Tuesday, July 14, 2009

Buyers Need to Get Real About Foreclosures & Flipping Property

In my real estate business I am constantly approached with questions like “how can I get into a foreclosure?” “Can you get me access to bank owned homes?” “Where can I find foreclosures to flip?”

I decided to share with you some vital information to help dispel some of the myths about getting rich quick with foreclosure homes.

Slogans such as “Make $600,000 in less than a year! Buy houses for pennies on the dollar!” are common in the business of marketing the ‘foreclosure industry.’ They may also have you believing that you can just take a seminar or buy a book and you'll be on your way to millions in no time.

With foreclosure filings up more than 30% from a year ago, it's easy to entertain visions of buying cheap houses and flipping them for quick profits.
The only trouble is that the reality of the process is not so simple. Recent dramatic shifts in the real estate markets have changed the foreclosure business as well. An impetuous investor may not always get what they set out for. If you are looking to buy a “pre-foreclosure” or a “foreclosed” home read this and do your research before jumping in full force.
Sometimes the best investment is the one that no one is looking at because of the flexibility it gives you (these days everyone is looking at foreclosures!)
My advice is to buyers is to not dismiss a property or real estate listing because it is a “normal sale” thinking that it is not a great deal …sometimes those transactions are the more profitable ones and the sellers are easier to work with and will give you incentives, concessions and more time to close escrow.
Here is a list of three changes and some things you need to watch out for before diving in:
1. No Equity: Previously, investors used to send out letters to distressed homeowners and get responses from about 5-10% of their initial mailings. Of that 10% an investor maybe able to help several families by carrying paper so they can stay in their homes or by purchasing the home from them to avoid a foreclosure, and turn a good profit. A lot of these seminars and books about buying pre-foreclosures are using a version of this method. However, it is not as effective these days, especially in the Los Angeles market where most houses that are in trouble or in default are over leveraged or "underwater". Homeowners owe more on their homes than the homes are worth.
2. Media & Social Repercussions: Foreclosures are on the forefront of emotionally charged and political debates. The existence of such groups as the “Moratorium Now” a coalition are working to stop foreclosures and evictions nationwide has made it more difficult to profit from foreclosed homes.
Believe it or not, an investor/buyer may have trouble taking possession of a home -- or keeping it. For instance, a sheriff in Chicago who believed some people, especially renters, have been evicted without proper notice and told all deputies to stop evictions. In February, the Association of Community Organizations for Reform Now, also known as ACORN, announced a campaign of civil disobedience designed to help families resist eviction and remain in their homes after foreclosure.
The homeowners are also not as likely to accept a buyer’s attempts to purchase the home either. They feel like they were pushed into a bad loan or just emotionally drained by the possibility of losing their home. They don't exactly welcome your contact; sometimes, they're hostile.
3. Competition: Once a homeowner receives a notice of default, the foreclosure process is public. Some homeowners report being contacted by as many as 65 people offering to "help" during the pre-foreclosure period. At an auction, it's no better. You register and get a bidder's card or paddle, but so do as many as 2,000 other people. You could skip auctions and look for REOs, or real-estate-owned properties, where the bank has already foreclosed and owns the home. But those are put on the Multiple Listing Service rolls along with every other property. There's really no way to get around the competition. (MSN Money)
• Unethical Tactics: There is a seminar market that teaches you how to find people who are about to lose their homes and pretend to be their hero. The seminars teach you to pitch to owners that they will lose their home but at least save their credit. You use complicated contracts and high-pressure and scare tactics, and misrepresent what the homes are worth. What you're hoping is that your target homeowner has about 60 grand in equity. You take over his/her property, his/her loan -- AND his/her equity. This is unethical for obvious reasons and a deceitful way to do business.
• Overpaying at Auctions: Auctions are designed to create a buying frenzy. I have seen people buy homes at a premium because of the auction atmosphere and extra fees added on in some cases. It's easy to get caught up in it. There are a lot of auction companies advertising bank owned homes but they usually add a 5-10% to your winning bid price and homes sometimes go for current market value with little equity.
Also, lenders do not always take a loss by selling foreclosed homes. Short sales are very frequent these days but the properties are still being sold close to or at the current values in most cases. Remember, when a house sells for far less than both the market price and the mortgage, it makes the news exactly because that's the exception, not how it usually works. At trustee auctions, which occur in California after a home has been foreclosed, buyers have to come in with all cash offers and most of the time the bank ends up not accepting the bids if they are too low and prefers to place it on the regular market as and REO (real estate owned.)
• Rushed Decisions: Foreclosure auctions are a quick process, so when you find out a property is coming up for auction; you don't have much time to research it. You will still owe property taxes if there are any due. You will also have to pay the HOA fees, supplements, and dues (which can be really high in some buildings and PUDs in LA) and you will not have time for a home inspection. You will be receiving the home as is. If there is structural damage or major repair, permit, or city violation issues, you will be in for a big contractor bill!
My response to anxious foreclosure buyers is to be aware and knowledgeable about the process. Jumping into the foreclosure frenzy may not be the best move for a first time investor. Everyone has a different strategy for success. If someone is trying to sell you their strategy, I doubt that it will be a good fit. Find out what works for you first and stick with it!

Compliments of Zeina Zeitouni
LA Women's Business Examiner

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A Division of Richard Realty Groups, Inc 6986 El Camino Real, Ste. H, Carlsbad, CA. 92009 Cell: (760) 583-2107 eFax: (760) 496-1649




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