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Archive for July, 2010

Foreclosure Real Estate Investment Strategies

Friday, July 23rd, 2010

Foreclosure real estate investing can be a profitable niche for those who take time to learn the strategies. Foreclosed realty encompasses a variety of properties including residential homes, vacant land, and commercial real estate.

When buying foreclosure real estate, investors must be financially prepared to invest in property repairs or renovation. While foreclosed properties are priced below market value, homes requiring substantial repair can quickly deplete home equity.

Investors must engage in due diligence by reviewing comparable sales reports and obtaining home inspections, property appraisals, and repair cost estimates to determine the true cost of buying foreclosure properties.

Several options exist for locating foreclosed properties at discounted prices. The most common is to attend public foreclosure auctions. All properties presented through auction are sold in “as-is” condition. Buyers must be prepared to submit payment in full within 24 hours once their bid is accepted. Once realty is transferred, property owners are responsible for removing creditor and tax liens and making necessary repairs.

Another option is to seek out foreclosure short sale homes. These properties are in the midst of the foreclosure process and purchase negotiations take place with lenders’ loss mitigation department.

With short sales, lenders agree to accept less than the full amount owed on the home loan. Properties are listed through realtors or sold directly through the bank. The short sale process can be complex and lengthy; taking up to four months or more to complete. Buyers must obtain prequalified financing prior to submitting an offer. It is important to note that banks rarely accept offers lower than the asking price unless property inspections reveal major problems.

Short sale houses can provide investors with a good deal, but may not be the best option for investors who participate in house flipping or plan to use the home to generate rental income. Buyers willing to wait out the process can generally purchase homes at 10- to 20-percent below appraised value.

One way to obtain the best price on foreclosure properties is to seek out private investors who specialize in wholesaling. Some investors and investment groups purchase entire bank portfolios consisting of dozens of bank owned foreclosure properties.

Also known as real estate owned (REO) homes, these properties are houses that did not sell at auction. One of the biggest advantages of REO property is houses are sold with a clean title. When banks regain ownership of foreclosure real estate they remove attached creditor and tax liens and commence with eviction action when foreclosed homeowners refuse to leave the premises.

Investors who buy homes in bulk obtain wholesale pricing and pass savings along to individual buyers. REO homes can often be purchased at 20- to 30-percent below market value and provide investors with instant home equity.

It is crucial for real estate investors to become educated about all facets of buying foreclosure properties. Many newbie investors are tempted by the low price tag of foreclosures, but fail to realize the costs associated with rehabbing the property.

Foreclosures, short sale and bank owned real estate nearly always require some level of repair. Investors must take time to calculate the true cost of the property before making an offer to buy. Otherwise, investors could hold title to a money pit which could take years to financially recover from.

Building an Investment Property Foundation

Sunday, July 18th, 2010

Many seasoned property investors with more income or capital are able to invest in more speculative growth areas. Often these properties are negatively geared providing relief on personal income taxes. It is important to remember that tax savings from incurring a loss is not a sustainable or growth promoting strategy. When a property portfolio is built on highly yielding or positively geared properties, the borrowing potential and capital balances will increase over time allowing the portfolio to grow. Even when property prices fluctuate, with the current banking systems in Australia, Canada, and US the values of properties are not re-valued daily like the stock/security market.

The property price fluctuations will not impact the property portfolio’s cashflow. When started the property portfolio, preserving capital by using a low down payment provides the investor with a larger safer net/buffer in case of required repairs or vacancies. Other investors may argue that the insurance on non-conventional mortgages or mortgages with greater than 80% loan to value ratios offsets the benefit of using a small down payment. It is a much safer approach to have a supply of cash to be prepared for unforeseen circumstances than to have it all invested in the market. If a down payment of 20% to avoid insurance is available with spare cash for contingency, the large capital investment still locks up a large amount of cash from other opportunities.

Once a foundation of positively geared/positive cashflow properties is created, more neutrally geared properties can be purchased. Often in areas close to growing populations have neutrally geared property and provide potential capital appreciation. Areas with high cashflow often are in areas where capital appreciation has not occurred and my not. The cashflow provided by the foundation will enable the investor to seek properties with more potential growth.

One of the keys to success in building a property portfolio is to understand that the property is an investment and not a personal home. The areas that are great investments may not have the aesthetics associated with an investor’s lifestyle, but an investment that gains value and provides income is an asset while an aesthetically pleasing property which drains the investor’s income is a liability. It is critical to decide on a strategy and then research the opportunities that satisfy the strategy requirements. If you are a cashflow investor, look for opportunities and analyse them for cashflow. Often investors are emotionally attached after reviewing a property and try to make the property into an investment.