Buying foreclosure properties is a great way to earn huge profits in real estate – if you know what you’re doing. Many novice investors think that just because a property is a foreclosure that it’s a good deal. Not true. In fact, many people lose a lot of money buying foreclosures. So, how can one maximize their profits and minimize his or her risk buying foreclosures? In this post, I’ll show you three unique ways to buy foreclosures, as well as the pros and cons of each.
1. Foreclosure Auctions
If you haven’t read my previous post about how I made $20,000 in 30 days from buying a foreclosure property, I recommend that you do. It explains how I used some basic techniques to maximize my profits while minimizing risks in a foreclosure auction purchase that I did a few years back. Foreclosure auctions are the least invasive way to buy property, but it can also be the riskiest. Foreclosure auctions are exactly that – auctions. The property goes to the higheset bidder. The terms for purchase are very basic: Cash is king. They don’t take mortgages or promissory notes. You need to have certified funds to buy property at foreclosure auctions. The terms are usually ten percent of the purchase price due the day of the sale with the remainder due within 24 hours. The pros of buying properties at auction is that there is no haggling or negotiating required. If you’re the highest bidder, you win. It’s also a very easy closing process. You don’t have to worry about signing your life away to buy the property. You just need to sign a few forms and that’s it…you’re the new owner. Of course there are also cons to buying property at foreclosure auctions.
One is that you’re usually not allowed inside the home prior to the auction. That’s because it technically still belongs to the foreclosed homeowner until the sale. I doubt that they will let you in their home prior to the sale, and I don’t recommend trying it. Another con is that since you can’t get inside, it’s really hard to determine how much it will cost to rehab the house. It might look nice from the outside, but inside it’s a real disaster. This is where the real risk comes in with buying properties at auctions. My advice is to talk to a contractor and ask how much it would cost to do interior repairs, assuming the worst-case scenario. This may be a very conservative approach, but it’s the smartest one. If you build in a $40,000 cushion and only need $5,000 to fix it up, you can make a huge profit. On the other hand, if you only leave a $5,000 cushion and need $25,000 for repairs, you will lose a lot of money. This is what makes buying real estate at foreclosure auctions so risky. Let’s take a look at another approach.
2. Buying from the Bank
This approach is what happens after a home goes up for a foreclosure auction and no one buys it. This is a much safer approach than buying from an auction for several reasons, but also is more competitive. The pros are that you can go inside the property, price out your labor and material costs, and negotiate directly with the owner (the bank). This will give you a great idea of how much repairs will cost as well as how much you can expect to profit from selling it. You can also finance the transaction, which means you can get a mortgage from a bank. In fact, the bank selling the home might even finance you!
The cons are that your competition can do the same. There are many more buyers involved with a transaction like this, because it’s easier to get a mortgage than to walk into an auction with cash in hand. The bank is looking to get the most money for their property, so the highest bid will usually win, unless you can come in with an all cash offer. This is where you really need to know how much it will cost to do repairs as well as how much profit you will be happy with. Some investors won’t buy a house unless they can profit at least $25,000. Others might be ok with only $10,000. This makes buying from the bank very competitive.
3. Buying from the Homeowner
A great way to make huge profits in real estate foreclosures is to buy directly from the owner before the house goes up for auction. This is what I specialized in for many years and it worked wonders. It can do the same for you. The pros of buying directly from the owner is that you can virtually eliminate your competition. Most people don’t want to deal with a homeowner going through a bad time in his or her life. They are afraid to approach the door. I always looked at this as an opportunity to help the owner. By doing this, I had very little competition and negotiated directly with the owner. In this market, the owner might not have much equity in their home, so you might have to deal with the bank anyway, only now the terms are different. You are now doing a short sale as opposed to a straight purchase. You can get a mortgage for a short sale and the bank will give you a list of what you need to do to make the deal happen. If they accept your offer, you get the house. If not, you can renegotiate or walk away from the deal. I’ve had banks turn down my short sale offer, and then I either purchased the house at an auction or bought it directly from the bank when nobody bid on it at the auction. That can work for you too.
The cons are that you have to deal with a stressed-out homeowner. Some people take foreclosure better than others. You have to come across as compassionate and wanting to help rather than as a vulture looking for scraps. A lot of people have apprehensions about cold calling or door knocking. If you are terrified to do this, it might not be for you. But this could be the best way to make a lot of money in foreclosures.
Foreclosed properties can be a great way to build your real estate fortune and empire. There are many different approaches to buying these types of properties, but all of them have pros and cons. Make sure that you do your homework before buying any type of home. For more information about buying foreclosures, or to buy my award-winning book, The Foreclosure Revolution, visit my website at www.joesesso.com.