Foreclosure hunting…and the pitfalls
The current trend in house flipping are the return of the daredevil investors who take very large financial risks in order to obtain a very high return on investment (ROI). A tremendous amount of flipping money in the last couple of years has been placed in foreclosed properties. These houses, owned by lenders who went through the judicial process to obtain ownership when their mortgagees defaulted on their loans, represent tremendous potential upside. But they also represent a tremendous ability for financial ruination as well. The reason: most foreclosed properties are sold “as is.” And, this also means that, if services such as electricity and water have been turned off, any buyer has to purchase the house without the ability to test out the plumbing, heating or electrical systems, to say nothing of the inability to test appliances as well.
Expect the unexpected
So if, for example, there have been any winter freeze-ups, and commensurate broken pipes, a buyer will not necessarily be able to ascertain this without turning the water and electricity on. In addition, some lenders of late are placing their houses on the market and are not allowing actual showings of the buildings! They ask for offers sight unseen. So any investor willing to take the risk of incurring huge potential problems with a foreclosure must accurately bracket for the worst case scenario when they crunch their numbers, and ultimately place an offer on a house. Certainly, this is not for the faint-of-heart investor. It takes guts. And a singular lack of emotion to achieve a successful, financial outcome.
Making matters even more difficult, investors need to stick to their guns when making offers. Banks have very strict guidelines when they place a foreclosure on the market. And every bank has their own internal set of guidelines. For example, I know some lenders won’t negotiate more than eight percent off their current asking price on a property. And they stick to their guns, that’s for sure…The main reason is that they are trying to unload an inventory of thousands of houses at one time. Other internal guidelines include the length of time a property stays on the market at a given price before a price reduction is made. Also, the percentage amount of that price reduction is another guideline, which is different for each lender.
So trying to purchase a foreclosure when flipping houses is a tricky proposition. It requires discipline, smarts (to crunch your numbers and feel confident you’ve done a good cost analysis of repairs and renovation that are not only needed, but can be reasonably expected to be necessary as well – and include a large amount for an emergency overage slush fund too. The daredevil investors that flip houses tend to be very confident, and know that flipping is not for the weak investor. Ultimately, you need to decide if you have the deep pockets, as well as the correct temperament to invest in foreclosures for the express purpose of house flipping.
photos courtesy of tmgnorthwest.blogspot.com, foreclosuredatabank.com, cbsnews.com, forsalefortcollins.com