Do foreclosures still make a good investment?
Foreclosures are hot. Really hot. Every investor and dozens of his relatives are looking for them. And for good reason. Banks are in the business of loaning money, not selling off foreclosed houses. Investors take advantage of their disinterest by offering them a swift but low settlement. At least, that’s how it works in theory. With so many investors interested in the market, is it starting to become overcrowded?
The Rise of the Sophisticated Homebuyer
In the past, investors were the only people that bought foreclosures. Average homebuyers were put off by the deferred maintenance, long lists of repairs, and exemptions from disclosure law. Other homes without those difficulties were not only less trouble, but they also seemed risky. So, banks were left with no one to buy the property but us opportunistic little investors.
Oh, how times have changed! As the real estate bubble continues to expand, the average homebuyer has transformed into an amateur real estate investor. People are realizing that anyone can make money from foreclosures, not just investors. So, they are bidding us. And usually, their bids are higher.
Increased Competition on Lower Valued Foreclosures
The foreclosure market is currently populated by millions of beginners, scrambling to make their first deal. Because they are beginners, most have limited access to cash and lower incomes. So, the most accessible deals are the cheap ones. For example, if making $10,000 excites you, then a $500,000 cash purchase is probably out of your reach.
The result is a lot of competition on lower valued foreclosures. In a hot market like Charlotte, a well-publicized foreclosure might get a dozen offers within a week of hitting the market. Typically, the bank will tell everyone to send their highest and best offer. Then they’ll take the highest bid. It’s not a pretty picture for people that need 20% or more equity.
The Solution: Adapt to Compete
By now, I’ve painted a grim picture of the foreclosure market, but the reality is you can still make money. People are doing it every day. The key is adapting to your particular market and figuring out a way to compete with both homebuyers and other investors. For example, you can:
- Remove contingencies from your contract. Most gurus recommend always having an escape clause in your contract, but banks are getting tired of it. They’ll take you more seriously if you can make an offer without contingencies.
- Offer higher earnest money deposits. My group just sent the bank a $180,000 binder check for a $1.8 million purchase. Needless to say, the bank was impressed.
- Pull together the funds to close with cash. If you can write a check for the purchase price of the house in five days, you’ll make a powerful statement to the bank. Send them a proof of funds letter to further increase your credibility.
For a detailed guide on how to beat other buyers to the best foreclosure deals, download this report.