It should come as no surprise that investors of all sorts are rushing to the real estate sector to cash in, especially since this sector is outperforming many other instruments.
Posted by: Nick Johnson in Pre Foreclosure, Motivated Sellers, Investment, Foreclosure on Jun 23, 2008
It should come as no surprise that investors of all sorts are rushing to the real estate sector to cash in, especially since this sector is outperforming many other instruments.
In short order, profit can be realized by the reselling of a property or by long term leasing of a property. This is a great way to generate revenue as your equity on the property builds.
Despite the options, investment properties can still prove to be hard to find, but that does not mean it is impossible. Employing the right strategy for your market can still yield sizable revenue streams, even in depresses markets.
Generally, a 20 to 30 percent spread between your costs and resale price will yield a handsome profit. This would mitigate any sort of inflated values due to an industry bubble and added costs like closing fees and repairs.
The most favorable buying situation for a buyer involves a vested seller with little time on his or her hands to spend in the actual selling of a property. Because they have equity built in the house, and they are motivated to divest themselves of it, they are more likely to sell far below market value.
There are an innumerable amount of venues to find information about properties on the market. One way to narrow down the field is by looking for those sellers that are most motivated to sell: foreclosure properties. These can easily be found on pre-foreclosure lists.
The Internet holds such information that not long ago was available on a limited basis to licensed real estate professionals, granted to them by the public records office in city hall. Now, any motivated buyer can access these lists easily.
As you may already be familiar, foreclosures are properties in which the owner is unable to meet their contractual demands with regard to their mortgage payments. To recover the remaining balance, most of these properties are placed in auction by the lender. Should the owner decide to keep the property, he or she would have to pay the amount in default, or sell the property at a price that will satisfy the remaining debt.
Most property owners in pre-foreclosure will entertain offers from real estate investors to avoid any blemishes on their credit history, of which foreclosure is a major mark, and they can also earn some money above the remaining debt.
The urgency of their situation makes them a very motivated seller. The likely rationale is that the property owner is likely to lose their home in any case, so it becomes a matter of doing things the hard way or the easy way.
Nevertheless, investors that are looking to buy pre-foreclosures need to employ strong communication techniques because the seller usually has not made the final decision to sell; they need some alternative solutions.
Any marketing efforts would need to extend beyond first impact and engrain the notion selling into the owner. Informative and visual outlets like a well developed Website and signage are effective tools. Written communication in the form of a letter can also be effective, but only if it is repeated and more than superficial entreaties.
Should the property owners decide to not sell before auction, investors can then place bids. Auctions can present great opportunities to purchase a property at amazingly low prices, but there is greater competition from other investors and there is a level of uncertainty and risk.
One of the competitors at the auction will likely be the bank that is foreclosing on the property. This can actually present itself as a good opportunity to investors, as the bank is extremely motivated to sell the property. The longer the property is within their portfolio, the worse their bottom line is, so they seek to divest rather quickly. They may even go as far as selling far below market value to recover the balance of the debt.
Two primary criteria for an investment property is a selling price below market value and the great likelihood that it will appreciate soon after its purchasing. While a motivated seller can create this opportunity, the financial figures would need to meet the goals of both seller and buyer. A seasoned real estate investor will make the effort to determine the financial feasibility of an investment and also consider the seller's needs.
Any outstanding debt on a property will be registered at the local recorder's office, and should be below the market value of the property for it to be considered financially feasible. A Comparable Sales report will further advance the information needed to determine if a property is worth investment. A wise investor would pursue only those properties that have outstanding debt 20 to 30 percent below the market value.
Structuring purchase agreements can be one way of ensuring that the investor stands to gain from the purchase of a foreclosed-upon property. If he can take over the current loan on a property, perhaps consider buying it for up to 90 percent of its market value. Should the investor need to finance the purchase, a more reasonable target price would b 70 percent of market value or less.
Investors create a more favorable situation by avoiding the use of personal savings or credit. By avoiding these, leverage is gained and a more stable picture is presented, overall. The more leverage, the lower risk.
A wise investor should also weigh the options in generating revenues and profits from the property. Would a lease to a tenant earn more than reselling the property outright on the market?
Should interest rates remain low and should overall property values be on the increase, it would probably suit the investor to resell the property after having made any improvements or repairs to make the property more attractive. Any profits can then go towards other investments, potentially with more windfalls.
In the event that rental properties are more of a viable commodity, leasing then becomes the favorable situation. Lease options and installment land contracts are good ideas to consider when sell the property on an installment basis. This is beneficial in two ways: not only does it provide a monthly revenue stream, but it also renders more revenue in the long term.
A smart investment will include plans not only for buying a property, but also plans to earn a profit from and potentially divest oneself from the property. These plans need to go beyond just considering the purchase price, and need to extend into the financing structure to maximize profit while minimizing risk.