Seven Ways to Find Good Prices on Investment Homes
The massive numbers of foreclosures that spawned the boom in single-family rentals as investment homes is over, while the purchase of homes for investment purposes have settled down to pre-boom levels. Purchases for investment purposes have been on the decline since 2011 when investment sales accounted for 20 percent of sales. Today about 15 percent of existing homes purchased every month are bought by investors, either to “flip” and resell or to rent out.
The hardest part of single family investing today is finding an investment property at a good price. Demand from first-time buyers and tight inventories resulting from the conversion of about 4 million ownership homes to rentals over the past ten years has made the smaller homes favored by investors hard to find. The number of starter homes on the market fell by 12.1% in the past year, while the share of starter homes dropped slightly, from 24.9% to 24.8%. Starter homebuyers will need to pay 1.9% more of their income towards a home purchase than last year.
While the days of buying foreclosures for a fraction of their value are over, investors who are willing to do their research can still find properties at discounted prices. Foreclosures sold for an average discount of 14 percent below market value in January, while short sales were discounted 10 percent. However, only 16.2 percent of single-family home and condo sales in 2016 were distressed sales (foreclosures and short sales), a nine-year low.
Getting a good deal on an investment property today takes hard work. A good place to start your research is Homes.com’s section on Foreclosures where you can surf foreclosure listings in your Zip code and review questions and answers from consumers on a wide range of issues in the FAQ section. Research services like Local Market Monitor and RealtyTrac provide information on the relative profitability of real estate market for flippers and landlords. Data on “cap” or “capitalization” rates, the rate of return on a real estate investment property based on the income that the property is expected to generate.
Here are seven tips on how to find the best price on an investment home.
Government Foreclosures. HUD, VA, the IRS as well as Fannie Mae and Freddie Mac and half a dozen other federal agencies have homes to sell. These are properties where owners defaulted on their loans and the government ended up owning their homes. Here is a single site where you can access listings of current foreclosures for sale by federal agencies, Fannie Mae and Freddie Mac.
Judicial State Auctions. In “judicial” states, foreclosures are sold to the public at auctions by sheriffs, judge or officers of the court. Auctions are live and usually conducted inside the county courthouse or on the courthouse steps. Some counties offer the option to bid online. If no one buys the property at the auction, or if no bids meet the asking price, it’s then sold back to the bank and becomes a bank-owned (also known as Real Estate Owned or REO) property. Sales are final and cash-only, so do your homework on properties before your bid.
Non-judicial State Sales. In nonjudicial states, the deed of trust used to buy the property authorizes a “trustee” to foreclose on the property if the homeowner defaults on their loan. State law determines the milestones in the foreclosure process, including how much notice the trustee must give the homeowner and how the home will be sold. The best way to find out whether your state follows a judicial or nonjudicial process is to check with the local county government. Some states allow both processes but tend to follow one or the other.
Cash-for-homes Companies. Every major real estate market today has companies that buy homes for cash from owners quickly. These are often from estates, divorces, and owners who lack the equity to maintain them. The best known is HomeVestors, which has 700 franchises across the country.
Full-service Real Estate Investment Companies. Local real estate markets vary greatly. Some have greater supplies of homes for investors to buy and better pools of potential tenants than others. Chances are that you might do better buying a rental home hundreds of miles away than where you live. In recent years, full-service real estate companies like HomeUnion, Memphis Invest and Norada.make it possible for investors to buy, finance, manage and sell rental properties in different markets account the country.
REO Brokers. Some real estate brokers and agents specialize in representing foreclosed properties owned by lenders (“real estate owned” or REO). You can find them in your market by searching for foreclosure on local real estate listing sites. These intermediaries make a commission on the sale, but the lenders they represent are usually eager to make a sale and get a foreclosure off their books. You can find fresh foreclosures by following their listings on Homes.com and registering to have an email alert sent to you when a new foreclosure is listed.
Short Sales. Short sales are discounted properties sold for less than the owner’s mortgage principal. Lenders agree to short sales to save the cost and delay of the foreclosure process. However, short sales can be lengthy as well, especially if the mortgage has been sold to investors. Short sales are much less common today than they were during the housing crash a few years ago. For investors with patience, they can result in a good price on a property that is usually in good shape, since owners occupy it until the deal closes.