Probably the most common question I get from clients considering using real estate as an investment tool is about the possibility of purchasing a foreclosure and flipping it for a quick profit. This can be a solid investment and a way to add some money to the family coffers, but approach with caution. This type of investing is not for the faint of heart! Here are some things to keep in mind if you are considering this.
1. Often people assume that just because a home is in foreclosure that it is automatically a steal. This is absolutely NOT TRUE! You really have to research the market to make that determination. Often lending institutions price the home right at the current market value even if the property needs work. Sometimes they even overprice! The key here is to be patient, be educated, and really research the market.
2. When considering a specific property, take the time to really crunch your numbers. The real world of property flipping is not like HGTV's show "Flip That House"! You need to consider all the costs such as closing costs, holding costs, materials, labor (how much work can you really do yourself?), selling costs, marketing costs, unexpected costs (there are always some of these), and so on. You also need to closely examine what a realistic profit is. Then take all this information and predetermine what your top purchase price is BEFORE you make an offer. I've seen many people get into trouble because they bought a foreclosure on impulse.
3. Be Patient!!! I tell clients all the time that purchasing a foreclosure can be one of the most frustrating and exciting endeavors they can make! Banks & Lending Institutions are notoriously slow in responding to offers. Sometimes you can go weeks without hearing a response! Offers often have to go upline or through committee for approval. Also, corporations tend to have a "My way or the Highway" attitude, so be prepared for lots of additional legal addendums. They want you to be very aware that the risks involved are yours, not theirs. However, in my experience, if handles correctly, usually corporations can and will negotiate.
4. Not in a big hurry? Consider purchasing a foreclosure and living in it for a couple of years. Not only will that help to avoid any capital gains issues, but you will also reap the reward of having the property appreciate in value during that time. It also allows you more time to spread the work and expense of remodeling out and avoid killing yourself and/or your bank account! This is particularly a good option for investors who don't have school age children as you don't have to be concerned with changing school districts.
Flipping foreclosures is a fun and crazy experience that if done correctly can really reap your family some financial rewards. This is an area I do have quite a bit of experiencein, so if you or someone you know is considering this, please give me a call. Banks are happy to pay a Buyers' Agency fee, so there is no reason not to put a qualified Realtor on your team. The market is most likely going to see a sharp increase in foreclosures over the next few months, so now more than ever is a great time to consider this option.
Lisa Gaiche - RE/MAX Real EState Group - (913) 486-3764
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