|Investing in foreclosed real estate
With interest rates at record lows and the stock market
looking too perilous for small investors, many people are putting
money in an asset they understand -- real estate.
One of the best places to invest is in foreclosure
and bargain residential real estate.
The current market conditions make it a perfect time
for a small investor to purchase one or more foreclosure properties
for their private residence, rental or resale. In this difficult
economy, more upscale homes are going into foreclosure, so the notion
that foreclosure homes are only available in crime-ridden areas
is inaccurate. Beachfront and homes in affluent areas are part of
the mix of foreclosed properties available.
Recently, one man purchased a Florida ocean-view,
four-bedroom townhouse in foreclosure for about $100,000. He renovated
the home in his spare time, spending about $12,000 for materials,
cabinets and fixtures to bring it up to "like new" condition.
Then he sold it for $197,000, giving him an $85,000 before-tax profit.
He also purchased an inland foreclosure property that
after renovation has also doubled in value. He decided to rent the
second one. The inland property's rent exceeds the monthly mortgage
note and expenses by about $500 a month, giving him $6,000 annual
income from the property.
Many owners of homes that go into foreclosure have
been struggling financially for almost a year before they give up,
which usually means that the house has not received needed repairs
or general maintenance for a while.
This may include everything from light bulbs not being
replaced to roofs leaks not being repaired. Tree limbs in front
yards, broken appliances and windows and dirty carpets, floors and
walls are found in very affluent-area foreclosures.
The first rule of real estate, "location, location,
location," applies in these situations. If there is trash in
every room of the house, but the foreclosure is in a good area with
high property resale values, hold your nose, walk through the entire
house and consider making a low offer.
Not all foreclosures are previously owned homes. Some foreclosed
homes are new. These homes are not as easy to identify and rarely
appear on national lists.
The slow economy has left many builders of new mid-scale
and upscale homes without a market to purchase them. With thousands
of homes for sale in every city, some builders have reached the
end of their construction-loan periods without finding buyers for
In these cases, the banks that issued the construction
loans take possession of the homes and attempt to sell them, using
real estate agents to handle the deals.
These too are foreclosures. They are "hidden"
foreclosures because no one associated with the sale of these properties
will refer to them as foreclosed homes.
Competition is fierce in some
cities, nonexistent in others
In some cities competition for foreclosures is fierce. In Mesquite,
Texas and Collierville, Tenn., foreclosure homes are sold in one
day to the top offer among many anxious bidders. In other cities,
valuable properties sit for days without receiving one offer.
The climate of the competition for properties is largely
dictated by the number of professional "rehabbers" in
Rehabbers buy properties and renovate them quickly
to resell them for a profit in 30 to 60 days. They have contract
crews that help them complete the renovation work. They are constantly
purchasing properties to keep their crews working.
But even in cities where rehabbers are present, a
foreclosure home can be purchased. Many rehabbers had a maximum
home price they'll pay that is very low compared with the value
of other homes in the neighborhood. If you are willing to exceed
their price by $3,000 to $5,000, you may obtain the home at a very
low price but slightly above what a professional pays.
If you plan to do most of the repairs yourself and
not employ a crew of subcontractors, you may have paid about the
same amount for the home when you consider your savings on outside
Getting started costs less than
With good credit, many banks will loan the full price of the foreclosure
or more. If the home is to be used as a rental, many banks will
require only a 10-percent down payment.
Individuals with a large amount of equity in another
home may get a line of credit from their bank to purchase a foreclosure.
When they convert the line of credit to a mortgage, no down payment
may be required.
Foreclosure homes bought in good areas at below market
values that appreciate annually can be a sound investment strategy
for many investors. The appreciation of the homes is tax-exempt
until the home is sold. If the home is a primary residence, the
appreciation may be tax-free.
Homes used as rental properties give most investors
valuable tax deductions while the house increases in value and builds
equity. With many stock portfolios down, foreclosure real estate
investing may be the alternative many people are seeking.
Zimmerman is the author of How
to Retire With a Million Dollars and the president of
a partner of Bankrate.com.