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Easy ways to save on Foreclosures

One of the least known secrets about buying foreclosures for owner occupants is the 203k loan provided by the FHA. The FHA or Federal Housing Administration is the body that insures mortgages for the federal government. As such they have more flexibility and more interest in making homes safe and occupied in order to stabilize communities that may otherwise have homes that could be vacant and eventually become tear downs. The 203k mortgage offered by the FHA for homes that fall under the requirements of the FHA which means most homes in America. 203k is the designation given to a repair mortgage that allows home owners regardless of the condition of the property to finance repairs into the mortgage. These repairs could be limited to just updating or could be for full rehabs of existing homes. The lowest amount that can be asked for is $5000 but it can go as high as the home will appraise for. Some conditions do apply as far as what can be financed into the mortgage. Improvements such as adding a pool or tennis court will not be approved but other items that are reflected in the value of the home such as a second story or cosmetics can be easily added to the mortgage amount.

The 203k loan may be slightly more expensive regarding rates than a traditional FHA loan but this can be overcome by refinancing out of the 203k once the repairs are complete. This flexibility is incredibly valuable when shopping for a home as knowing about the 203k can expand the possibilities when looking at a home that needs repairs to bring it up to the standard that the home buyer wants. A 203k specialist must be engaged in order to assemble all the necessary paper work and provide it to the loan officer but the cost of this is far outweighed by the amount of options that are opened to the educated buyer regarding 203k mortgages and how most homes regardless of condition can be purchased and the entire home can be rehabbed to the taste of the new owner.



Top 5 Foreclosure States

The top 5 states with the highest number of foreclosures per capita are Indiana, Michigan, Wisconsin, Ohio and Maryland. What do these states have in common?

The easy answer is high taxation compared to the national average. High taxation keeps businesses from starting up or in some cases from staying in the state. In the most dramatic of cases a business can be closed because of taxation that is more designed to extract as much money as possible from the business rather than being designed to encourage the business to grow and stay in the state.

Low unemployment is a leading indicator of foreclosures. Low employment is not good even for the investor as once the foreclosure is purchased it will need to be sold or rented to someone that has a steady income. Be aware of the employment in the area that the home is located as it will impact the ability to sell or rent. This rule applies to Cities and Counties as well. This is not to say that there are not good opportunities in these states or any others. It is just part of the larger equation that needs to be added rather than ignored.



Building wealth quickly

Many investors wait for everything to be in line before they move on to the next step in the process. As an example, an investor may have a ratified contract on a foreclosure that needs repairs and wait until the house has settled and then start doing the repairs. As soon as the repairs are all complete, they then move on to the marketing stage of the investment that they have made in order to sell it.

This is completely unnecessary and increases carrying cost which has to be factored into the profit from the purchase and sale of the foreclosure. Carrying costs are the same as lost profits in the best case scenario. It is fair to say that it is factored in as lost income if the investor had been more proactive. It is even fair to say that the expense of paying the mortgage during the carrying phase is an expense rather than lost profits. The wise investor waits only for the ratified contract and then begins to market the property in the hopes of finding a buyer that is ready willing and able to purchase even if the house needs some repair.

By advertising early we are able to give the end buyer the chance to select their own colors for carpet and paint if the home requires it. Either way the carrying costs can be dramatically reduced if we market the property prior to taking possession. This way we can move on to the next deal more quickly as well and increase our volume over the course of time.



3 Secrets to Buying Foreclosures

The first secret is to make a reasonable offer. Many of us feel that the banks and asset managers are willing to take a dramatically lower price than the asking price. This is not the case. We can lose a good deal on a foreclosure by trying to make it a great deal. In order to know what we are willing to offer on a foreclosure home we need to cover the second secret. That secret is to be prepared with the supporting data in advance of making an offer. By checking the recent sales we can often see what the home should sell for under normal circumstances.

By knowing what other similar homes have sold for recently we are more likely to have a better idea on what to offer in order to make a wise but rapid decision on what to offer rather than a knee jerk reaction to the pressure that we feel when we are trying to make quick decisions. The last secret we sort of covered within the second secret. The third secret is to make a decision quickly and be determined. If we have done the two first secrets we are far more likely to be able to make the decision to either pass on the foreclosure or to make an offer. Foreclosures are as often underpriced as they are overpriced.

Understanding the difference between what a good price is and what a ridiculous offer is allows us to make the decision quickly. The reason for the value fluctuations is often because the appraisers for foreclosures are many times under a great deal of pressure themselves to get the appraisal done and move on to another. This haste can lead to great opportunities.



Short Sales from Fannie Mae

The real news is that short sales are so badly named it should be against the law. If there is any truth in advertising they should be called “Long Hard Haul Sales” which is much more appropriate. The word short sounds like it will take a short time to buy one but that is so far from the truth that they are on different planets.

What short sale means is that the bank will take less than what is owed on the property. “Short” has nothing to do with time frame and less to do with a short amount of pain. The link below discusses some of the changes that are coming down the pike regarding short sales but as a word of caution…don’t be in a hurry to close the deal and move into a short sale.

And if you are selling a short sale you will not be paid by the hour because if they did you would be making below the legal limits of minimum wage. Workers in Bangladesh will feel bad for you and perhaps send money, stuffed animals  and kind letters. But they won’t envy you.

Short sales are like Chinese water torture. One drip of hope at a time followed by weeks of silence and buyers that are ready to jump ship every other day. At the end of the process will it be worth it to anyone? Well that depends on who you are and what you expected to begin with. Speaking from as little exposure as I could possibly have with short sales and only listening to coworkers moan and complain as they slow go both broke and insane, I wouldn't put myself through the ordeal or any of my clients.

It is not that I don’t have any patience. It is just that I don’t need to have every experience in the world to know what I don’t want to experience. I don’t want to eat cockroaches dipped in chocolate, I don’t want to jump out of an airplane naked and I don’t want to live through the drama and gnashing of teeth that are associated with short sales. 

Webinar on Short Sales

Building Your Foreclosure Portfolio

The current real estate environment is ripe with potential issues that must be taken into consideration. Local real estate prices, mortgage worthiness and local economic and employment conditions are only some of the variables that an investor in foreclosures must take into account. If someone is just beginning to invest in foreclosures to build their real estate portfolio, it is important to understand that decisions made now can and will affect financial flexibility later.

Before Buying A Foreclosure…

Questions that buyers must ask themselves (and answer) are:

  1. What are your short-term real estate investing goals (i.e., how many foreclosure homes the first year)?
  2. What are your revenue generation goals for buying foreclosure properties? Breaking even is not a goal that is called a mistake and should not be repeated.
  3. Am I willing to be a landlord? If no, collect stamps or buy lotto tickets.
  4. What is my credit like? If you need to improve your credit, start now!
  5. How much cash am I working with? If none, study Hard money
  6. What are long-term real estate investing goals? Don’t fire without aiming.

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