Hey There,
I just wanted to take a minute to share an article that I recently read from Rismedia. For our investors out there, these are some pretty good rules of thumb. This article references basements being “a must”; however the author is located outside of California. For our California and Laguna Beach Real Estate market, basements may be nice…but would not be considered “a must”.
Another thing to point out is that investors ARE buying homes in this market. Some are still waiting on the sidelines; however, for a well-priced investment home a good time to jump in is when YOU are ready and the RIGHT deal is found. And trust me, deals can be found every day somewhere in the country.
Know the risks….know the rewards. Enjoy the article!
Seven Tips to Profitable Investing in Foreclosures
RISMEDIA, May 18, 2010– Have you been thinking of investing in a foreclosed home? The game plan sounds simple enough: purchase a foreclosure at pennies on the dollar, cover the mortgage by renting the property to tenants, and then sell it at a tidy profit when the economy recovers.
Unfortunately, when it comes to buying foreclosures, “things are not as simple as they appear,” says Jim McClelland of Mack Companies, a Tinley Park, Illinois firm with a portfolio of 365 previously bank-owned homes under management.
McClelland knows foreclosures: he buys two or three each week. Most of his homes are located in Chicago’s south and west suburbs, such as Dolton, Olympia Fields, Homewood and Glenwood. Mack’s in-house contractors redevelop these often badly run-down homes so that they can be rented out.
Foreclosures can be either a financial boon or a boondoggle. To help smooth out the inevitable bumps in the road to real estate riches, McClelland offers this advice:
1. You are investing in a community, not just a home. The neighborhood in which the foreclosure is located will ultimately determine its long-term appreciation. Before being lured in by a low price, do your homework. Is the town investing in new infrastructure, roads, schools, libraries and public parks? Is the downtown area thriving or declining? Bottom line: if the local government or businesses are not investing in the town for the long-term, neither should you.
2. Stick to REOs: A “Real Estate Owned” (REO) property is a safer way to purchase a foreclosure. Unlike a home sold at auction or purchased during pre-foreclosure, its title is held by a bank or lender; there are no other liens against the property. While an REO’s price discount is typically less than a foreclosure sold at auction, there is also less financial risk. Inspections are allowed. No evictions are required. Plus, the bank will see that the property is cleaned out before you take ownership, saving you potentially thousands of dollars in labor cost and dumpster rentals.
“Investors should know that homes sold at public auctions are the leftovers of an inventory picked over by professionals,” warns McClelland. “Buying one sight unseen is a gamble.”
3. The more bedrooms the better. “Three bedrooms is good, four is better,” says McClelland. Other features that will help you charge higher rents are garages, basements (a must), and at least one-and-half bathrooms. In general, steer clear of wood frame homes. Brick is a better investment.
4. Know when to walk away. There are hard fast rules as to when to pass up on a foreclosure. For example, if total repair work is more than $30,000, it is unlikely an individual investor will recoup their money. Damage to the foundation is another serious red flag, as is mold infestation or extensive plumbing repairs that will require breaking open floors and walls. It is crucial that you hire an experienced home inspector before making a bid. Otherwise, a foreclosure that seemed like a good deal could end up costing you more money than the home is worth.
5. Use the one percent rule for rents. McClelland recommends that investors charge a monthly rent of approximately one percent of the value of the home, i.e., $1,500 rent for a home valued at $150,000. While there are exceptions to this rule, collecting one percent per month should cover mortgage, insurance and taxes, plus provide a small profit that he recommends be held as a reserve for home repairs or other emergencies.
6. Skip the flip. “Real estate is slow,” advises McClelland. In other words, don’t quit your day job. Plan to hold your foreclosed properties from ten to fifteen years, just as you would a mutual fund or other retirement vehicle.
7. Consider a passive investment: Buying a foreclosure on your own is a major commitment. If you are not ready to become a landlord, McClelland offers an alternative. He has sold a limited number of his redeveloped properties to investors. For a small monthly fee his staff continues to maintain management responsibilities on the property. This way investors can take full advantage of foreclosure opportunities without wearing a landlord’s many hats.
