The seesaw swings both ways with leverage
The main advantage of leverage
The main drawback of using leverage
While REO properties (“real estate owned” bank foreclosures) can appear on the surface to be great deals, make sure you’re aware of these potential pitfalls that could mean unexpected gargantuan costs down the road. These hazards should normally be avoided even when acquiring non-foreclosed investment properties. However, there is an even greater danger with REO’s. In many instances, water and electricity have been turned off by the bank that owns the property. This safeguards them from further property damage in case of any leaks or winter freeze-ups.
However, banks that own REO’s tend to be sticklers in the adage “caveat emptor” (buyer beware) when they place their inventory of foreclosed homes for sale on the market – and they require all offers be in “as is” condition. Also, they usually refuse to turn the water and electricity back on prior to closing. So you’ll be in the dark, quite literally, regarding your house inspection.
When buying a foreclosed home, make sure you get a very experienced house inspection company to go over the property in tremendous detail. If they can’t make a determination about some of the following major hazards, you’ll have to build in a slush fund for the probability that one or more of these hazards are present. Crunch your offer numbers accordingly…
Buying a property with mold is a major headache. While the reasons for the mold problem itself is usually an easy fix, mold remediation is not. In addition, trying to get a mortgage on a foreclosure with mold present is going to be problematic, since the lender will want it removed prior to your closing on it. (I am currently representing a buyer in the purchase of a ranch house with mold in the unfinished attic. The seller foolishly had bathroom fans on the first floor empty hot, humid bathroom air without venting of any kind directly into the attic space…You can’t make this stupidity up. The situation had apparently been this way for years. In winter, the attic space would actually develop frost, according to one current tenant of the building. Naturally, there is an accumulation of mold throughout the attic now. And in order to sell the property, the seller must address the issue. And to do so properly, a specialized mold abatement company, licensed by the state, needs to be called in to properly remediate the problem.) So make sure there is no evidence of mold anywhere in any REO you’re considering purchasing. Especially since banks will still expect you to be making an offer on their property in “as is” condition only.
Any foundation cracks need to be inspected for size, shape and duration for how long they’ve been there. Different cracks mean different things. Let your house inspector make the call as to how big a potential problem any given crack could represent in the future of the property. If it’s simple settling over a long period of time – not a big problem. But if the issue means a total rebuilding of the foundation – well, obviously, this will be a major costs that could run tens of thousands of dollars.
Any good house inspection company will be able to ascertain very quickly the presence of pest infestations. Termites tend to be number one on the potential list. If evidence of past termite infestations is old and not active, and the damage to the house sills have been minimal, or repaired, there shouldn’t be a problem moving forward. But if the damage is active and extensive, calling for sill replacement, this could also pose a potential cost you didn’t expect that could run in the thousands of dollars. Be very wary when confronted with the evidence of termite damage in foreclosed homes.
If the water has been turned off, you really won’t be able to get a good idea of any potential problem lurking in the house, especially if there is the presence of much older piping in place. In this case, you must plan for the worst – and expect the pipes to have burst or leaked at some point in the past. Using “caveat emptor,” you’ll need to either plan on a very expensive renovation of all plumbing in the building. Or simply be prepared to walk away. And make an offer on another property in the foreclosure process instead.
Likewise, if an REO has no electricity on, it is impossible to ascertain the integrity of the entire electrical system. Are some wires old? Are some fixtures shorting out? A house inspector won’t be able to inspect anything that’s hidden behind the walls. They must have the electricity turned on to determine the potential hazards. With REO’s, just like with plumbing when the water has been turned off, expect the worst. You’ll have to decide if you’re prepared to rewire the entire house – or move on to another offer. Just be aware of the potential hazards.
photos courtesy of bestlongislandhomeinspectors.com, homesinspectors.com, 203krehabnow.com, 24dash.com
Just like a fanciful walk through the twisting, colorful and dizzying amusement park attraction, the House of Mirrors, that bend your shape and leave you rubbing your eyes for better perception, so too is the effect on real estate investors trying to read the current state of the U.S. housing market. My singular property investment advice: be wary of what you see in the current housing recovery.
All factors and new data suggest a rapidly improving housing arena. But, like the House of Mirrors, everything’s bent totally out of proportion and recognition. And, we’re left with the main issue I’ve preached in two previous articles here this year: all investor’s eyes need to remain squarely fixed on the unemployment rate – not how the housing market is doing. For it is that unemployment rate that should dictate how you invest in these current economic times.
In an article from this week’s Time magazine (“The Housing Mirage,” by Rana Foroohar, Time, May 20, 2013), she notes that in regards to the present housing market conditions, “prices are up, but the market is far from healthy. We’re missing key elements of a true recovery.” She goes on to ask, “if housing is back, why is the percentage of people who own homes lower now than it was over a decade ago.” Of course, it’s because property investors have been gobbling up most of the foreclosure market over the last few years. And this is especially true with institutional investing firms.
She goes on to note “that a relatively small group or rich investors…is driving the real estate market. That includes private-equity titans like Blackstone (which owns a portfolio of 20,000 rental properties) as well as high-wealth individuals who can pay cash up front for property for themselves or to rent out. “Investors remain the dominant force behind the house-price bounce back,” says Capital Economics property economist Paul Diggle. That’s reflected not only in the lower rate of homeownership but also in the swelling ranks of renters. Not since 2002 have fewer rental properties been empty in the U.S., and rents are rising sharply in many cities.” And that’s a scenario that makes property investments in residential real estate all the more valuable in the coming months, if not years.
Ms. Foroohar makes the case that tight credit policies by banks are still placing a stranglehold on mortgage lending nationwide. She then makes a point I had predicted back in my article of January 1st here, entitled “Predictions For 2013.” I had written then: “watch the unemployment rate.” I then went on to offer up these pearly bits of property investment advice:
“The unemployment rate will be one of the most important figures to keep a watchful eye on in the coming year. If it starts ticking upwards because of the effects of no deal being reached by Congress on the proverbial fiscal cliff, then look for overall U.S. rents to continue to increase as homebuyer malaise begins to sink in. So individual rental property owner’s should be able to see increases in their cash flow as the new year progresses. Clearly, residential rental properties will become even more valuable than they were in 2012. So it would behoove the individual property investor to continue to search for and acquire additional rental property in 2013.’
And now, five months into 2013, Ms. Foroohar backs me up. She quotes Jonathan Miller, CEO of a New York based real estate appraisal firm, who said “to have a sustainable and healthy market, all that really matters is employment….You need higher employment and wages to support housing consumption and looser credit. If we see some real economic growth over the next two to three years, then we’ll know the housing recovery is real. Until then, we’re in what I call a precovery.”
She then goes on to bring it all home: “ this precovery has been underwritten by the government at historically unprecedented levels. Every month, the Federal Reserve is purchasing $40 billion worth of mortgage-backed securities. And Freddie Mac and Fannie Mae stand behind the bulk of new mortgages.” Finally, she notes that “it has long been said that you can’t have a sustainable economic recovery in the U.S. until the housing market is back. In truth, it may be the other way around. Until you have more jobs, rising wages and a middle class that can afford to take out a mortgage….you can’t have a real housing recovery.”
And, as I’ve been saying for months, the housing arena does not indicate nor showcase the deeper, structural problems such as tapped-out consumers pinched by a slowing job market, higher taxes and lower savings. I had also previously written that “if the unemployment rate were to go up next year, look to continue acquiring residential rental property, since rent prices will then continue to escalate. And cash flows on rental properties would commensurately increase as well.” I would have to amend that statement slightly, and say, if the unemployment rate remains stagnant, as it has been, or goes up, then look for increased cash flows on your rental properties.
My best property investment advice continues to be taking your existing properties and make sure you continually maintain, if not upgrade, them in a down economy. Especially in this House of Mirrors economy, where rent prices continue to escalate. Continue to make your product more attractive relative to your competition. In this way you’ll be able to maximize cash flow and profits. Also remember the advice I gave in that earlier article on the coming shape of our economy, and how it will affect what you do in your property investing strategy for the coming year. “Consider the next year as a good time to try refinancing your investment properties to help increase your overall cash flow on all your collective properties. With rates at all-time historical lows, and with an economic downturn occurring, you’d be able to lock in excellent rates for the long-term on your portfolio of real estate holdings.
photos courtesy of selmainthecity.wordpress.com, ptoday.blogspot.com, travelwebdir.com,, multiplex.coolhouseplans.com, hereandnow.wbur_.org, 3-424tales.blogspot.com, laurieflower.com, auroragov.org