So, you think you want to be a real estate investor? Is it because you have seen the shows on HGTV, you have heard of someone else’s success, or you are wanting to try something new? Well, let me give you the good, bad, and the ugly.
Several years ago, we had a bit of a housing bubble, not near as much in the Midwest as certain parts of the country, but we did see an increase in the amount of foreclosures on the market. As I write this on January 8, 2018, the total amount of foreclosures on the Cedar Rapids MLS (multiple listing service) is 16, while the number of short sales is 5. What is the difference you ask?
A short sale is a pre-foreclosure sale, the owner still owns the home, but they are behind on payments. The owner then lists the home, but because the bank is going to have to accept less than what is owed, the bank is the final decision make on whether the offer can be accepted. Unfortunately, this process is very time consuming, anything but a short process. If the buyer is lucky, it may close in 3-6 months, but sometimes they never close.
If the property does not close, or the owner does not attempt a short sale, at some point the bank will foreclose on a property. The property goes to sheriff’s sale and generally the bank buys it back. As a buyer, you can go to the sheriff’s sale and attempt to bid, but you are buying the property “as is” with no inspections and any title issues or liens are now your responsibility. If the bank purchases the property, it then becomes listed with a Realtor. Some of the banks only allow buyers that plan to reside in the home to bid on it the first 10 days, then it is open to investors.
Are you paying cash or obtaining financing? Cash is always the easiest route, but if obtaining financing, most of these banks require a preapproval to submit an offer. Keep in mind, some of your conventional fixed rate financing options are not going to work on these properties. Generally, an in-house investor loan will work best with a local lender, as they allow you the flexibility to purchase the property and fix it up. An issue I have encountered in the past is that the water has been turned off, the bank will not turn it on, the appraiser comes through to check the water, and you cannot obtain financing because the water is not on. If the floor coverings are missing, the roof needed replaced long before now, there are holes punched in the doors- this will not go on the secondary market, you will need an in-house loan. Know your options prior to finding a home!
What about inspections? You can certainly do inspections, but generally the bank is selling the home “as is” and will make no repairs. Sometimes they will not turn on the utilities, so you are getting a very limited inspection if you do decide to move forward with one. Other times, they will require you to pay to dewinterize the property, then winterize again once the inspection is completed.
We are in a multi offer situation, what is that? You are now in competition, a potential bidding war. Things to consider- your purchase price, earnest money amount, is the property financing or cash, are you doing every inspection possible or none, closing date, and any other contingencies. The bank of course will look at price, but the offer with the least number of contingencies as well. They want to move forward with the most straight forward offer that has the lowest chance of falling apart. And sometimes, people will pay way over list price because they want to purchase the home so badly.
A few other quick notes… if you have watched the TV shows, forget nearly everything you have seen. You will not, I repeat, you will not, make $200,000 on a flip home here in Eastern Iowa. If you fell victim to one of the national speakers and paid thousands of dollars, throw most of that information out the window. There are always unknowns that you will run into after closing, potential issues that were not discovered. If you are just getting in the game, you must remember there have been people doing this for 10+ years, people that are able to walk through and decide immediately about writing an offer. You must be able to move quickly, or you will lose out on deals. I have seen people succeed, and I have seen people fail. You must be able to do some of your own research, but also have a Realtor that is experienced in these types of properties as well. And if you don’t want the risk of flipping, maybe having rentals is a good option for you, but that is another article. And you want more information, well, give me a call or work with another Realtor that can provide this much background and experience. I cannot give all my secrets out on my blog.
Notes: I have been in the real estate business since 2006 and have been part of three flip houses, all which turned out very successfully (time constraints and my love of selling real estate have taken away from wanting to focus on that). For eight years, I primarily focused my efforts on foreclosures but as of 2014 I have focused my efforts elsewhere. Foreclosures are not for everyone. Please contact your local Realtor to discuss the process further and to make sure they will be a good option for you to consider.