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Home on the Range

Is foreclosure investing on your horizon? then heed these truths and tips.
June 1, 2008
URL: http://www.entrepreneur.com/article/193712

This year, Michelle Mangione will make her move on the country's swelling foreclosure market. As a veteran foreclosure investor, she decided to stay on the real estate sidelines in 2007, when 1.3 million families were in some stage of foreclosure. That's a 75 percent increase from 2006, according to RealtyTrac, a resource for foreclosure data and information. "I don't buy when everyone is hyped up," says the 44-year-old founder of Blue Real Estate Services in Dana Point, California. "I buy home runs, and I'm very conservative. Right now is the best time to buy. This is the time to make money."

One myth-buster before investors roll up their sleeves: Inventory abundance doesn't equal dirt-cheap prices--at least not in this market. "One of the myths about foreclosures is that they're all available for pennies on the dollar," says Rick Sharga, vice president of marketing at RealtyTrac. It's especially false in today's climate, he says, where homes are going into foreclosure with zero equity.

"People make the mistake of overvaluing their property," adds Alexis McGee, co-founder and president of Foreclosures.com, which provides foreclosure listings and advice. She says an average appraisal won't suffice because it's based on past sales. It's better to find out asking prices from the last three months or current pending prices. Says McGee, "That's a good indicator of what the market is."

With that in mind, here are some ways to proceed:

Opt Out of Auctions
Auctions can be extremely risky, experts say, and with property values falling fast, there are even fewer opportunities for investors today. Even Mangione, who's flipped 20 foreclosed homes in the past seven years, skips auctions. Not to mention, there's frequently no escrow, no title insurance and no inspections, and most transactions must be made in cash. "It's like sending [troops] into war without guns," explains McGee. "It takes a tremendous amount of knowledge. You can lose hundreds of thousands of dollars." Instead, Mangione mails letters to pre-foreclosure homes she finds at RealtyTrac. "I let them know that I want to purchase their property and can offer a quick closing," she says. That's how she bought a 4,300-square-foot home in Fallbrook, California, four years ago. She paid $670,000 for it and put it back on the market this year for $1.95 million--a potential return of more than 140 percent (after the cost of fixing it up). Opportunities like that are rare, however. Mangione says that for every 100 letters she sends, maybe one or two property owners respond.

Keep It Short
A more popular option is a short sale, in which the bank lets the distressed homeowner sell his or her house for an amount less than the mortgage. The bank then eats the loss, mainly to avoid the often heavier expenses related to foreclosures, such as legal fees, carrying costs and insurance requirements.

The bad news is that investors need to negotiate with both the homeowner and the bank. On the flip side, investors can finance short sales in traditional ways, like with a 30-year fixed mortgage, says Sharga. Investors can find specialized short-sale real estate agents at their local real estate brokerage.

Get on the REO Bandwagon
With some 50 percent of properties in a foreclosure auction getting sent back to the bank, there is a booming real estate-owned market, or REO, where a bank owns the property, says Sharga. "Banks are getting buried with inventories of properties they've been compelled to take back." Typically, banks hire third-party brokers to assess the market and sell the homes.

Staci Treloggen Saunders, an agent who sells about 10 to 30 REOs a month in Southern California, says buyers can usually nab a 20 percent to 30 percent discount by going through REO brokers. Many buyers contact REO brokers through bank or brokerage websites like bankofamerica.reo.com and reoexperts.com.

Farnoosh Torabi is a correspondent for TheStreet.com TV.