Homes to Invest In

So now that you’ve got the financing in place, how do you know which homes or properties to buy? There are plenty of factors you need to consider to ensure the purchase makes sense.

As the saying goes, you make money when you buy, not when you sell. This is why it’s key to buy the right property, which entails being clear on where you’re trying to sell and who your buyers are. Also, keep in mind this saying: “You don’t have to like the house, just the numbers.”

Read on for more details on how to make the best choice, particularly when it comes to flipping homes.

WHERE TO START

Another option is remote investing, which could theoretically be anywhere. However, be sure to choose someplace that’s not only familiar to you, but also a place to which you feel emotionally attached. This might surprise you, as most people have been told that emotions should stay out of these kinds of decisions. I don’t disagree when it comes down to the details, like which specific property to buy, what to fix up, etc.

However, in this one case, emotions are important. You’ll be spending a significant amount of time there doing some pretty hard work, and being in a location that you enjoy and feel connected to will help. Plus, you’ll know the area well, which can be advantageous in many ways, as well.

• • Hypermarket: Less than one month of inventory; little to no competition. Listings tend to sell above asking price after receiving multiple offers.

  • Seller’s Market: Less than four months of inventory; low competition. You will likely sell for a good price.

  • Stable Market: Four to six months of inventory. Properties might take longer to sell, and could sell at or below asking (if they sell above, it probably won’t be by much).

  • Buyer’s Market: More than six months of inventory; lots of competition. Properties take a while to sell, and often sell below asking.

After you’ve accumulated sufficient information on all applicable factors, it’s time to decide whether it’s a wise investment. That said, remember that even with the most detailed research, things can change. Maybe the up-and-coming neighborhood takes an unexpected downward spiral, or maybe it up-and-comes more quickly than expected.

Unless you’re psychic, there’s just no way to predict what will happen, so making the most well-educated decision you can is the best way to mitigate — but not eliminate — the risk.

The most important part of running the numbers is calculating your Return on Investment (ROI). Here’s how to do that:

• • Figure out the investment gain. This is the amount of money you’ll make before expenses. So, if you make $500 per month on your rental property, multiply it by 12 months a year, and your investment gain will be $6,000.

  • Add up all your operating expenses. This should include taxes, insurance, repair costs, and any other expenses you know or think you might have. If you pay $1,200 in taxes, $450 for insurance, and $900 in repairs, your total expenses would be $2,550.

  • Subtract your expenses from your investment gain: $6,000 - $2,550 = $3,450.

  • Divide the figure from step three by the price of your investment. So, if you bought the property for $75,000, then $3,450 ÷ $75,000 = .046

  • Finally, turn the figure from step four into a percentage. In this case, 4.5%. This number is your ROI.

Owners of distressed properties tend to be pretty desperate to sell, which means investors can often get them for less than market value.

For these types of buildings, a popular option for investors is to wholesale them. This means the investors get the home under contract, then market it to other buyers for a higher price than their contract, and ultimately assign the contract to another buyer. The investor ends up with the difference between the new contract with the new buyer and their contract with the seller.

For example, if an investor gets a home under contract for $60,000, then finds new buyers who agree to pay $70,000, the investor will make $10,000.

A major advantage of wholesaling is that you don’t have to have a lot of capital, and there are many cheap — or even free — options to find them. They can use auction websites, including Hubzu.com, Hudsonandmarshall.com, Auction.com, and Zone.com.

Because I have access to MLS (Multiple Listing Service), I can help locate properties, as well. In addition to my own MLS, I can look through others in the area, which helps to expand your search.

Foreclosures

According to the most recent NAR® Investment & Vacation Home Buyers Survey, 18% of investors buy foreclosed homes. In order to purchase these properties, investors must go through auctions. If they’re the highest bidder, they have to pay the full amount at that time. They will then get the trustee’s deed once the sale is complete.

Foreclosed properties’ prices are determined differently from other properties. Instead of using what the home is worth, the starting bid includes the following:

• • How much is still unpaid on the loan

  • Interest owed from attorney’s fees

  • Any costs stemming from the foreclosure process

Sometimes, properties don’t even get that starting bid. When this happens, it becomes bank-owned, or Real Estate Owned (REO) property. The loan lender owns the home and will use a real estate agent to try to get it sold. One thing to note is that these properties are sold as-is, so if you’re looking to buy one, that’s something to keep in mind.

There are three main ways to find pre-foreclosed homes. The first is to check with the County Clerk at the County Recorder’s Office. There, you can look up Notice of Default (NOD), lis pendens (“an official notice to the public that a lawsuit involving a claim on a property has been filed,” as defined on Investopedia), or Notice of Sale public records. There’s also a good possibility that you’ll find properties that aren’t yet online.

Speaking of online, that’s another good way to find properties. There are national and regional listing services. Most have a weekly fee but offer a free trial so you can get a “feel” for them and how they work. I suggest taking them for a trial run so you can see which site or sites best fit your needs. You’ll likely find out all the important details, including name, address, amount owed, and outstanding loans. Sometimes you’ll even find contact phone numbers.

These listing services may also have REO properties, but don’t let that be a factor in deciding which sites to use, as most of these properties will already be listed on their lender’s (e.g., bank’s) website, which you can access for free.

The third option is to look through newspapers and business journals. This is because when a foreclosure is filed, the Notice of Sale has to be published. You can look in the Public Notice section for trustee sales to find these notices.

REO/Bank-Owned Properties

The main advantages of buying REO properties is that you can get them at below market value without having to worry about unpaid taxes or liens. The downside is that it can be an intense process to buy one of these properties, but the ultimate profit is usually worth the effort.

Earlier, I mentioned these homes tend to be sold as-is. However, buyers are allowed to have an appraisal and inspection done. The bank won’t make any changes to the property itself, but they will likely negotiate the price down so you can use that money to make the repairs yourself.

If you want to buy an REO property, you have to have your financials ready. Lenders set the prices low so properties will sell quickly, and if your finances aren’t in place, you could miss out on a great deal.

To prepare, you need to make sure you’re pre-approved and have a letter from your lender. The letter must include the pre-approval total, how much you’ll pay for the down payment, and how to reach the loan officer. If you’re paying cash, you’ll still need a letter from the bank. This will state that you have enough money to cover what you’ve offered.

One step that’s different in making an offer on REO properties is that you include an earnest money deposit. Essentially, this is a show of good faith that you’re truly interested in purchasing the property. The deposit will stay in an escrow account, then go toward your down payment and closing cost. These deposits tend to be 1-2% of the full offer, and may or may not be refundable. For example, if you decide not to buy after all, you likely won’t get the money back. However, if the bank backs out of the deal, you will probably get a refund.

There are a few ways to find REO properties. A good place to start is by enlisting the help of a real estate brokerage that can search lists the general public can’t access. Sometimes the brokerage has one or more realtors that focus solely on REO properties; sometimes, they have an entire department dedicated to REO.

Second, you can look online at websites like Foreclosure.com, Auction.com, and RealtyTrac.com. Just be aware that you might have to become a paid member in order to search these sites.

In addition, you can look at government and bank loan sites, which often list relevant properties. You can search national and regional banks and the government-run sites HomePath.com (Fannie Mae) and HomeSteps.com (Freddie Mac).

Short Sales

The most recent NAR® Investment & Vacation Home Buyers Survey also looked at how many investors bought properties through short sales: 17%.

A short sale occurs when the buyer purchases a property for less than what’s still owed on the mortgage. The lender must approve of the transaction. They usually do this when the seller is going through a hardship (divorce, health problems, job loss, etc.), and the home doesn’t have enough equity to cover the balance of the mortgage, especially when factoring in sale costs. Part of the process of short sales is that sellers must give the bank their financials. What exactly this entails varies between banks, but the process tends to be comparable.

Why would lenders be okay with getting less than they’re owed? Because the loss they take in short sales can be less than the loss they’d take if the home went into foreclosure. Plus, they won’t have to deal with marketing and selling the property. Just so it’s clear, this doesn’t mean you’ll get the deal of the century on a short sale. Lenders still want to get the most they can! (Wouldn’t you?)

Overall, short sales are good for everyone. Investors get a good deal, lenders get a significant amount of money without having to deal with the foreclosure/REO process, and homeowners don’t get foreclosed on, which can tank their credit score.