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Distressed Properties: Investing In Foreclosure And REO Houses

Apr 18, 2008
Distressed properties are predicted to become the next hot real estate market, but can investors really make money buying fixer-upper houses? According to housing experts, the answer is a resonant "Yes"! What they don't tell you is there are a few tricks that can significantly increase your bottom line.

Two of the most popular types of distressed properties include foreclosure and real estate owned (REO) houses. However, experts warn this type of real estate investing does not create abundant profits overnight. Instead, distressed real estate investing is primarily for the investor who plans to hold on to the property for an extended period of time or those who engage in house flipping strategies.

To obtain success in this arena, investors will want to locate properties in areas affordable enough to cover the mortgage with rental income. This can be achieved in a variety of ways including long-term rentals to families or short-term rentals for individuals in transit or as a vacation rental.

Investors who prefer long-term tenants would be wise to seek out foreclosure or bank owned homes in family-oriented communities. By charging a fair rate and properly maintaining the property, it's fairly easy to attract tenants who will remain in the house for two or more years.

Investors enticed by short-term tenants should look for homes which can be rented for vacations. Keep in mind a home located in a popular vacation destination can oftentimes yield a higher profit than long-term rentals. Investors who rent on a short-term basis, typically charge a higher monthly rate. If the house is partially or completely furnished, rental rates can climb by 25-percent or more.

Prior to investing in distressed properties, it is crucial to engage in due diligence. This involves obtaining estimates for repairs and renovations and conducting research to determine if there are tax or creditor liens attached to the property. It's also important to choose houses with payments you can afford if you are unable to rent the property for an extended period of time.

Foreclosure properties generally carry a higher risk than investing in bank owned properties. However, this is not always the case. If you are able to locate a foreclosed home that requires little repair and does not have liens attached, it might be more profitable than a bank owned home. In essence, the only way to know for certain is to investigate the availability of both types of properties to locate the best deals.

When purchasing foreclosure homes investors are required to bid on the house through a foreclosure auction. The bid must include the balance of the mortgage note, outstanding debts attached to it, along with accrued interest and legal fees. Occasionally, investors will be required to evict the previous homeowner. If you would rather avoid these issues, consider investing in REO properties instead.

Foreclosure homes are returned to the bank when they are not sold at auction. Once the property is given back to the bank, the mortgage is eliminated and the bank negotiates with creditors to reduce or eliminate liens. Banks also remove tenants from the home and occasionally will take care of minor repairs.

When purchasing REO properties directly from the bank, be prepared for a lengthy transaction. Typically, it takes two or more counter-offers to strike a deal. Many banks will not accept offers of less than ninety-five percent of the bank note. If the note balance is $100k, offers must start at a minimum of $95k. In reality, investors generally will pay $97k or more to seal the deal.

A little known secret is to purchase REO properties from a private investor who specializes in purchasing bank portfolios. When investors purchase portfolios in bulk, they are able to obtain distressed properties well below market value. They then pass a large percentage of their savings to you, creating a win-win for all parties involved.

It's not uncommon to buy real estate owned property from a private investor for 25- to 30-percent under current market value. Repairs and renovations usually equal between 10- and 15-percent of the purchase price. This still leaves investors with 10- to 15-percent equity in the home even after repairs.

There is no doubt that money can be made by investing in distressed properties. However, it is usually not easy or quick. Experts suggest holding the property for at least ten years in order to triple or quadruple your investment. If you are willing to maintain the property for a decade or more, foreclosure and REO houses could potentially make you a very wealthy person over the long run.
About the Author
Simon Volkov, private Real Estate Note Investor, offers nationwide REO investment opportunities. Subscribe to real-time investments via RSS feed or email subscription. Many opportunities are now available for as low as seventy cents on the dollar. Learn more by visiting www.SimonVolkov.com.
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