How to Avoid the Foreclosure “Spin”

The news media is all doom and gloom about the current real estate market, and the economy in general. But let me tell you. You can still make money with foreclosed property, especially in today’s economic climate. I’ve had great success with this, and it can work for you too.

But it’s crucial to separate the facts from fiction and ignore the hype.

Almost everyone approaches real estate investing with the same point of view. They try to convince themselves that they’ll make a ton of money quickly, without any risk whatsoever. You’ve seen many of those people profiled on evening news shows or in newspaper articles. They’re the ones who were caught short when the real estate bubble burst.

The get-rich-quick impresarios almost never reveal the full extent of the downside risk of the strategies they’re promoting. And the downside risk is a big deal for me.

Take, for instance, the “buy, fix, and flip” strategy. The days when you could make money doing this are over for the short term (the next three to five years). Why? Because buyers are scarce.

Despite all this, opportunities for making huge profits with foreclosed and bank-owned properties can’t be ignored … even by entrepreneurs who are coming into the market for the first time. This is especially true if you are able to acquire foreclosed or bank-owned properties at deep discounts.

But before you jump on the “foreclosed train,” here’s something to keep in mind …

Just because a property is foreclosed or a bank owns it, does NOT make it a good deal. As with any business or investment opportunity, due diligence is necessary. Whatever your experience level, the best foreclosure deals can be identified through patient research.

The Perfect Insider Strategy

The current trend in real estate emphasizes rental revenue (versus appreciation). That’s why foreclosed and bank-owned property is worth a look.

If people can’t afford their homes or condos, where will they live? Smaller, more modest homes and/or rentals. So there are still buyers and renters out there, but they are looking at smaller, cheaper properties. That’s where the opportunity lies for you.

One way to capitalize on this current market demand is to acquire foreclosed homes or bank-owned properties – at deep discounts − and rent them out. When I tell you to purchase at deep discounts, I’m talking about buying from desperate sellers – sellers who must sell, no matter what.

Billionaire real estate developer Sam Zell is known as the “Grave Dancer” because he gets interested in a property when it’s almost dead and gone … and no one wants it. You should take a similar approach if you want to make money with foreclosed and bank-owned property.

One of the largest banks in the world is Bank of America. They have a new website featuring hundreds of bank-owned properties for sale. You’ll be amazed at some of the deals. But don’t go hog wild. Be patient and develop a clear strategy for your business.

Before You Get in, Know the Downside

Buying foreclosed property can be a lot of fun and it can be very profitable. But it’s important to avoid the typical foreclosed property “spin.”

If a renter’s bull market develops, you’ll want to be sure you’re not left holding the bag. So always consider the worst-case scenario. There’s always a possibility that something will go wrong – especially when it comes to real estate.

Consider the fact that millions of so-called investors who were planning on making big bucks with their “buy, fix, and flip” strategy are now holding properties that are worth less than what is owed. Most of the homes the flippers are trying to unload are too nice (or pricey) to offer as rentals. But what if hundreds of those fixer-uppers hit your market at the same time?

In larger cities, renters have been easy to come by. But what happens if the rental market softens or collapses? Can you afford that foreclosed or bank-owned property you have your eye on if the rental income goes down? This is a calculation you must make before buying.

Let’s say you’re looking at a foreclosed property within two miles of a Super Wal-Mart for $50,000. (A potentially excellent investment.) Let’s say the mortgage payment is $415 a month ($50,000 at 5.75 percent for 15 years).

Your objective would be to recoup the cost of your mortgage payment, simple maintenance, insurance, property management, taxes, and background checks on prospective tenants. And let’s say those expenditures add up to $650 month. So, in this case, you’d need to rent the house for $650 to cover expenses.

In most areas of the United States and Canada, this property would be fairly easy to rent. Of course, if hundreds of inexpensive rental properties suddenly hit your market, renters would have a smorgasbord of options. Bad for you. However, few of the “buy, fix, and flip” real estate investors and developers are likely to be in this particular market. The kind of properties they’re sitting on would have to rent for far more than $650 a month.

Sam Zell is confident the trend toward rental revenue (versus appreciation) has already begun. This doesn’t mean a foreclosed or bank-owned property will not appreciate. But don’t count on it. Instead, focus on patiently acquiring deep-discounted properties that will provide you with rental revenue. In 10 years, when it’s time to get back into “buy, fix and flip” real estate, you can sell all your rental properties for cash, or just sit on them with mortgages paid in full.

What happens if other landlords sweeten their deals to renters by including heat, electric, and water? This may happen in apartment buildings, but I don’t see it happening in single-family home rentals. You’ll have to adjust your strategy accordingly if this occurs. But I think you’re safe.

As with any business, you should expect the best but prepare for the worst.

The Big Upside

Despite the risks, there’s a big upside to buying foreclosures. Because foreclosed property can often be purchased for less than market value.

Contact the top 20 mortgage lenders in your state. Ask for the Real Estate Owned (REO) department. They’ll send you a list of REO properties that are currently available. Banks typically sell foreclosed properties “as is,” and buying them is like buying anything else “as is”: There are no warranties or guarantees. However, you can review the property (and its assessed value).

The next step is to submit an offer to the bank (with proper due diligence, of course). The bank will often return with a counter offer that is higher than you expected. If you feel the property still has tremendous potential, you should counter their offer with a new offer.

Granted, locating and purchasing a property before it reverts to the mortgage company is always the best way to go. But REO properties give you a way to get started quickly. The main objective is to find smaller homes at deep discounts and rent them out to qualified tenants.

If you purchase two deep-discounted properties this year and two each year thereafter for the next 10 years, you’ll have 20 rental properties. The debt service on those properties should be very manageable.

Let’s say you rent each of your 20 homes for $1,250 per month. If the debt service, taxes, insurance, and maintenance on these homes is $12,000 (about $600 per property), you could conceivably net $13,000 per month.

I hate generic illustrations. But if you work the numbers, you’ll find that acquiring deep-discounted bank-owned properties with a view toward renting them makes sense.

Hundreds of bank-owned property websites are popping up every month. Why? Because banks are not in the real estate business; they are in the money business. And so they are eager to get these properties off their books.

Getting Started

Okay. So how do you get your hands on deep-discounted foreclosed and bank-owned properties?

There are many sites on the Internet that list foreclosed homes for sale. And, of course, real estate agents always try to get in on the action. Though they seldom tell you about properties that are not listed by their agencies, it is possible to find agents who are unbiased and knowledgeable.

Here are some sites to help you locate deep-discounted foreclosed and bank-owned properties:

• HUDWorks.com
• RealtyTRAC.com
• iForeclosures.com
• Foreclosure.com
• FannieMae.com
• BidSelect.com
• ForeclosureNet.net
• Countrywide.com
• BealBank.com
• DowneySavings.com

Don’t be scared away by all the negative press the housing market is getting. It IS possible to make a great living and build substantial wealth by purchasing foreclosed and bank-owned properties.

[Ed. Note: You don’t have to limit yourself to traditional ideas when you’re thinking of ways to make money. Plenty of profitable opportunities exist just out of sight. Marc Charles – the “King of Business Opportunities” – can show you just where to look for unique and sometimes unusual possibilities.]