How to make a killing buying foreclosures

I’m sure you’ve read a few articles and watched a few shows on how foreclosures will make you rich. Let me tell you a little secret. It’s not all of the improvements that you’ve completed that make your profits, but it is how you buy. These types of properties are not always a good deal.

Are foreclosures a good deal? Your friend purchased a foreclosure. Next, they fixed the home up with new landscaping, put in a new bathroom and presto, they sold the home for a significant profit. Many times, it is thought that all of the minor cosmetic improvements are what added to the value. Let me tell you the truth.

The cosmetic improvements such as installing new landscaping, installing new carpet and fixing the holes in the wall sell the home, but most of the time the real value is how you buy the home. I’ve seen several buyers pay market value for foreclosures in an attempt to fix up the property. After they pay for the improvements, Realtor fees and legal cost, the bank should have paid them for taking on this troubled property.

The moral of the story is if you are interested in purchasing bank owned homes, foreclosure homes and troubled homes, it’s your negotiating skills and the knowledge that you have in any particular market that will allow you to make money. Cosmetic improvements will allow you to sell the property. Make these two distinctions and you will be successful.

When should you buy foreclosures?

A foreclosure is when the owner of the home can’t pay the payments. The bank takes legal action to take possession of the home. Now the bank is the proud owner of the home. You should buy foreclosures when it’s a good deal, but most of the time, they are not good deals, so don’t buy them just because they are foreclosures. If you do, you’ll be buying someone else’s problems. Let me give you two examples of when a foreclosure can be a good deal and when it will usually be a traditional deal.

My assignment was to appraise a home in a smaller town. This area offers a small subdivision of newer homes. The surrounding area was mostly older homes built in the 70’s with newer residential developments throughout this area.

As it turns out, several builders in this area were in the process of foreclosing on all of the spec homes (homes built out of speculation that they will sell these homes). In this development, there were 30 or so homes. Of these homes, up to ½ of them were owned by several of these builders. After the foreclosures, the bank owned these homes.

The bank wanted to sell these homes at a discount, so they listed them cheap. All of these homes are brand new, offer similar amenities as homes in the area. These homes were finished to the same level of quality as the rest of the homes and they were prices significantly below the market. This is the type of home that you may be able to buy for a significant discount. Other homes in the area were selling for 40% more.

Here are the reasons why these homes may be good to purchase. First, you have several builders and several banks in this area that help lend money for these homes. At the time of my appraisal, you had several banks competing with each other to sell their homes that were located in the same development. This leads to competition.

Second, these homes were selling for 40% less than the similar homes in this market area. If you were to buy a home at this discounted price, you’d still be purchasing homes that are 40% below market value with high probability that there will be little to no improvements needed, since they were new homes.

Now unless all of the home prices drop significantly to lower than what you purchased your home for, your investment will be protected. While this may happen, the probability is less and the better the price as compared to the market, the better off your investment will be.

But, most of the time, you’ll never find a good deal in foreclosure properties. Here’s why.

When you should never buy foreclosure properties

One of the best ways to explain why you should never buy foreclosure properties is to give you an example. My assignment was to appraiser a high end home. This home was being built as a speculation home. This home was located on the outskirts of town located on a small acreage parcel. The home offered a lot size of 1 to 2 acres, but the lot sloped downward to the rear of the property and took advantage of the views of the area. The lot functioned as a city lot.

The reason why this home was being foreclosed on is because the home just wouldn’t sell for what the borrower wanted the home to sell for. The home was on the market for up to two years. As it turns out, the borrower ran out of money. At this point, the bank took possession of the property.

One of the first things a bank will do is determine the market value of the property. They will make strict stipulations that no other bank owned properties should be used, so they can decide how and at what price they will market their property. Here is the listing history of the subject.

The subject was listed on 09/24/2007 for 1,468,000. After around six months, the price was increased to $1,568,000. After three months, the price was increase again to $1,670,000. The total marketing time during this period is 375 days. This listing expired on 10/01/2008.

10/02/2008 the subject was re-listed with the same Realtor for $1,670,000. After two weeks, the price was increased to $1,720,000. After around 5 months, the price was decreased back down to 1,620,000. After 8 days, the price was decreased again to 1,575,000. After 8 days, the price was decreased to 1,495,000. After 16 days, the price was reduced to $1,350,000. The home remained listed at this price for around one month before the home was reduced again to 1,350,000 by a new Realtor. Around this time, the bank purchased the property back. They had their appraiser determine the value based on their rules and regulations and put the home back on the market.

The home was re-listed at 1,200,000. This price remained the same. The last listing data is noted on 11/24/2009. The subject is now a pending sale for $877,900.

An out of state buyer wanted to buy this home. I appraised this home for $750,000. This is a significant value difference. I did not have any idea that another appraiser appraised this home for 1.1 million. The Realtor began harassing me about the value of the home and wanted me to change my opinion of value to match the sales price. I told her that it would not be in the owner’s best interest if I lied for you, so I left the value of the home the same. Rest assured, many appraisers would have just rewrote the appraisal and changed the value so that everyone is happy. Most would have not did this.

The borrower of the home went through with the sale at $862,900. Now in my opinion, he paid up to $100,000 too much of his own money because he was persuaded by a Realtor that would not look out for the best interest of the buyer and his emotions got the best of him.

(Update, the owner is trying to refinance after he purchased this home, but was unable to find the value he needs to get refinanced without placing an even larger amount of money down.)

This is why this deal was not a good deal. This is one example, but I see this quite often.

First, the Realtors involved in this transaction were not concerned about the buyer as much as their commission checks. The Realtors were willing to lie, cheat and persuade to make the deal work. The Realtor found a buyer from out of town. She told me she did not want to start all over and look for a new home and risk losing this sale.

In almost all cases, the bank will have the home appraised at market value and market the home for market value. Are you getting a good deal for your home if you buy a foreclosed home for market value? I didn’t thing so.

Remember this. There is always a reason why the home is a foreclosure, a strange heat source, a terrible floor plan, all of the incorrect improvements, not the correct improvements and/or asking the incorrect price at the incorrect time. The real comparable sales should be bank owned homes that offer similar appeal, quality or problems.

So are foreclosure properties a good deal? Only if you purchase them significantly below market or otherwise what’s the point? You’ve just bought someone else’s problems.