Investing in Raleigh Real Estate - Let’s Make Money on Foreclosures
November 8th, 2007 Categories: Investing in Real Estate
Is there money to be made buying and selling foreclosures in the Raleigh real estate market? Maybe. Is it easy? Making lots of money typically isn’t easy. This explains why there aren’t more rich people. Can it be done? Yes, but you have to find the right one! In this 2nd installment of a 3 part series on investing in the Raleigh real estate market we’ll discuss the truths of buying foreclosures at a bargain.
Truth #1: Making money on foreclosures cannot be done by looking for oportunities in the usual places. Let me get the bad news out of the way first. In part 1 I explained how I get lots of calls from people who want to approach fixing and flipping houses in a casual, part time manner. It’s difficult at best to do fix and flip with such an approach. Chasing foreclosures as fix and flip opportunities doesn’t make it any easier.
The real challenge with foreclosures is to discover the ones in which the bank has a good finiancial position. More about that in a minute. Or, you could try to get involved before the bank has spent lots of money in the foreclosure process. Go to the courthouse auctions, but expect lots of company. Big discounts usually attract big crowds. Big crowds tend to bid prices up. That being said, there are those who successfully buy their investment properties this way.
By the time a foreclosure is listed in our Multiple Listing Service (MLS), the bank has tried everything they can to minimize their losses. They have also spent lots of money getting to that point. That’s right. Banks typically loose money on foreclosures. Once you understand this, what I’m about to tell you makes a lot more sense.
Truth #2: Banks do not necessarily sell foreclosures at bargain prices. One of the other calls I frequently get is from a home buyer who just wants a “good deal.” Nothing wrong with that. I want a good deal too. Everybody does. This person usually isn’t looking to invest in real estate. They just want to buy a home for less than it’s worth. At some point in the conversation the buyer will suggest that we look for a foreclosure because it will be less expensive.
Please understand. There is nothing about a foreclosure that suggests it is a bargain. Many foreclosures come from highly leveraged buyers who fell on financial hard times. It is not at all uncommon for the loan amount to be equal to the market value of the house. Sometimes the loan amount can even be more than market value. Here’s why that’s a problem.
Banks are terribly inefficient home sellers. The internal cost of the foreclosure process to a bank would probablly surprise you. I’ve heard that it can cost a bank 10%, or more, of the loan amount to take foreclosure all the way to collecting money from the sale. That makes sense. The selling costs for you or me could easily be 6–7%. Regulations can make up the other 3–4% of the cost of selling for the bank.
If the bank forecloses on a $200K property that has a 100% loan amount, they might have to sell for $220K just to break even. Of course that won’t happen because the market will not deliver a buyer at that price. If they sell at $200K, or market value, then they loose $20K. Do you see how this could be a problem? This is why foreclosures, especially highly leveraged ones, are not sold at bargains prices.
Truth #3: You will have to look at a huge number of foreclosures to find the right one. Basically, you are going to have to find a house that had something like an 80% loan balance. Now the bank can sell this one for 10% below market value and break even. Will they? Maybe, but I’ll bet you will have to negotiate them hard. They would probablly like to turn a profit on one of these to cover losses on others.
Truth #4: Foreclosures should be considered just as you would any other investment oportunity. When I get the calls from the non-investor home buyer looking for a good deal, I tell them that we will look at foreclosures, just not exclusively. The advice is the same for real estate investors. Don’t get too hung up on the elusive bargain priced foreclosure. Just be ready to move quickly when it comes along.
I’ll admit that the first 2 parts of this series have made investing in real estate look like something that takes lots of time, capital, and expertise to do it right. Well… it does. That’s thruth #5.
But I have some good news for you! In part 3 we will discuss a stategy that anyone can use to make lots of money. And you will not have to work near as hard finding a suitable property. These properties are plentiful. It’s called buy and hold and it works pretty well in the Raleigh real estate market.
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Investing in Raleigh Real Estate – Fix and Flip is a Challenge
Bob - what a great article - we find buyers usually underestimate the emotional price you pay in the process - investors are more prepared and we always explain - if you’re going to be benefiting from instant equity - there is a price to pay - work with a Raleigh real estate expert like you makes a huge difference, Cyndee Haydon
[...] Investing in Raleigh Real Estate – Let’s Make Money on Foreclosures [...]
Cyndee - The bottom line is the bank simply doesn’t care in the same way an individual selling their home does. To them, it’s just another file on someone’s desk.
Be sure to check out the final installment in the Investing in Raleigh Real Estate series. it talks about a buy and hold strategy that the Raleigh real estate market was custom made for.