I recently attended a real estate investor meeting regarding buying foreclosures for fix and flips. It was a packed room. As I scanned the faces in the room, I tried to determine how many people were actually investors. The few I spoke to were other agents, financing and loan originators, or contractors. By the nature of the questions to the presenter, there were a number of participants who knew little of the process but eager to learn how they could profit as well.
The continual popularity of Do It Yourself shows on cable channels proves there is a bit of Bob Villa in all of us. The words œYour can do it, we can help created a confidence in American consumers that they just need to ask any expert in an orange apron and perfection in construction becomes a weekend task. Combine that with the urban legends of fortunes made at the closing table, the interest in fix and flips continue to draw the causal and curiously interested bystanders.
Here are a few preliminary recommendations to remember as you start to explore the idea.
Don't believe anything after 9PM at night!
Those late night TV promises of fortunes in real estate with no money down are legends, not reality. I don't know of one legitimate lender who is willing to finance you with no money down. If you are not occupying the property yourself, new circumstances apply. You will need to provide real dollars to make this happen.
Define your comfort level.
This will be an investment. It may be more hands on and carries more personal achievement than a stock portfolio, but it is still an investment. Define the type of return on your investment you are looking for and compare to your existing investments. Find your comfort level in terms of the amount of funds you are willing to commit, the amount of time you are willing to wait for a return (this is to itself a real cost) and what level are you willing to risk.
Study the landscape
Neighborhoods define property values. Two identical homes that are two miles apart could vary tens of thousands of dollars when you go to sell. Actual appraisals are based on subdivisions rather than improvements. It is easy to over improve a home if the neighborhood itself is faltering. Insure you have realistic reports on previous sales, current pricing trends and actual market values after completion. Do your homework and trust the right agent to provide you the necessary data to make the best decision.
Ready-Fire-Aim often leads to shooting yourself in the foot.
It is tempting to feel compelled to move quickly. In some circumstances, it is required but not at the sake of forgoing a real assessment of the property and the deal. Plan on losing the first few deals; someone faster and more in tune with the market is going to be out there. The right scenario will be available for you as well if you remember to Aim and then Fire.
The D formula Distressed=Disclosures and Documentation
Unless you are buying a bank owned (REO property) that has already been foreclosed, most likely you are looking at a pre foreclosure and/or short sale. Consider these properties as DISTRESSED. There are specific contractual procedures you must follow if you are not going to occupy the property as your primary residence. If the homeowner is in default of their mortgage, meaning even one payment behind, you must proceed under the Colorado Foreclosure Prevention Act guidelines. DISCLOSURE is paramount. The seller is given the right of rescission as part of the process as well, even after the contract is accepted. Make sure you have third party documentation of all liens and encumbrances. Even after foreclosure, certain liens are unrecorded but stay attached to the property after a sale. (HOA, water bills etc) Make sure the title company has provided a comprehensive determination of the encumbrances on the property.
In a short sale, you are negotiating with the homeowner and the lender to accept a sales price lower than the current balance of the mortgage. Banks rarely feel obligated to respond in a timely manner, as you would expect in a normal contract negotiation. It is frustrating to both the seller and the buyers. Patience is often required and even less rewarded but it is the only way to complete the purchase.
After the purchase of the home, DOCUMENT the cost of improvements, the permits, and the condition before and after. Appraisers do not favor opinions, only fact and look carefully at the true market conditions rather than appreciating the efforts of your labors. Documentation will assist the inspection and the appraisal of the home.
In conclusion
As properties value start to climb upward in certain neighborhoods, there will be some good opportunities to invest in real estate. The rewards of bringing an ugly property back to a marketable position are found in both personal and financial achievements.
Build a trusted group of advisors, starting with a real estate agent you trust and have a strong dialogue between your resources. Interview contractors and trades professionals to find the best. Talk to the municipalities on securing the permits and understand the basics of building codes. Real estate has long proven to be a valuable and important investment. Discover if it is a viable resource for you.
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