Housing markets rife with foreclosures can still present great deals for investors, but also stiff competition and pitfalls for the inexperienced. What does this mean in plain speak? Use foreclosures to build your business, but be careful if you do not know what you are doing.
Buying now often involves bidding wars. Better opportunities may arise soon as more repossessed homes head toward auction.
“There are too many investors and not enough inventory,” said William Cole, a San Diego insurance salesman aiming to invest in Southern California’s hard-hit Riverside County. “I’m expecting a new wave of foreclosures to bulk up the low stockpiles as investors exit the market due to lack of funds.”
Cole, age 42, wants a property or two that can yield positive cash flow over the long haul. Aided by a real estate agent, he has made more than a dozen bids in the past five months. They’ve lost out to low-ball all-cash offers and bids from buyers with Federal Housing Administration loans.
Repossessions are stoking the pipeline of homes that will become available to investors. Foreclosure listings firm RealtyTrac says REOs, or real estate owned by lenders, jumped 31% year over year in January. The numbers may increase in the next few months, the company says, as lenders foreclose on late loans that couldn’t be saved by modification programs or other means.
Foreclosure sales are handled auction-style on court steps, at hotels, or privately between bidders and banks. Some banks list properties at their Web sites or auction sites.
Foreclosures often elicit multiple bids that result in a cash purchase by an investor rather than a bank-financed arrangement, according to the National Association of Realtors.
It says multiple bids often come in on foreclosures priced at $60,000 to $100,000. The typical sale price is 5% over list for foreclosed homes under $250,000 with multiple bids.
Investors should do their homework and get advice from a real estate agent who knows foreclosures, says Don Matheson, a ReMax agent in Maricopa County, Ariz.
“I tell them to do their due diligence,” he said. “You want a property that will meet your long-term growth criteria, provide the lowest cost of ownership and attract the best possible tenants.”
Preparing To Purchase
Investors may have to hold on for five years to turn a profit, says Matheson, who specializes in foreclosures, short sales and luxury homes. He says distressed properties in the Greater Phoenix area make up 80% of the active market; 30% of the foreclosure-sale brokering his team does is for investors.
Matheson gives this advice:
Monitor sales stats and price changes in a target neighborhood.
Check home condition to help tell value and make a smart bid.
Consider local value-drivers — good schools, jobs, public transportation, hospitals, shopping centers and ideal tenant demographics.
The big mistake that novice investors make is chasing a property without considering who will live there, says Chad Merrihew, founder of the Rooted Group in Riverside, Calif. It’s a property management firm that owns rental homes in California, Oregon, Illinois and Missouri.
Merrihew, age 25, bought his first investment property in 2005 as a University of Oregon sophomore.
Last year, for investors, his firm spent $1.3 million on 13 foreclosures in Riverside County, Calif. The average it paid per property was $88,000 plus $30,000 for renovations.
Seven sold for a profit. The others are being held. One bought for $100,000 and fixed up for $20,000 sold in about a month for $182,000.
Merrihew’s bidding strategy in early 2009 was to offer 70 to 80 cents on the dollar. But that was when there were just a few bidders per property. He made 75 offers between January and March 2009.
“Last year there was zero action, but today I’m one of 50, which makes the bidding process tough,” Merrihew said. “Compounding the problem is low inventory.”
The number of households receiving some filing in the long foreclosure process hit 315,716 in January, up 15% from a year ago but down 10% from December, RealtyTrac says. Nevada, Arizona, California and Florida led in foreclosure rates.
Not every region is seeing a spike in investors. In Palm Beach Gardens, Fla., investors are slow to return to the market, says Carol Clawson, a Keller Williams Realty agent. Clawson estimates that 10% to 15% of deals she brokers are foreclosures.
Clawson said, “Investors are interested in the best price, and those are often foreclosures.”.
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