Building My Rental Empire – The Truth About Foreclosures – Part II

In Part I of this series, I talked about the aura of foreclosures and how homes end up being owned by the mortgage companies that lent the money in the first place.  We left off with banks/lending institutions owning an ever growing list of properties that are effectively…rotting inventory that must be moved.  And now…

The Perfect Storm is Brewing
I’ve skipped the actual "foreclosure process" where notice is given, people are removed, etc..because that’s covered better elsewhere.  We’re at the point now where the bank owns the property and must get rid of it.  In the era of upward home price mobility…banks simply listed at what was owed on the property.  Let’s say it’s worth $150k.  In the era of "suck all my equity to buy the SUV, the customer probably owed $130k.  The bank would list at $130k and sit there.  Every few months, they’d drop maybe $5k or so until an eager investor or first time buyer came along and paid what they were asking.  The banks had very little incentive to move properties because the longer they waited…the better the deal got.

Now, prices are stagnate if not dropping.  In markets like CA, FL, and NV…the price boom is now the price bust.  Here in Iowa, we never had the big boom…rather slightly higher than average appreciation.  So our "bust" is not so noticeable.  However, foreclosures are up 4x-10x vs. previous years now depending on what article you read.  People, for whatever reason, got too much property…with a large payment or an adjustable that skyrocketed, etc. 

This situation has left the banks understaffed and ill prepared to handle the now 10x volume of homes they need to get off the books.  Keep in mind that this is "bad debt" for these firms and selling properties off frees up cash and makes them look better to Wall Street. 

In the Midwest we have an additional factor…old man winter.  He’s coming.  Now, we have financially rocked banks/lending institutions, winter on the way, 10x the volume of properties that need managed (heat must be on to avoid pipes freezing, chances for vandalism is high, houses must be kept up minimally so they can actually sell), and no infrastructure to handle them.  It’s the perfect storm that’s brewing that may encourage these institutions to become more "flexible" with regard to their pricing.

And They’re On!
On the market that is.  Banks and lending institutions use real estate companies like REMAX to list houses for sale.  Some real estate companies have specialists within the agency that do ONLY foreclosures for a living.  This is why you’ll likely see a normal FOR SALE sign in the yard of a foreclosure.  You’ll probably see some papers taped to the window as well with disclosures and/or warnings about the state of the property.  If you want to buy these properties, you need to know the people in charge of FORECLOSURE LISTINGS at the various agencies around your town.

Here’s the rub though…these agents typically have a handful of "GOTO investors" that they work with.  These investors can be counted on to buy XX properties per year from that agent, i.e. the investors butter those agents bread.  The investors get the call when the new property is coming down the pipe…but BEFORE its listed.  The GOTO people have their pick of the "good ones" and a chance to effectively (but probably not officially) buy it before it even gets listed.  Thus, you the normal buyer are getting scraps or nothing at all.

Your mission is you decide to accept it, is to become one of the GOTO investors that the agents have "in their pocket". Make connections.  Get in the loop. Take this business seriously.  Repeat the mantra, "I AM A REAL ESTATE INVESTOR".  Know what you’re talking about.  Put your credit and or funding sources in place before you call these agents or email them.  For goodness sake don’t tell them you’re a flipper and you’ve seen shows on TLC about it.  Everyone wants to flip.  Not me.  I want to buy and hold…for life.  I want to sell a property so I can write a check to Harvard for my kids education. (I’d prefer they were Hawkeyes or Cyclones)  Any good real estate investing class will tell you that 99% of the deals done where you get a $250k house for $90k are NOT LISTED PROPERTIES.  They’re deals done because someone knows someone like me that will "buy your property immediately as an investor…not a retail buyer…with the intent of creating a win-win deal that may or may not be 100% cash".

Becoming the GOTO investor will take time.  It will possibly take you numerous attempts, misfires, glad handing with people that don’t take your seriously, etc.  Eventually, you’ll work your way through the food chain and find the right mix.  Start slow and build…and you will become a buyer and renter of foreclosure homes that were bought with equity from the start!  Of course, I say all of this very early in my investing career.

Deal Status:
Properties seen in last 10 days:    14
How many were foreclosures:       14
How many were too far gone:         10
How many meet my needs:            3
How many offers submitted so far:  1   (offered $70 on a $119k listing) 

No emotion here. Just business.  Laugh at the offer if you’d like bank…because if you want to sit on the property through March…I have NO problem with that.

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