I have been going to the REO auctions in my area of California - actually got a house at one in November: all rehabbed now and ready for a tenant. I purchased for cash and applied for a loan later - I had a hard time getting a new loan - hard to prove income as an appraiser in a declining market. So first advise is line up financing first.
Be careful where you consider buying a house - if it is not an area you live in or live near; be sure to set up a team of professionals to help you make a SMART purchase. Be sure your real estate agent is one who will tell you the truth, not what they think you want to hear. You need to know if values are going up or going down - it is OK to buy in a declining market - if you can get a house today at tomorrows prices.
Two ways to look at an investment purchase: buy and hold for the cash flow or to buy and flip for profit. If you are looking to flip - be sure the future value (with or without rhab) will result in a profit - which can be extremely difficult in a declining market. If you plan to buy and hold for the cash flow - you will need to know before making a bid the potential rent for the property - the rehab cost and financing available - to determine the maximum purchase price.
Reasons why to use a property manager:
They know a reasonable rent and will pre-qualifty your tenant.
They will set up rent increases and keep an eye on the property to be sure all is OK.
If something is wrong they can get a bad tenant out quick and will take care of things that break (so you will not need to address a leaking roof on a Saturday night).
At the Auction
Have you deposit ready and financing lined up - know the Maximum price you will pay for a property (and NEVER bid on a property you have not seen). We have an auction in our area where they list previous values - those previous values are often prior purchase prices - not current values - do not be mislead - find out the current value of all properties you are considering before going to the auction. I am finding property value sites like Zillow are not up to date with current values, in my area. A winning bid does not mean you got the house - the lender may not accept a bid they believe is too low.
Adding an appraiser to your team
Your lender will order an appraisal before they offer you a loan, but that appraiser is working for the lender (not you) and may have a tendency to value high or not disclose truths that might hurt loan funding (this is a common problem with appraisers - at this time - with a shortage of work and a deep desire to please the lenders who are giving them work - with lenders too anxious to fund every loan possible).
If you contact an appraiser prior to putting in a offer or bid on a property and have them do research on the properties you are considering and current values - you will be less likely to make a purchase mistake. But you need to be sure you have a local appraiser - who has been in the business at least 10 years (preferably over 20 years). I would recommend you seek out an SRA designated appraiser (from the Appraisal Institute) - for just the process of getting that designation you will have a knowledgable person. You may be able to get something less then a traditional appraisal - something to help you make a smart decission. Maybe you could use current market conditions and value ranges. You will not be able to use the appraisal you arranged for your loan (the lender must order their appraisl by Federal law) but even paying for an additional appraisal would be worth the cost if it prevented you from making a dumb purchase.
Questions to ask for Realtor, Appraiser and Propery Manager
Are values going down or likely to go down in this area?
Are are similar houses now priced at and what are they selling for?
What is a reasonable rent for this property?
How many similar homes are now listed for sale and how many are selling per day or month - with those numbers you can figure the time needed to sell the standing inventory (100 listings 10 sells per month = 10 months of standing inventory). 10 months is probaly too long; 2 months might indicated a warming up market - but best to know if marketing times are increasing or decreasing.
What is the impact of foreclosurers in this area? A good sign of a market in distress is a high ratio of vacant homes for sale.
Good Luck and Good Hunting
Beverly A. Bayer, SRA www.AppraisingMorenoValley.com
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