Thinking of investing in foreclosures? Look before you leap

With an abundance of foreclosures on the market and the current stock market a somewhat iffy proposition, many investors are taking a look at available foreclosures and short sales to see if housing is a better place to put their money. There are definitely deals to be had, but before you leap into this market consider these issues:

• Are you looking for short-term or long-term opportunities? This market isn’t quite right for “flip this house” type venturing. There are some rehab / resale investors out there, but I would say they are the exception rather than the norm – and they’ve generally been in this business for a while. In the current environment you should be prepared to fix, rent, and hold the property for a minimum of 3 – 5 years.
• Manage your expectations. Yes, deals are out there, but that doesn’t mean you’ll find a castle for $50K. A majority of foreclosures and short sales need a good amount of work to get them back into decent condition. Remember that the folks who lived here could not pay their mortgage, so don’t expect them to have kept up the maintenance.
• Manage your expectations – Part II. Banks aren’t taking just any offer that comes along. Don’t expect to throw out an offer of 50% of the list price and have it accepted unless the house is in VERY bad condition. Conversely, foreclosures that are in relatively good shape and priced aggressively are getting multiple offers and even going above asking price in a matter of days. Yes –there really are bidding wars in this market.
• Funding. Although there does seem to be some recent thawing with banks being more open to investment lending, rates and points for investment loans can be a bit steep and you can expect to need 20 – 25% down. You’ll also need enough to cover repair costs and make mortgage payments until you have it rented. This is truly a “time is money” situation. The ideal scenario? Pay cash to buy and fix the property, get a lease, then put a mortgage on the house to regain some liquidity and achieve higher (i.e., leveraged) return on equity. If you have equity in your primary home, a second mortgage may be another option for funding.
• Can you be a landlord? Not everyone is cut out to be a property manager. A short list of responsibilities includes screening possible tenants, general repairs (not to mention the possible 2 AM water leak call), and debt collector if payments run late. You can pay to have this part handled for you, but that will eat into your returns. Paid property management is not typical for the average investor.

These concerns aside, real estate can be a fantastic long-term investment, especially when buying in a market such as we have now. Historical returns on real estate rival that of stocks, and usually beat them when leverage and tax advantages are thrown in.

Still ready to jump in? Great! Give me a call. I am ready to help you locate a property that will fit your budget and investment objectives.