Tuesday, April 2, 2013

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