Friday, September 16, 2011

Fear is the Darkroom in which all of your negatives are developed.

     When I was younger, I considered myself someone who would take risks and many times that risk resulted in some type of profit from a real estate investment.  Finding a property with a sufficient amount of "hair on it" became the object of the hunt.  Oftentimes the property needed more of a haircut instead of a genetic reworking, but in all instances required some work to make it usable again.  Real Estate investing of this type is not for the feint at heart, there can be some real perils associated with it and along with perils go dollars to remedy the peril(s). 
     Today the market is flooded with foreclosed properties, most of them with some degree of "hair" on them.  It seems that when a property owner forfeits a property, they feel compelled to scavenge the improvements they put into the property.  Few and far between are the bank owned properties that are "broom clean" and ready to resell.  The majority of foreclosed properties require some level of involvement to make them market (or move-in) ready.  All to often the previous property owner stopped making payments due to an overwhelming situation that may be the result of latent defects and/or deferred maintenance.  Not all foreclosures occur from the borrower's financial hardship.
     In walks the "Real Estate Investor" who is ready to make a killing in the new found arena of "quick money".  Too often I have had the request for someone who has some money to invest and they want a nice clean property in a fantastic neighborhood in good repair, and oh yes, for 40% of the neighboring properties.  Unrealistic?  Perhaps.  So then why is it that we hear about all of the "fantastic deals" that someone has made?  The home run on the foreclosed property that someone who knows someone found and profited from.  The answer is simple:  Compromise.
     The investor who wanted the perfect property in the perfect neighborhood for the low price had a few developments with their investment criteria during the shopping process.  Through the course of his search, a few things may have been revealed.  The market rate for bank owned properties is not 40% but 65% of what the bank has into the property, not the perceived market value and his price point is adjusted.  All of the properties viewed may have repairs, and his tolerance of a property with some degree of repairs is now acceptable.  The properties in the best neighborhoods are either not being foreclosed or out of his price point and now the geographic areas are expanded and additional neighborhoods are being considered.
     Offers are made on properties and at long last one is accepted by both the seller and the purchaser.  This is much more simplistic that reality, but for the scope of this blog, I will keep it simple.  The amazing part about this process is that the property is NOTHING like the original perception of what the purchaser was looking for.  It is however a manifestation of the education obtained during the shopping process and the adjustment of the purchaser's expectations.  A result of COMPROMISE in the mind of the purchaser. 
     So now what happens?  The property is purchased and the revitalization is underway.  The cleanup and construction begins.  The remarketing of the property is launched.  Eventually the property will sell or lease and the investor is a happy camper...or is he?  Most people will not admit to their mistakes publicly and no one every brags about how much money the lost.  It is human nature to exaggerate, justify and rationalize how and why we did things, even if they did not turn out the way we planned them.  "I had a dream" of flipping a property and making a huge profit!  Now that the dust has settled, the dream has become a nightmare and the "flip" is nothing but a dream today.  The more prudent investor is still looking at properties for long term income or appreciation.  The timeline on our investor has now become extended, and time equals money.  The profit projected has dwindled and the amount projected for investment is now a fading light in the past.  Does this stop our boy from bragging about his latest deal at the coffee shop?  Of course not!  He revels in the high points and totally avoids the bottom line accountability.  Perhaps he does not know, but in the back of his mind he does.  These are the things that separates the professional investor from the amateur.  The professional has a pre-determined game plan, well thought out investment criteria, and a feasible exit strategy.  Most importantly is the contingency.  The amount that the investor will allow for unforeseen and unexpected items which may affect his bottom line.
     The final thought on the big picture of foreclosure investing is that I treat it as any other real estate investment.  Just because a property is being offered by a bank at a deep discount does not necessarily mean it is a great deal.   People make bad investments and walk away leaving the bank holding the bag.  All properties need to be fully evaluated before making any investment decision and purchasing someone else's mistake.  Then again, at the right price, anything is do-able.
     For contact information see my website at

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