When Rita approached me about becoming a real estate investor, I was just about to head out the door and sign a contract on a new property. So, I asked her to join me. We’ve known each other for decades and she’s been toying with the idea of investing in real estate for at least half that time. I wanted to encourage her, but I was also curious about what had finally convinced her to get serious.
Once in the car, she mentioned that a couple of other investors she’d recently met had recommended buying foreclosed homes and flipping them as a fast and easy way to build a career in real estate investing. Since she’d waited so long to get started, their advice made her think it might be possible to catch up. I assured her that if she went in thinking that successfully buying, renovating, and selling property wouldn’t take a lot of time and hard work, she’d be thoroughly disappointed. But, that didn’t mean she shouldn’t try. I just don’t think that buying foreclosed homes and flipping them is the way to go.
The Problem With Buying Foreclosed Homes and Flipping Them
The notion of making fast and easy money is why a lot of people start house flipping but, all too often, however, their careers flop before they’ve barely gotten off the ground. That’s because buying, renovating, and selling houses for profit demands a level of professional expertise and market insight that, without the right training, most new investors lack. It also requires access to a consistent stream of distressed properties year after year and a great deal of motivation as you tirelessly work to build on your returns. Unfortunately, few investors will tell you that. And, you certainly won’t see it advertised on reality TV. That’s not to say that you can’t make flipping houses into a good business in a decent amount of time. But, the more you know about what it really takes, the better off you—and your pocketbook—will be.
Building a real estate investment business takes getting good leads on distressed houses—and some investors turn to foreclosures. Foreclosed homes are often viewed as some of the best deals around. They typically need some work and are usually priced well below market value. If you can snag a few foreclosures for cheap and add fresh paint and new fixtures or perform a kitchen renovation on your investment property—while staying within budget—it’s possible to see good returns.
But, buying foreclosed homes and flipping them can be difficult to do and problematic for your bottom line. In an effort to recoup costs, most properties that have been foreclosed on are first sent to auction before they’re officially absorbed back into a lender’s inventory. And, trying to buy a foreclosure auction home presents its own set of headaches that aren’t easily remedied. For example, if you win a bid at the Cook County Judicial Sales Corporation in Chicago, you have to pay in full for the property within a day or you risk losing your 25% deposit. Even worse, just because you paid for the property doesn’t mean it’s yours. A judge still has to approve the sale and that could take months. Things don’t necessarily get any easier if and when properties are returned to the bank’s inventory, however. These days, more and more lenders will perform a fast “nails and lipstick” rehab on a house to get it back on the market as soon as possible—sometimes at full ARV. So, even if there’s room to improve upon the condition of the home, there’s rarely any room to realize a respectable ROI.
Dealing with the complexities and risks of buying at auctions or the sheer frustration of having to negotiate with a bank on an overpriced REO aren’t the only issues you’ll run into with foreclosed homes. Here’s what else you can expect to encounter:
- Poor property condition. Unless the lender has renovated the property, foreclosed homes are almost always in poor condition. Unfortunately, you won’t know how bad it is until the property is yours since home inspections at the auction stage aren’t usually allowed and the details of its condition aren’t always disclosed. Because these properties are sold “as-is,” you’re going to have to take what you can get—even if the repairs end up eating into your returns. And, since foreclosures often sit for months or even years at a time, you can almost count on the rehab requiring more than a fresh coat of paint.
- Surprise expenses. Foreclosed homes can come with a lot of other expensive surprises too. Unpaid property taxes, utility bills, liens, and legal fees are all a part of the “as-is” package that you become responsible for when you buy a foreclosure. You also inherit the former owners, if they haven’t left the property, and any tenants or squatters that remain. These and any other encumbrances can really bottom out your ROI and there’s no good way around them. As far as the bank is concerned, you can take the property as-is or leave it.
- High competition. Finally, there is a lot of competition amongst real estate investors for foreclosed homes, whether they’re sold at auction or directly from a lender. These properties end up on lead lists, advertised on the MLS, and are even frequently posted in government notices. So, everyone knows about them. This is great for the banks who want to ensure they get top dollar for their properties, but terrible for you if you overpay for a distressed house just to beat the competition—assuming you can snag one at all.
In addition, the current state of foreclosure activity in the U.S. is adding to the competition. By the first quarter of 2018, the number of foreclosures dropped by 32%, to pre-recession levels, in more than half of the country’s major metropolitan areas, according to ATTOM Data Solutions. And, only about 45% of those are from bad loans that precipitated the housing crisis. That means it’s highly likely that wherever you invest—or hope to invest—has experienced a drop in foreclosure inventory that may continue to fall. So, banking on foreclosures as a source for finding investment properties to flip isn’t nearly as reliable as it was once thought to be.
Of course, instead of waiting for a limited supply of foreclosures to end up at an auction or back in a bank’s inventory, you could focus your efforts on finding a way to approach distressed homeowners directly or help them find a way to approach you. When they’re in danger of being foreclosed, people often need to sell their home fast in order to make ends meet. Make an effort to connect with them and you’ve got the solution for getting better investment opportunities.
The Solution to Getting Better Leads on Distressed Houses
In my early investing days, I chased after foreclosed homes in the hope of building my career on the backs of severely distressed, but very cheap, properties. I did experience some degree of success, but it came at a cost of both time and, ultimately, money. One “as-is” money pit that I purchased at an auction was all it took to send me packing for another way to find better leads. So, I told Rita that attending auctions really wasn’t worth the trip.
But, it wasn’t until I became an independently owned and operated HomeVestors® franchisee that I realized the solution to my problem of finding good deals was there all along—since 1996, in fact. Thanks to the trust that the HomeVestors name generates and the nationally-known “We Buy Ugly Houses®” advertising campaign, motivated sellers of distressed homes know where to turn when their finances make it hard to keep up—local franchisees like me. It’s an easier way to get good leads on some really great deals compared to chasing down foreclosures—leaving you the time and energy to work hard on building your business.
Contact HomeVestors today to find out how you can build your real estate business with the best qualified leads around.
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