When it comes to hot real estate investing topics, “foreclosures” is one of the hottest buzz-words out there. We’ve had several million foreclosures since 2008, and a few million more are out there in various stages of delinquency or default.
“Ex-Wall Street executives” as they are called in the media, have formed dozens of new capital investment companies and Real Estate Investment Trusts for the purpose of buying up foreclosures by the tens of thousands. The general idea is that all these foreclosures will be rented to people who can no longer obtain a mortgage. But this is not a foregone conclusion for all foreclosures.
Buying foreclosures is not, in and of itself, an investing strategy, whether you intend to rent them or not. Foreclosure is a fundamental. It is a fundamental because it represents the status of a property. It is a circumstance if you will, not a plan for making money.
Renting a property for cash flow is an investing strategy because it is one of a number of choices you may have, with regard to how you will make money with a particular property. Foreclosed properties are a source of potential leads, but even after you buy the foreclosure, there is no guarantee that you’ll make money with it.
People seem to think that simply buying foreclosures guarantees that they will automatically make money, but that is not true. I’ve seen dozens of cases where a property was purchased after a foreclosure, but the plan to make it cash flow or produce a profit did not pan out as expected. This usually happens because other fundamentals were ignored, and the strategy that was chosen was ultimately undermined by the fundamentals.
Strategies are the choices you make about how to buy, sell or hold a property. Fundamentals are the circumstances pertaining to the specific property or the local real estate market, that cannot be changed. You don’t have a choice about fundamentals, they are what they are. (For a detailed explanation of real estate investing fundamentals and strategies, you can watch my videos on youtube, here). A property that has been foreclosed on has the fundamental issue of being a foreclosure. That may mean you can get a better deal on it, but this is not guaranteed.
Foreclosures are a large pool of available properties which are relatively easy to find these days, but making money with them depends on your abilities as an investor, and your choice of investing strategy. For example, what if I told you I can sell you a 3 bedroom, 2 bath foreclosure for only $40,000. Is that a good deal?
It may sound like it. But what if I also mention that there is significant termite damage and other items that will require another $45,000 for repairs? Is that still a good deal? (repairs are another fundamental issue). If the property happens to be located in a very high income area, and will resell for $200,000 after those repairs, is it a good deal now? (location is one of the most important fundamentals).
Or, what if you find out that you can’t get a permit to renovate this foreclosed property because your desired renovation is a violation of the neighborhood zoning laws. That is another fundamental issue. I’ve seen folks buy a foreclosure because they thought it was a good strategy to buy a foreclosure, only to discover that unanticipated repairs or other problems completely ruined the profit potential.
What if the foreclosure you bought does not fit well with your choice of strategy? Rental is all the rage right now, because everyone seems to think that everyone else is going to have to rent a home. But what if you bought a foreclosure, then discovered you can’t rent it because there are 25 other houses in the same neighborhood that are also for rent. There are lots of fundamental issues that can lead to your success or failure; supply-and-demand-ratio is a big one.
Buying a foreclosure does not guarantee that you will automatically make a profit from renting it, especially if your mortgage payment is $900 per month and you discover that you can only rent the property for $700 a month. Oops–that mistake is more common than you think.
So when you see those tantalizing advertisements offering you a “great deal” on a foreclosure, don’t assume that this is a “great opportunity”. Do your due diligence, and determine the ideal strategies you may use to cash flow that foreclosure if you do buy it. There are limits on what you should pay for any specific foreclosure, and the fundamentals in your particular area will help determine whether you should rent it, sell it, or stay away from it.
You can’t be sure that any foreclosure is a great opportunity for an investment until you have done your due diligence, run your numbers, and checked it out thoroughly. Then you can make an informed decision about the right choice of strategy, once you are aware of all the fundamental issues involved.
The key to profitable real estate investing strategies lies in knowing the fundamental issues in play, and then choosing the correct strategy that will work with those fundamentals. As fundamentals change over time, so also, will your strategies.
Donna S. Robinson is a real estate investor, author and investing coach located in Atlanta, GA. Follow her on twitter at donnaconsults, Facebook.com/RealtyBizConsulting and watch her videos on youtube. Her latest book, Basics of Real Estate Investing, is now available for Kindle on Amazon.com