Real estate investors, along with the rest of society, are what you may consider conscious consumers. Every time a truly good deal presents itself, investors would be hard pressed to pass it up. After all, a real estate bargain presents the perfect opportunity to maximize profits.
The cheaper you can acquire a property, the more attractive the ROI (return on investment) is. However, procuring such a deal is sometimes easier said than done. In particular, new investors may have a hard time bargain shopping within the real estate industry. Savvy investors, on the other hand, know a real estate bargain when they see one. You just need to know where to look
As perhaps the most well known method of procuring a “cheap” property, foreclosures have proven time and time again to be a great bargain for those who know how to navigate the process. In fact, the recent influx of investor activity may be attributed to the uncharacteristically high foreclosure rates that followed the recession. Properties owned by underwater homeowners were simply too irresistible for investors to pass on, as profit margins were so impressive. Essentially, the fallout of the housing sector made foreclosure deals a hot commodity amongst bargain shopping investors.
For those that are unfamiliar with the concept of a foreclosure, there is one thing to keep in mind: a foreclosure occurs when a homeowner fails to make payments on their property. Neglecting to pay down the principal will therefore result in a default on the loan. While the foreclosure process is entirely dependent on the state in which the property resides, most municipalities will issue a Notice of Default if the borrower falls more than 90 days late on their payments. The loan is then handed over to the foreclosure department, where it becomes public record. Typically, if the loan isn’t made current within three months, a foreclosure date is established.
The very nature of a foreclosure is particularly attractive to real estate investors. The price tag associated with each is usually representative of a significant discount, as time is of the essence for the owner. However, in understanding that you could potentially receive a home for a fraction of the price it is worth, you must also acknowledge that you will not be the only suitor. When a foreclosure hits the market, savvy investors will be ready to act – and so should you.
Seeing as how foreclosures are public record, acquiring one can become highly competitive. In order to avoid any unnecessary “busy work,” some real estate investors are advised to specialize in working with homes that are in the “pre-foreclosure” stage. Accordingly, investors in the business of pre-foreclosures typically intervene during the three-month period following the Notice of Default. Underwater homeowners are awarded the opportunity to sell their home, at a discounted price, to an investor before losing it to the bank. This is where the magic happens. Done correctly, a win-win scenario can be reached.
Investors will be tasked with gaining the approval of the seller – not necessarily as easy as it may sound. As you may already be aware, the real estate industry is a people business, and you need to make sure you treat it like one. It is necessary for you to address the situation up front. Let the seller know your intentions, but also take into consideration their current situation. The more transparent you are, the better off you are. Essentially, your goal is to create a win-win scenario for every party involved. Once you have gained the trust of the seller, you may move forward.
Prior to entering into negotiations, however, investors are advised to mind due diligence when finding deals. Do not proceed without conducting the appropriate research on the home in question. It is at this time that you want to learn everything you can about a subject property. In particular, make sure there are no liens or anything else that will serve as an obstacle later in the transaction. Once the coast is clear, contact the homeowner and arrange an appointment. Remember, the owner has already received a Notice of Default. Therefore, you will need to negotiate the terms, enter escrow and close the deal before the property is scheduled for public auction.
Done correctly, buying a pre-foreclosure property can be one of the most profitable exit strategies exercised by an investor. However, it is also one of the most misunderstood. Do your research and consult an expert before moving forward.
When finding deals, don’t forget to look at auctions. While not as well known as foreclosures, or at least understood, properties up for auction can facilitate an equally budget friendly transaction. Having said that, there are two different ways in which a house can be placed up for auction: either the homeowner has neglected to pay property taxes, or the property itself has gone into foreclosure. Typically, houses placed on the auction block receive a starting bid of less than or equal to the remaining balance on the mortgage. Action will be fast paced and buyers intent on participating must act quickly if they intend to partake.
As with any auction, and home auctions are no exception, there is a great deal of risk involved. However, that risk is made more bearable by the exceptionally high reward that may accompany it. Investors are advised to conduct a considerable amount of research on auction houses, as this will help you decide how much should be spent on the property.
Keep in mind that buying a property at auction usually requires a cash payment. However, there may be exceptions. Each auction company and community has their own way of running these events and the method in which transactions will be made. Having said that, know what to expect ahead of time.
Provided that a home fails to sell at auction, it may become the property of the bank. Otherwise known as an REO (real estate owned) property, these bank-owned assets are a great bargain for homebuyers. Of particular interest, however, is the relative safety in which these properties may be purchased.
Bank-owned REOs can be some of the safest deals on the entire market. Since the bank owns these properties, there is a chance that they will take care of tax liens or repairs that were once a hindrance. Also, lending institutions intent on ridding themselves of underperforming assets may be more willing to offer attractive terms.
Implement Your Own Strategy
Bargain shopping within the real estate industry has its time and place. As you have already learned, there are several places in which you may begin your search for cheaper properties.
However, as an investor, there is more you can do to drive down the asking price of a property you find appealing. If you are not ready to actively participate in an auction or hunt for foreclosures and REOs, there are other steps you can take:
Cash, as I am sure you may already be aware, is an investor’s best friend. Simply by using cash, investors are introduced to an entirely new world of opportunities that they may not have been aware of, especially when looking to acquire a nice real estate bargain. Money talks, and when it does, people listen.
The single most important aspect of using cash, however, is the ease it is associated with. Cash can speed up the transaction process exponentially, as it eliminates a lot of hassle. With cash, there is no need for a loan and all the nuances that accompany them. This, in and of itself, is incredibly attractive to sellers and should place your offer at the front of the pack.
Location, more so than any other factor, has the ability to impact the direction of your next potential real estate bargain. There is perhaps no greater draw, or deterrent for that matter, than where a property is located.
Having said that, the right property in the right location could turn out to be an immense bargain. In the event that you are able to purchase a property in a neighborhood that is up-and-coming, you may be able to buy at the bottom of a market that has shown promise for future earnings potential. Essentially, as the neighborhood improves so will the value of your house.
The Internet has become a critical component to any successful real estate investor’s arsenal of tools. There is no reason to suspect that a real estate bargain can’t be found online; free leads are just a click away. Take to the Internet and see what you can find with a thorough search. The more proactive you are on your online searches, the better chance you have of finding a great deal. Listing sites like Craigslist are full of potential bargains.
However, the trick is to be the first responder. The early bird gets the worm. More likely than not, the first person to respond to a post will be given the chance to acquire it.
Where will you find your next real estate bargain?
Credit: Fortune Builders