Intro to Investing in Foreclosures


Hello and welcome to my new blog, https://redannyday.wordpress.com

The propose of my blog is intended for real estate news, market information, facts, and how-to materials. What inspired me to start writing this blog came from other members in the social media world. Others were asking questions, but could not find answers – better yet, did not know where to find answers. Some people could find answers, but did not know how to ask the right questions. Hopefully I can shed some light on subjects that will help you out, with real life examples – and you can learn from them.

I do not have all the answers, and I am constantly still learning as well. I am here to share with you the knowledge I have gained over the past few years.

Let me say first that real estate is an amazing business. There are all kinds of ways to make a living, or investments in real estate. You can work full time, or part time – and still be very pleased with the income you receive. There are narrow niche markets in real estate, and wide markets in real estate. This post is an introduction to a niche market of residential real estate, investing in residential foreclosures.

What is a foreclosure? A foreclosure is a property that was once owned by an individual who lost the property for some reason. Typically, the individual loses their property due to financial woes. Some reasons why homes go into foreclosure is known in real estate as “The 3 D’s”: death, divorce, and debt.

The typical process of home ownership goes something like this:

Couple A decide to buy a house. Together, they come up with a down payment and finance their house.

Once the house is financed, the original lender will typically sell their mortgage on the secondary mortgage market, to another buyer. The first lender makes money, and sells this note to decrease their risk (borrow default).

The buyer who purchased the original note now holds the mortgage. Currently, Fannie Mae and Freddie Mac are the largest buyers on the secondary mortgage markets.

If the home owner defaults on their mortgage (non-payment), the company who owns the note will usually begin the foreclosure process after 3 months of delinquent payments. This puts the home owner in a bind, because of many stipulations, such as the acceleration clause, which gives the owner of the note the legal authority to call in the entire note once the payments are delinquent. If the home owner can not come up with this amount, than the house will be taken from them and sold as a foreclosure.

If you have been watching the news lately, you will notice that right now there is an all time high foreclosure rate in the United States. In fact, 2011 is expected to have the most foreclosures ever on the market – over 1,200,000 houses are expected to flood the market.

Other media outlets talk about homes being “underwater”, which means the owner owes more than the house is worth. This induces the dilemma of the homeowner walking away from their mortgage, and taking a hit on their credit score for the next few years. Each individual case is different, and homeowners facing foreclosure have more options today than ever to resolve this type of issue.

What does this mean? Well, this type of news can be good – or bad, depending on where you are in your life, and what you are trying to accomplish. If you bought your house in the 90’s, the market was a lot different than what it is today. You could have paid top dollar for the house, waited for a few months, and it would appreciate in value over that time – tremendously. This is what got many states in trouble, artificial inflation of home values.

This can be great news for first time home buyers. Interest rates are tremendously low, and home prices are dropping. Currently, 1 in 4 home sales, or 25% of US home sales are a foreclosure. Foreclosures sell anywhere from 95% to 60% of fair market value, depending on the state of the house.

This can be bad news for an established family who bought in at the peak, and who now need to sell and take a loss on their equity, or worse, who are now underwater.

Again, this all depends who you are, and where you are at in your life.

Flip This House on A&E shows crews from all over the country who buy foreclosures, pre-foreclosure houses to renovate, and sell. They are able to do this because they are buying these properties at pennies on the dollar. Many people watch these shows and see the entire scouting/purchase/rehab/sales process in an hour show, while the investor makes anywhere from $20k – 150k.

Real estate investors know that although this makes great TV shows, this is hardly the case in residential real estate investing. Typically investors look at over 10-20 properties, before they decide to make an offer on one. These types of shows do not show this process. There are other costs associated with fix & flip deals that are not shown on these shows, that will need to be taken into account as well.

Hopefully we can give you a realistic idea of how much you can make depending on what you can put in. There are many ways to make money in real estate. I am currently focusing my efforts on foreclosure investing due to the fact that there are so many in the US right now.

I will be creating YouTube videos on location to help out people who are new to real estate investing. My first video is an introduction to foreclosure real estate investing (fix & flip or buy and hold). My company focuses on the fix & flip strategy.

As a real estate investor, what you should take from this is:

  1. Banks DO NOT want to hold real estate. They will be more inclined to negotiate with you.
  2. Home owners facing foreclosure are motivated to sell. They want to sell fast, because they are on a time crunch. This is typically called a pre-foreclosure or short sale.
  3. Typically foreclosures are in bad shape (interior and exterior). The house isn’t doing anyone any good. Banks don’t want it, it is making the neighborhood look bad, and it drives down other home values which are being sold.
  4. Gurus selling “real estate systems” for thousands of dollars are NOT turn key make money quick ideas. Invest 1/20th of that money in books.
  5. The best resources for real estate investing are usually free
Hope this helps. It should get you started in the real estate investing world, and hopefully save you some money.

Until next time,

Danny

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About redannyday
Danny Day is a local Houstonian who has worked in many different areas of real estate. He blogs about real estate investing, trends, and data that relate to micro and macro markets in the United States, and Houston.

2 Responses to Intro to Investing in Foreclosures

  1. Steve says:

    Thank you good info Steve

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