Q. Who is a good candidate for investing in foreclosures?
A. It’s right for someone with a secure job, solid cash flow and lots of cash on hand — someone who wants to make some money on the side. If you’re married, your spouse needs to be on board, too. I like for people to use their own money. But if you don’t have enough cash but you’re willing to do the work, find a partner. My first “bank” was my grandmother. I didn’t pay her interest, but every time I made a deal, I took her out to lunch. If you really want to do it, you can always find sources of investment capital.
Q. And who’s not a good candidate?
A. Anyone who thinks this is easy money. It’s a myth, perpetuated by all these late-night TV gurus, that you can get rich quick doing this. If you’re in financial trouble, this is not going to bail you out.
Q. Why would someone want to look into this now?
A. There’s never been quite so many opportunities for individual investors to buy foreclosures. There are just so many of them. Before, the market was chiefly controlled by good old boy networks, through the banks’ brokers.
Q. How does it work in declining markets, which are the ones that are most likely to have lots of foreclosures?
A. You account for this in the price you pay for the property. You make your profit when you buy, after all; you realize it when you sell. There’s a formula in the book that helps you adjust for a soft or flat market. My wife once pointed out to me that no matter what the economy looks like, people are still going to buy and sell houses. They’re still going to get married and start families. Even if 10 percent of workers are laid off, the other 90 percent are still working. They will still need housing.
Q. Describe the perfect property for the foreclosure investor.
A. It should be in a good neighborhood. And you should be able to see clearly what you need to do to fix it up and sell it.
Q. What kind of work is usually involved?
A. All kinds of things, inside and out. Look at the doors, windows, roof, concrete — everything. Properties that are in foreclosure aren’t always in great condition. After all, the owners couldn’t afford the mortgage payments. They probably couldn’t pay for maintenance either. It’s important to have a thorough, professional home inspection before buying. But if that’s not possible, then you should at least inspect the outside of the property yourself — all four sides.
You’ll also need staging (making the property look pretty) to move the property if the market is slow. Once you start working, multitask to fix things up as quickly as possible. Timing is everything. Every day you keep a house off the market, you’re losing money.
Q. What types of properties should investors avoid?
A. Don’t buy if there are a lot of distressed properties on a block.
Don’t invest in foreclosures long distance. You need to be able to see what you’re buying. And don’t touch pre-construction projects.
Also, avoid any deal in which somebody promises you cash back at closing. This is never legal. Stay away from that.
Q. What are some other things that potential investors should keep in mind?
A. Always have a Plan B. Not every house on the market sells right away. You may need to rent the place out for a year or two after you fix it up. This isn’t necessarily a bad thing. It can lower the tax rate on your capital gains .
And be prepared to lose money sometimes. Even I don’t hit home runs every time.
Q. What about guilt? Do you ever feel bad that by profiting from foreclosures, you’re making money off other people’s hardship? How should people handle those feelings?
A. Of course you can feel guilty. So don’t take advantage of people. You’ve got to try to make it a win-win. Sometimes the best thing to do is help the person keep their house. I’ve run into situations like this, including one in which the woman who co-owned the house just got behind after one bad event. She didn’t want to ask for help from her family. But instead of buying the house after foreclosure, we made some phone calls that helped her keep it. You’ll get more opportunities that way than being a vulture. And you’ll sleep better at night.
From: “Foreclosure Investing For Dummies” by Ralph Roberts
