interest, utility, land tax and your management time.
Many established real estate development firms have adopted the strategy of investing in distressed properties at discounted price, then renovate and convert them into profitable rental properties. Allied Properties (AP-UN.TO) for example, a Canadian based publicly traded REIT, its core strategy is to buy old factories and warehouses, then remodel the properties into loft or offices. Other perks from this strategy include interest-only loans and mortgage interest being tax deductible, which all contribute to the stable stream of cash flow for the REITs’ shareholders.
Conclusion Remember to be considerate when negotiating with foreclosed home owners. They are real people, undergoing tremendous amount of distress.
In Amazon’s best-selling real estate book, Real Estate Investing in Canada, the author talked about topics such as house hunting, market analysis and variety of investment strategies in more detail. It is highly recommend for people with a pique interest in the real estate industry.
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