Foreclosures

Most investor wannabees I talk with want so badly to "flip properties" that they forget from the outset that they are talking about launching a business -- a real estate investing business. They simply think and say: "I want to begin buying and selling real estate."
Sounds pretty simple, doesn't it? Find a run down home, maybe a foreclosure; go through it repairing and painting walls, replace flooring, install new appliances; put it on the market and make $50,000 each time. Yeah, right.
Before you launch into the real estate investment world, first consider how the transaction went with your primary residence. The agent probably took care of many of the minute details, such as lining up contractors for inspection items, helping you with financing and insurance, and even getting the inspector. If you're going to start investing on a regular basis, then you'll want to develop relationships with these professionals yourself and follow these steps to begin your real estate business:
1. Locate financing
All investing hinges on this first action. If you don't have financing, most likely you won't be investing. You'll want to find a program that will allow you to put as little of your own money into the property as possible. In today's competitive mortgage environment, there are now investor programs that allow five percent down on the investor's part. Since you may have remodeling or rehab costs, don't forget to look for programs that include money for those activities. Set up a limited liability corporation. This protects you from any accidents that may happen during the refurbishing process. If someone gets hurt on your property, they could sue you -- the LLC purports to protect your personal property.

2. Find a real estate agent

Find one that knows the marketplace, knows how to deal with foreclosure listing agents, the disposition companies, and is HONEST.

3. Line up your contractors

Unless you're going to do it yourself, then you have to ask the following questions:
     o Do I have the expertise to handle tasks that require trade status, such as plumbing, electrical, HVAC?
     o If you're repairing electrical and plumbing you may need to get proper permits and inspections.
4. Find a trusted home inspector

This is a critical member of your team - choose wisely.

5. Find a title company

You have to check out titles of properties and ensure they're clean.

6. Find an attorney

You need a solid "go to" legal expert.

7. Find an insurance firm

If you're holding onto the property short term, you'll need a short-term insurance policy to cover the property until you sell it again.
And then here's the kicker -- except for the LLC setup, you have to do each of these steps every time you want to buy another house, fix it up and sell it.
As you can see, this is another job when you're considering the refurbishing of property and selling. I haven't even gotten into the tax ramifications of short-term investing (you will more than likely owe capital gains taxes of 5-15 percent on all of your profit). You CAN make a lot of money, and you're going to work hard to do it. The good part about it is that the returns are usually higher than what you'll find in any other business.
Before you get started, write down your financial goals together with your partner -- usually your spouse. Find a real estate agent who can walk you through real estate investing as it pertains to your area and then talk with your accountant about tax liabilities and benefits -- then, make your decision.

 

Potential pitfalls...


1. Paying too much for a foreclosure
Many VA and HUD foreclosure buyers have found themselves getting caught up in the excitement of auctioning up on properties and watch, without even knowing it, their supposed cash cow die right in front of them. If you must have a 20 or 25 percent spread to make money on the purchase, then stop bidding when the price gets below that spread amount. In simple terms, if you’re bidding on a property with a $150,000 value and you intend to sell it for a 20 percent gain, then stop bidding when the price gets above $120,000. In a hot market, even foreclosures will sell at market price, but then the new owner must move in and most likely fix up a dilapidated property that has been neglected by the former owners. (Usually, when an owner is headed toward foreclosure, fixing the leaky roof or basement is the last thing on his mind, leaving it up to the “bank” to fix instead.)
2. Getting a house without clear title
Since I’m not an attorney, I won’t go deep into this point, but make sure you can get clear title to a property before you put your $10,000 earnest money deposit into the deal. Order a title search by an attorney to find out if you’re going to have any problems taking title to the property. If you can’t get title, you can’t sell the property.
3. Negative or unprofitable cash flows
The whole idea behind buying a foreclosure is to buy low enough so that rent checks will cover the investor’s mortgage payment, taxes, insurance and fees each month and then leave the investor some profit at the end of the month. Unless the property is in pristine condition and all the systems will last repair -free years, you’re setting yourself up for financial hardship if an air conditioner breaks or the refrigerator has a compressor attack. The monthly cash flow should include enough to finance any breakdowns or repairs while the tenant lives in the dwelling.

4. Not taking care of problems

Don’t take the cheap way out on being a landlord. A house starts deteriorating from the day the builder completes its construction. Your new investment property is creating cash flow – take care of it. Keep it painted regularly, clean carpets and floors between tenants, fix broken windows, repair leaks promptly, replaced rotted wood, etc. If you let the property deteriorate until you can’t rent it out any longer, you’ve waited too long to fix these items. In addition, to fix defects early on will save you money if you wait and the bill doubles or even triples.
5. Failing to educate yourself on tax benefits

If you’re going to invest in rental property, talk with professionals in the field who know how to maximize your financial benefits form this new form of investment. Accountants, attorneys and real estate practitioners are all worth their fees as they help you avoid pitfalls, increase your gain and keep you out of trouble.