TURNING NEGATIVES INTO POSITIVES
Investing in foreclosures = investing in communities
Woodward Talk June 18, 2008
Foreclosures hurt the economy: Not only has a family lost their home, but cities lose tax revenue and neighborhoods lose value due to vacant homes and the ensuing blight, not to mention the safety of a community.
"We've all seen the houses with notices posted on the doors and windows, papers and phone books collecting on and around the porch, uncut and/or weed-filled lawns, and worse. Because the homes are empty, they invite thieves, vandals, rodents, etc.," said Joanna Darmanin, a Realtor with Century 21 Town and Country.
To that end, the negative chain effect of foreclosures is intensified: As more neighborhoods experience a decline in value, more homeowners are left with upside-down home values, and both the housing market and the economy continue to suffer.
"We've kind of been hit doubly hard.
We've been affected by the bad economy and also affected by the abuses of the mortgage industry. Property was over-appraised. Money was lent irresponsibly," said Gregg Wysocki, a Realtor with The Fairway Realty Team and Emporio Casa Real Estate.
"Now, underwriters and appraisers are fearful of making a bad loan. In the past, they would go back one to two years for comps - now, it's three months. In the past, foreclosures were not weighed in - now, they're being weighed. ... Foreclosures are artificially lowering the value of other homes in the neighborhood," Wysocki said.
The only way to reverse that trend is to fill those vacant homes.
"Sellers are getting hit hard in the private sector. We have to continue to sell these bank owned properties. Until they are sold, it will keep the market in a decreasing mode - the private sector won't increase in value until these are sold. It all comes down to supply and demand," said Frank Barket, a Realtor with Century 21 Campbell Realty.
The good thing for potential homebuyers, both investors and those looking to purchase their own home, is that interest rates are low and many homes can be picked up for just a fraction of the true value.
"If you put on an investor's hat, as for buying foreclosures, it's a great thing. As in investor, you can look at the mathematics and you can see the potential profit," said Furhad Waquad, a Realtor with Max Broock Realtors and the current president of the Metropolitan Consolidated Association of Realtors.
"If you're buying a home for 40 or 60 cents on the dollar and spending 10 cents on the dollar fixing it up to bring it up to par, it's a good investment then, as an investor, leasing it out at least for a year, it's gravy - nothing else can make that kind of money," Waquad said, noting that in this market, investors need to wait at least a year, if not longer, to make a good profit.
Not only are investors getting a great deal, said Barket, but they are also "improving the values of neighborhoods by fixing them up to look more desirable and changing the neighborhood aesthetics."
"For the neighbors of a foreclosed home, it's a relief to have new owners in a home that may have stood empty for many months, and slowly deteriorated with nobody taking care of it. ... For other sellers in the neighborhood, it's good to get these homes sold and off the market, to eliminate the competition," Darmanin said. "For buyers, the obvious benefit is the opportunity to get a great deal."
"First-time homebuyers can benefit if the home is in good shape. The hardest part is getting a mortgage on a home that needs a lot of work. FHA (Federal Housing Administration) is about the only resource for these types of loans," said Barket, adding that "you have to have good credit or cash" - with a minimum down payment of 8 percent - to purchase a home now.
According to Waquad, homebuyers have a tendency to offer about 60 percent below the asking price, which is already "a great price, a great deal on that home."
"What one should do when looking at foreclosed homes is have the Realtor tell what it would sell for under normal circumstances. You can't look at the price with regard to a home's value," said Waquad.
"There are two kinds of foreclosures: one, where banks want what is owed on the home; and two, the bank says a value and will hold onto that house until it gets that value."
It's important to note that depending on the circumstances surrounding the foreclosure, the home may need a lot of work; however, the cost of repairs tends to be a drop in the bucket compared to the overall value of the investment.
"There are foreclosures out there that are beautiful; however, there are others where the previous owners completely ruin the home," said Wysocki.
"One of the most common problems is that most homes are sold as is, so the risk is there, and you have to evaluate that. When looking at a home, imagine everything you think is wrong is wrong and make your bid based on that - assume the worst," said Barket.
To avoid any problems, the experts agree it's essential to get an inspection done prior to making an offer.
"When there's damage, having an inspection is ever so important.
Water damage is a big problem with foreclosures - get a release from the bank to have the water turned on and make sure there are no leaks or burst pipes," said Wysocki, adding that "it's just as important to get a release from the bank stating that you are not responsible if there are problems."
With foreclosures, it is also important to act quickly, and have patience, especially with more desirable properties.
"Once an offer is presented to the bank, it can sometimes take weeks to get a response. If you're lucky, you will get a response right away, but if the home is priced way below market, you may have to compete with multiple offers," Darmanin said.
Another potential drawback includes removing occupants from the home. Experts recommend getting an attorney in these cases, as sometimes the tenants retaliate, destroying the property.
Purchasing a short-sale home is one way to avoid some of these potential problems, said Wysocki, as those who are going through a short sale are less likely to destroy the home - they would be held responsible - and have come to terms with losing it.
However, said Waquad, buyers must be aware that short sales tend to take more time than traditional sales, and both foreclosures and short sales involve a lot of extra paperwork.
"There is a lot of fine print. You really need to go through the paperwork line by line - there may be fees and charges that are normally paid by the seller that the buyer will be expected to pay," said Darmanin, adding that the buyer's agent can help, but it's also a good idea to have "an attorney review the details of the purchase agreement and addenda."
"Buying a foreclosure isn't for the faint of heart, but if you are patient, and willing to take some risks, you can land a really great deal," said Darmanin. "Like everything in life, there are pros and cons."
Erin's Favorite Real Estate/Investment Books
Missed Fortune 101: A Starter Kit to Becoming a Millionaire by Douglas Andrew
Stop Sitting on Your Assets by Marian Snow
Rich Dad's Guide to Investing by Robert T. Kiyosaki
Real Estate Investing Loopholes by Diane Kennedy
Real Estate Tax Secrets of the Rich by Sandy Botkin
Rich Dad's Real Estate Advantages: Tax and Legal Secrets by Sharon Lechter
What Every Real Estate Investor Needs to Know about Cash Flow by Frank Gallinelli
The Insider's Guide to Tax-Free Real Estate: Retire Rich Using Your IRA by Diane Kennedy
Wealth Protection Secrets of a Millionaire Real Estate Investor by William Bronchick
Property Management for Dummies by Robert Griswold
Posted by Erin Rose at 3:13 PM