Should you invest in foreclosures right now? Maybe. There are several factors to consider.
Factor #1 – Finding Foreclosures
There are two basic methods for finding foreclosures: the conventional way and the creative way. The conventional way involves searching those foreclosures that are listed on the Multiple Listing Service (the MLS). The vast majority of available foreclosures are listed on the MLS. Bank owned REOs, HUD homes, VA foreclosures and almost every other type of foreclosure is on the open market with a listing agent.
Banks list their properties on the MLS for a reason. They want to get the highest possible price for the property and listing a property on the MLS usually yields the highest offers because it exposes the property to the entire market.
But for investors, competition is a major problem with getting the best deal. When a foreclosure is listed, everyone else knows about the deal, including retail buyers who are usually willing to pay for more than an investor for a property.
And a new trend is cash buyers grabbing up all the available foreclosures, even if they are paying more than list price.
If you plan to make offers on listed foreclosures (the conventional approach to finding foreclosures), you may NOT want to invest in foreclosures. You could end up frustrated with no deals–and a whole lot of time invested into an endeavor with little results.
Successful investors buy deals that have little or no competition. In order to find foreclosures that are not on the MLS, you must be creative. Thankfully, there are some rare instances where foreclosures are not subject to much competition.
1. Before they are bundled into a bulk REO package
When foreclosures sit on the MLS for more than 120 days, some large nationwide banks choose to bundle those misfit properties up into a bulk REO or note package and sell them off to an institutional investor. Right before that property gets bundled up, both the asset manager and the REO listing agent become very motivated to get rid of the property because once it gets added to a bulk REO package, both the asset manager and the REO agent lose the opportunity to get a commission on the deal.
Sometimes you can pick up the deal at 50% of list price. How do you get notified of these deals? Get to know some top producing REO agents in your area. Tell them you are a serious buyer, that can move fast, and you are looking for the deals that are about to get gobbled up into a bulk REO package.
2. Bulk REO package liquidation
What happens to those properties that get bundled up into a bulk REO package and are purchased by large institutional investor? Sometimes they are liquidated by the new institutional investor buyer, and guess who they hire to sell each property? You guessed it, the top producing REO agents in each area. Often these properties are not listed first and REO agents have the flexibility to call on their top clients before they hit the MLS.
In some rare cases, a bank may have difficulty selling a foreclosure and choose to do an absolute auction with a local auction company. In order to be aware of these deals, sign yourself up on the marketing list of every auction company in your area.
4. Auction websites
Recently, banks have begun attempting to sell some of their foreclosure inventory through online auction sites such as Auction.com. The idea is to try to auction it off before assigning it to a real estate agent. This is not the case in all markets across the country. In fact, in some cases, the asset manager for the bank still hires an REO agent to handle the transaction and put the property on the MLS but–in addition–they try an online auction site.
So you will need to check it out for your area. The good news is that you can pick up these deals without having to compete with everyone that would see them on the MLS. The bad news is that as more and more people discover Auction.com, once again, you are presented with the issue of competition.
If you employ these creative ways to finding foreclosures, you will have a much better shot at actually finding deals that are worthy of investing in.
Factor # 2 – Conventional Investing Required
Investing in foreclosures requires a very conventional way of doing the business. You must provide earnest money with the offer. The bank/seller requires you to use their contract. In many cases, you must be pre-qualified with a bank. Almost always, even with a hard money loan, you must have a down payment. And on and on.
There’s almost no flexibility. You’re almost always unable to employ creative strategies that eliminate the need for earnest money, a down payment, and qualifying for a loan. In some cases, you can use a hard money loan, but you will have to absolutely steal the property for a hard money lender to fund the deal.
What if you want to flip a foreclosure? Good luck. You will need an incredible deal with tons of room to actually flip to another investor and still make money. Then, you will need an all cash buyer because you must do a back to back closing (you can’t assign a foreclosure).
Finally, that new all cash investor buyer must move very fast because banks rarely give you more than 30 days. And if you found the deal through a creative strategy, you will probably have more like 14 days.
What if you don’t have any money? What if you can’t get a loan right now? What if you are new and aren’t prepared to move extremely quickly on a deal? Perhaps you should stay away from foreclosures.
Factor # 3 – Banks Are Rigid
Banks as property sellers can be a nightmare to deal with. If an inspection turns up a major issue, the bank rarely provides any concessions and simply tells you as the buyer to hit the road. They are also downright bullies in other cases.
For example, I had a situation where the contract I had with the seller/bank clearly stated that the seller had to provide clear title prior to closing. Right before closing, a title problem came up and the cost was going to be $10,000 to fix. The bank wouldn’t reduce their price by $10,000 nor would they fix the title problem that they agreed in writing to fix.
When I threatened legal action, their response was something along the lines of, “We have far more money to fight a legal battle than you, so good luck.” In the end, the listing agent representing the bank took the commission reduction to ensure the deal closed.
It’s a rough game negotiating with a bank, and in most cases, it’s take it or leave it with them. So be prepared to be bullied and pushed around.
Other issues to consider in today’s market is that many banks have purposely slowed down the number of foreclosures they are releasing onto the market. They are artificially reducing supply in the marketplace. Meanwhile, there is much talk about the benefits to investors of buying single family homes, so demand for foreclosures is on the rise.
This is creating bidding wars in markets all across the country and buyers are paying above list price to get offers accepted. It’s insane! As one of my favorite business people in history, Sam Walton, said, “swim upstream.” If supply is limited and demand is up, go upstream, move in the exact opposite direction as everyone else.
Deciding whether to invest in foreclosures involves several factors. If you can find the foreclosures creatively, have the earnest money and ability to pay cash or get access to some quickly purchase money as well as be willing to deal with rigid banks, you can make investing in foreclosures profitable.
Otherwise, you may want to seek greener pastures. Foreclosures aren’t for the faint of heart, and I rarely advise a beginner or even intermediate investor to invest in foreclosures. But for the experts and full-time investors, adding a few foreclosure deals to the mix every year can be a solid plan. Your comments are welcome!