Investing in foreclosure homes can be quite lucrative – when done right. One popular way is to “flip the house” by purchasing a foreclosure home (at a discount from today’s market value) adding value (repairs and improvements) and reselling it for a profit. The average “flip” takes 60-120 days from start to profits in the bank.
Contrary to what you may have heard – “flipping” properties (the right way) is a legal and ethical investment practice. This is NOT the same as “illegal flipping” which involves no improvements to the property and appraisal fraud to raise the price to your unknowing buyer.
But before you can flip a house and make a profit, you must do the right research to assure you are buying the property at the right price.
“You make your money when you BUY the house. You bank your profit when you SELL.” Alexis McGee
Good foreclosure home buys are available everywhere, but they require research, preparation, patience and persistence.Setting realistic goals and recruiting the help of experienced real estate investor professionals will help you minimize your investment risks.
1) Begin by researching the local areas you want to invest in. Choose a small area so that your research remains manageable, and then expand that area as you determine the quantity of leads you need to match the number of properties you want to buy.
2) Next, search your area for available foreclosure home opportunities. You will want to look at Pre-foreclosures with equity (loans are less than market value) and Short Sales (loans are more than market value – by contacting the owner in default directly. You will also want to review Auction notices to purchase the home from the owner in default before the Auction, or purchase at the public sale. Don’t forget to check out the entire bank owned foreclosed homes on foreclosures.com. You’ll be surprised how many of the properties listed on foreclosures.com are NOT available on the open market (AKA: Phantom Foreclosures).
Check out our Foreclosure Listing Search Tutorial Here: ForeclosureS.com List Tutorial
3) Not it’s time to build relationships with investor-friendly foreclosure agents in your local market. They will be an invaluable resource for access to critical information available only to agents in the MLS (Multiple Listing Service). And, if they are closing wholesale deals with investors right now, they will know which banks, which markets and which properties are the best opportunities for your investment goals. Finding these foreclosure agents contacts, and establishing credibility so they want to work with you. This is critical to your success as a foreclosure investor.
4) Decide your minimum profit, based on your time and risk involved in each project. If you are doing a full flip, investing 3-4 months of your time and money, I would recommend a minimum 15% profit on resale or $30,000 per deal (whichever is higher). Or, if you want to “wholesale” your deal to another investor, (who will flip it), and invest only a few weeks of your time (and no money at all), I would recommend a $5,000 or $10,000 minimum “wholesale fee” or 25% of the total profit in the deal (whichever is higher).
5) If you are flipping, you will also need to estimate the cost of repairs. You can do this on your own or seek the help of a contractor who accompanies you to tour the house and create a budget. Be careful here. Oftentimes contractors will create a much bigger budget than you need to flip the house. You will want to educate yourself on which repairs will get you the best return of your time and money. In some cases, there may be little need for repairs, but generally speaking, when you are making a big profit, you are adding a lot of value to get the higher price.
6) Make sure you have your money resource figured out. Your agent may have relationships with mortgage brokers or lenders that match your financial profile. You will either need to get prequalified for a mortgage loan (if you plan on holding for rental) or find some good hard money lenders and private investors in your community to joint venture the deal with you. Some foreclosure sellers require that buyers submit “proof of funds” with their foreclosure home offer to purchase. Make sure you have this in place before you write your offer.
7) It’s time to write an offer on a foreclosure home. You will need to calculate how much you can pay for the property and needed renovations and build in your minimum profit. This is the maximum amount you can offer to purchase the foreclosure home. You must get your offer price right. Too low and you will never buy a property. Too high and you will lose money and be wiped out of any future investments. This is another critical area of concern for new investors that you must perfect, before you start investing. If your agent is skilled in foreclosure investment business, she will be able to negotiate your wholesale price based on asking the right questions and properly determining the seller’s motivation.
8) Once your offer is accepted, it’s time to do your due diligence. This is when either hire a property inspector to analyze the property, or walk the property with your contractor to make sure you are on budget and there are no surprises. (I do the latter.) If your contractor finds discrepancies between what was advertised and the reality of the property, you can negotiate a lower price or cancel your purchase contract.
9) After closing, it’s time to hire your general contractor to get the rehab done. Create a contract with your contractor to ensure the work is completed on time and on budget. You can include a clause that penalizes the contractor for finishing late, or reward him for finishing early. (I do the latter.) Now sell your property to a owner occupant that will use the home as a primary residence, and bank your 15% or $30,000 (or more) profits.
Of course this more to this process than I can write in a blog. But hopefully this gets you started down the right road. To learn all the details, from start to finish, I suggest you complete my 8 Steps to Mastering Foreclosure Investing multi-media online training course. This in-depth foreclosure investment course developed from my 25 years of investing experience (and 17 years of helping new foreclosure investors succeed) will help you profit from your first foreclosure flip in the next 90 days.
1) Research local areas you want to begin investing in foreclosure homes.
2) Search Foreclosures in your area. (Check out our Free Foreclosure Search Tutorial Here. )
3) Build relationships with investor-friendly foreclosure agents.
4) Determine your minimum profit goal for each investment property.
5) Estimate repairs needed to maximize your profit.
6) Find money partners for your deals (or get prequalified for a mortgage loan).
7) Write an offer on a foreclosure home property.
8) Complete your due diligence with a contractor and then close the deal.
9) Create a contract with your contractor to ensure the work is completed in on budget and on time.
10) Sell your property to an owner occupant and bank your profits!
Have a thought or comment? Please chime in below. I love hearing from my readers!
To your success! Alexis McGee