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The Real Estate Adviser

"Flipping" foreclosures not for the faint-of-heart

Dear Steve:
Is it a good idea to purchase homes that are foreclosed at a low price, and then resell them after they are purchased?
"Keeping Up" Jones

Dear Keeping Up:
Before I define "good" in this case, let me first ask you a question: Are you a handy guy, Mr. Jones? And I don't mean with the remote control or the "search" button on the Internet. I mean in the fixer-upper sense.

Here's why I ask:

The managers of the REO (Real Estate Owned) departments of most banks generally know what their foreclosure inventories are worth and will try to recoup as much of their defaulted loan's value as they can. So if you plan to scoop up an undervalued home and flip it for a nice profit in a short time with minimal effort, the idea may not be so good. Others have tried. Many have failed, particularly at the hands of the many real estate "experts" who sell them on the idea of how easy it is to make a fortune buying and selling distressed real estate.

"It's not for the faint of heart," says Bryce Hamilton with Coldwell Banker Residential Brokerage in Portland, Maine, a veteran real estate agent who has handled foreclosed properties in an eight-county area for more than a decade. "In 80 percent of the cases, these properties are in poor condition. Some have been abandoned a long time -- maybe a couple years. They can be tough to work with."

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But if you are willing to fork out money for an inspection to know exactly what repair challenges you're facing and can endure some often-tough negotiations with the lender, you might pick up a property that's reasonably undervalued in its neighborhood and rehab it yourself. With a stalwart fix-it effort, you might be able to add 30 percent or more to its value, while spending only a fraction of the difference in materials, not counting your innumerable labor hours, of course.

If you need to "sub" out the work to contract folks, your dreams of a healthy profit margin could vanish. That is, unless you can afford to wait a few years for the home's appraisal value to catch up with the market, says Hamilton.

One common misconception in the foreclosure game is that the lenders who hold the note will be glad to offer you financing.

"Ninety percent of the time, there is no financing available. They are just trying to clear an asset off the books," Hamilton says.

However, you will need pre-approval for your mortgage from a different lender, or proof of liquid funds in the case of a cash sale, before the seller will even negotiate with you, agents say.

Often, the lenders are located out of state, and there is a communication lag.

"Expect offers, counter offers, executed contracts, etc., to take several days for response," says Hamilton.

One possible plus for you, Mr. Jones, is that while the housing market remains relatively stable in most metro areas, foreclosures have risen rapidly in the past few years. This unfortunate phenomenon can create additional investment opportunities that could really pay off when (and if) job creation kicks back into gear in the near future. And with the bigger volume, your chances of getting that occasional unpolished gem are a little bit better. The more time you invest in researching the market and property, the better off you'll be.

Just know that your first such venture will no doubt be a learning experience, and education usually has a price tag. But if you are successful with one house, your lender may stake you to better terms next time and you're on your way. You have taken an idea and made it truly a "good" one by virtue of your own sweat.

Good luck.

-- Posted: Dec. 27, 2003

 
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