There are unique income opportunities for the savvy real estate investor in today’s market. Over 46% of all home purchase transactions are distressed properties according to Inside Mortgage Finance Magazine and thier Housing Pulse Newsletter. So what does that mean for you? Bank owned properties, or real estate owned properties (REOs), are homes that went into foreclosure and made it all the way through the foreclsoure process. The property then failed to sell to an outside investor in a foreclosure auction and ownership reverted to the lender. There are profitable gems on the market today that can turn a tidy profit if handled creatively and wisely. Speaking conservatively and generally it takes about 4-7 months to buy a bank owned property, renovate it and sell it for a profit. The following five tips will help you avoid the pitfalls and pave the road to maximized return of your investment dollar when investing in foreclosures, reo’s and bank owned properties (all one and the same) :
1. BUILD YOUR TEAM. An attorney is essential to setting up a company, like an LLC or S-Corp to buy bank owned properties in. An real estate attorney and can help you understand real estate contracts, foreclosure laws, title, insurance, disclosures and other legal issues involved. A local real estate agent who focuses on the foreclosure market and bank owned properties knows the current market and can steer you clear of pitfalls. A local real estate agent can also help you run comparable sales to compare the bank owned property to. The can also help you find competant affiliates and vendors like inspectors, appraisers, contractors and title companies. Your accountant will be able to help you outline your investment budget and help you understand how to track your expenses. An accountant is critical because they will help you understand what expenses you can write off and what you can’t. An acccountant will also force you to be organized so they can prepare your business tax returns for your newly profitable real estate investing company. Strategic Real Estate Coach can also provide information on these and other topics related to reo’s, bank owned properties and foreclosures.
2. EXERCISE PATIENCE. The market may be glutted with REOs at your price range, but remind yourself to stay emotionally detached from each one. Evaluate and analyze each one before deciding which one to buy. Research comparable sales in the area, obtain the history of the property, determine if it is free and clear of all liens. Bank owned properties are typicaly free and clear of all liens because the lender has re-possessed the property and cleared it free of any other liens. Here’s the formula you’ll want to remember. It’s called the “Fixer-Formula”. It goes like this: ARV X’s 65% minus repairs = Max offer price. Let’s dig deeper. A.R.V. stands for “After Repaired Value”. So take the After Repaired Value (A.K.A. – the perfect condition value) and multiply times 65%. Then subtract the cost for repairs to the property. That number is your maximum offer price and you don’t want to go over that number.
Here’s an example of a recent bank owned case study. 1467 Sunny Acres in Copley Ohio. Purchase price was $53,000, renovations cost $20,000, resold for $125,000. After all costs the net profit was $40,200.
Taking our “Fixer-Formula” we would take the After Repaired Value = $125,000 x’s 65% = $81,250 – $20,000 (repairs) = $61,250. $61,250 is our maximum offer price. We paid $53,000 for it from the lender. Great Deal!
3. DO YOUR “HOME” WORK. Walk the neighborhood and talk to the neighbors. This is the best thing you can do to “scope out” the property. The neighbors are usually free wheeling talkers who will tell you what’s going on with different houses and even the history of the bank owned property you are thinking about buying. They usually full of important information. Make your own observations regarding such things as area amenities, traffic, noise, crime, and the condition and curb appeal of the neighboring homes. Note location of street lights and fire hydrants. Most importantly you need to know within a $10,000 range what the property will resell for after it’s repaired and what the repairs are. A good real estate agent and a good contractor can help you with both.
4. GET A HOME INSPECTION. Many REOs have been unoccupied for months, sometimes a year or more leaving them prone to plumbing, electrical, roof and basement disrepair. Bear in mind the former owners moved involuntarily and were not concerned with routine maintenance of heating and air systems, fireplaces, sprinklers, roof and gutters. A whole house inspection will uncover issues that could be budget busters for you. Sometimes “what’s behind the walls” and not noticable by the naked eye can cost the most money. Get an inspection!
5. STICK TO YOUR BUDGET AND TIMELINE. Negotiate the price as you would if buying from an individual. Banks don’t make money by owning real estate, so a quick sale speaks volumes to the seller. When you write your offer based on the “Fixer – Formula” always write into the offer that can close within 30 days or less. A cash purchase is ideal. Cash is King in the eyes of the bank who owns the property. Most investors don’t know this BUT there is an entire world of “private finance” that is used to purchase most real estate. Today most buyers of bank owned properties DO NOT use conventional bank financing to purchase properties. If an investor doesn’t have their own cash they typically just use someone else’s cash. That’s private finance in a nut shell. You buy the property but another individual with money in an IRA or brokerage account or savings account lends you the money to buy the property. Its called “private lending”. We buy all our properties using “private lending”.
If that is not possible have your financing arrangements made in advance to expedite closing. FHA offers a 203k loan today for buyers who are buying properties that need work. Only one problem with 203k. Those loans are not available to buyers who are investors. You have to be an owner occupant. Create a punch list of repairs and improvements to be made before putting the house back on the market along with the deadline for completion and cost of each item. Track your expenses closely for possible tax deductions and give those to the accountant mentioned earlier. Bank owned properties can be renovated in 30 days or less with a strict budget and deadlines for contractors to meet.
Your diligence and extra effort will determine how quickly and how much profit you will turn.
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