How to Make Money with Real Estate Foreclosures and Short Sales

So You Wanna Be In Real Estate....

"He made How Much?", "they sold it for what?", are just some of the expressions I have been hearing from people who are always looking for "Quick" money in real estate. Let's get something straight about Human Behavior first. No one tells you the nitty gritty. No one talks about their losses or their hardship for the deals that didn't work out. People will, however, embellish and puff their accomplishments to make it look like they did much better than they actually did. All this being said, and taken with a grain of salt, now you are ready to listen to some practical advice from a person who has been investing in foreclosures and short sale properties for over 20 years.

To begin with, real estate investing is never a short term investment or "quick money" business. The nature of the investment prohibits it from being so. Real Estate is a non-liquid asset. That means it cannot be sold quickly when it needs to be sold. The current market conditions and surplus of foreclosure properties, gives today's investor a sense of false achievement in thinking he can get properties "on the cheap" consistently. Do not misunderstand me, there are plenty of properties available at a substantial discount, but this is not always the case. The current surplus should be absorbed within the next 24-36 months.

So how do I profit from foreclosures and short sales? The answer, like many other ways to make money is.........WORK. Yes work. First, determine your market area. Pick a subdivision, a side of town, a town, county, whatever is manageable for you to drive and visit properties. Second, be prepared to learn about every property currently available in that market area. If you really want to make a home run, then you have to know every inch of the playing field. Third, engage Realtors to work for you. Offer them a bonus in addition to the standard commission if they bring you the property you wind up with. In the long run, it will not cost you that much, and you will be presented with a better cache of potential properties. Fourth, get your financing in place before you go anywhere. If you are paying cash, be prepared to show proof of funds. If you are financing the deal, get a bona fide qualification letter from your mortgage lender. The best thing to do is get a line of credit from a local bank. If you get one of these, you can write a check like a cash buyer and then find long term mortgage financing later.

Know your construction costs. Most foreclosed properties have some degree of remodeling required. Many of them have substantial work to be completed. You could have a contractor come in and give estimates, but they will usually eat up your budget pretty fast. The better way is to hire an estimator to give you the figures. Many times they will just tell you it is "$2.75 per square foot" or whatever the price is that will give you the ability to do your own estimating. When you do hire a contractor, interview several and tell them this is what the budget is, can they do it for that or less?

NEVER NEVER NEVER buy a property from the individual seller directly. Too often the Seller has taken off with the money, not paid the mortgage company and you wind up with a deed on a property which will soon vanish to a secured Creditor. Oh, and yes, your money is gone. Sure there are laws, but good luck getting your money back, or even catching the person. Always use a Realtor, Attorney, Title Company and Surveyor on your transaction. By using them, you will better insure your chances of not making a costly error.

Once you have your estimates, take another look at the investment. The acquisition cost, the remodeling cost, the selling cost and your initial investment had better be more than 10% return on investment after all the dust settles, or you are better off buying treasury bonds.

Michael Sims has been in the Chicago Real Estate Market and is active on a daily basis, you can reach him at 815-791-7467 or email at michael.sims@att.net

The Arrogance of the Entrepreneur

To be a Captain of Industry, a King of the Hill, Master of Your Own Destiny; these are all the caveats of being an Entrepreneur.  While our business environment encourages free enterprise and the proliferation of small business entrepreneurial spirit, all to often that spirit turns to arrogance.  So how does it happen?

Take a small business owner who has a service business that provides a health care customized product and maintenance service for the product.   The product and the market niche is specialized and manageable for the business owner whom has built the business from scratch.  Starting out in his/her basement while working for a larger corporation  he transformed the part-time additional income enterprise into a thriving full-time business capable of sustaining his living expenses and affording his family a comfortable style of living.  All of which has been fueled by Entrepreneurial Spirit and probably some charisma as well.

At what point does the Entrepreneurial Spirit turn to arrogance?  Typically this occurs when the business owner is challenged to expand an area of his business operation that is not the primary line of business he is used to operating.  In my business this is the procurement of commercial real estate space in which the business owner is to locate/relocate his business.  All too often I have run across a business owner, whom having experienced enough success to expand their business, is now in an ego-boosted position lease or buy an office, industrial building, manufacturing facility or, construct a building from the ground up.

"I built my house with a contractor and the office cannot be that difficult" the business owner thinks to himself/herself.  While the two may have similarities, nothing could be further from the truth.  Albeit it is a nice project to take on in addition to his regular business activities, reminding him of his former days in the basement working the "second job".  The task at hand is much larger than anticipated and it very quickly consumes his entire work day leaving little time to effectively manage the business.  Shortly thereafter the business begins to suffer from his involvement with the new building project.  It take an inordinate amount of time from day to day and the cash flow may be affected.

Leasing or purchasing an existing space is none the less as distracting to the small business owner.  Leasing professionals can streamline the process and aid in the negotiation.  Brokers may know the pitfalls of purchasing a commercial property more readily than the Buyer who may only purchase one or two in their lifetime.  If a specialist in real estate can prove themselves and add value to the transaction, why do so many business owners feel that the real estate professional is a minor player in the transaction and sometimes worthy of not being paid?

Part of the problem exists with crossover brokers.  These are brokers who act as general practioners selling just about any property they can sell.  Jack of all trades and master of none!  Would you feel that the same person who sold you a home could also effectively sell you an office condo?  Why not?  Its all basically the same is it not?  Not quite. 

The purchase, sale, leasing and construction of commercial real estate is tremendously different from that of residential real estate.  Zoning compliance, construction, permits, taxation, licensing, inspections, environmental compliance, and much more are entirely different from the same named functions in residential.  One bank President told me with regards to commercial real estate, that he wanted a professional to do the work, just like he wanted a dentist to work on his teeth and not try to do it himself.  While perhaps the job would get done, it would be a lot less painful letting the dedicated professional handle the situation for him.

After years of experience with all types of clients, today I try to limit my time to the type of clients that value my services.  In return, they wind up with a very good foundation to continue running and growing their valued business.  Leave the headaches to the professionals who deal with them all the time is the easier softer way that allows the business owner to concentrate on his/her primary business.

My BFF Listed With Someone Else!

So it goes like this.  My best friend has been having financial trouble for about the last 2-3 years and is into foreclosure like 40% of the properties around here.  For the last 18 months he has been picking my brain about the best way to handle his situation.  While I am not an attorney, I have had considerable amounts of experience with short sales and foreclosures.  Many of the people I have helped are very grateful and happy with the service.  So why did I not get the listing? A number of reasons come to mind, the first is Brand Association.  I am a sole proprietor broker.  While I have oodles of experience, I am not affiliated with a national chain.  Clients have a perception about what brand association can do for you.  As we all know, buying brands is typically more expensive in the long run and any savvy buyer recognizes the value of generic over the higher priced "brand".  The second reason he stated was that my competition was offering "free legal service" which is an oxymoron if I ever heard one.  What he really meant to say is that the competition has a lawyer who will not collect a fee until the closing.  While I have attorney's who work with me and offer the same service, my BFF did not ask me if that was available.  Thirdly he said the competition took the listing at 5%.  Here is where the ego of the drowning man gets between him and the water.  Eventually the short sale/foreclosure will happen and the informed short sale specialist will be up on the current regs.  In November 2012 FNMA and FHLMC agreed to up the negotiated commission to 6% for distressed assets thereby setting the base line for real estate commissions.  Since the homeowner in a short sale situation is not going to receive any funds other than a relocation fee from the transaction, why quibble about commission rates?  The only reason is that it makes the (trapped) property owner feel like they are negotiating something.  Pondering the entire situation further and reviewing why I did not get the listing, I can attribute it to one point and one point only.  I did not communicate with the prospect enough and lost the deal to someone else as a result!

Update: My BFF just called and said they only had one showing in 2 weeks and wants my advice...