BUYING FORECLOSURES…Is it Really a Good Idea?

By
Real Estate Agent with The Fischer Investment Group

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BUYING FORECLOSURES…Is it Really a Good Idea?

 

Some investors think that buying Foreclosures, Bank owned properties, and Short sales are a good way to invest in today’s real estate market.  Is this true? Or is it just a romantic sounding endeavor that is fraught with lots of work, lots of pressure and lots of unknowns.  With few exceptions, it’s a high risk, low return investment strategy.

 

In all of these cases lending institutions are involved.  They are not stupid.  So, they are not going to give away any substantial equity, based on market values, without a fight.  Not only are they not going to give away equity, but in most cases they are prevented by legal contracts from doing so.  How is this possible?

 

Well, in most of the lending institutions the majority of the hundreds of thousands or millions of loans they collect are done so on behalf of other investment organizations, such as sovereign wealth funds, hedge funds, pension funds, insurance companies, trust and a wealth of other entities.  These lending institutions (banks) receive a loan servicing fee for collecting the mortgage and transmitting the funds on a regular basis to the investor.  The borrower may never know who actually owns his/her loan.  So, if the borrower gets in financial trouble and asks the bank whom he or she thinks owns the loan, the bank actually can’t do anything.  And, the actual investor isn’t interested because the investor owns perhaps hundreds of thousands of loans and is never going to take up the issue of a single borrower.

 

So, what’s the result?  It’s either a short sale, deed back to the bank, or foreclosure.  In any event, the bank servicing the loan has a fiduciary responsibility to the investor to minimize the investor’s loss in any given loan, and to maximize the investor’s return on invested capital.  How then can the “Bank” give away free market equity, unless there isn’t really any significant equity being given away in the Bank’s eyes.

 

In either event, including foreclosure, the “Bank” expects to recover the real market value or higher, after deducting the cost of repairs, if necessary.  And, repairs could be much more than the actual cost of the property, itself.  The reason is that property owners who lose their property and hard earned savings to the “Bank” have no incentive to maintain the property.  In fact, they often try to remove anything they can from the property in order to recover some of their money.  We have heard many reports of homes, both old and new, needing whole new kitchens, bathrooms, carpeting, window treatments, air conditioning and water heating equipment etc.

 

Unfortunately, when the deed to a foreclosed or otherwise bank obtained property is recorded, there is no mention of the additional substantial repair costs.  Thus, the investor has automatically created an unrealistically low market value for his/her property.  And, the property, itself, is often located in a blighted or poorly maintained community which might have many similar properties.  This also creates renting problems as many families except for the least favored economically may not be interested in relocating themselves to such an area.  Thus, rents will be lower and will take longer to obtain.  Vacancies and vandalism will be a bigger problem.

 

While the above does not have to be the case in every foreclosure or similar bank problem, it does include a myriad of problems that our clients at the Fischer Investment Group do not have to face.  Why, because we are investing below market prices and not at the thinly veiled market price using the foreclosure strategy.    We are also, more importantly, investing at or below estimated builder replacement cost.  In addition, all of our properties are complete and new, with a one year warranty, front to back.  The communities are new and well groomed.  So, our properties rent faster and at a higher rent factor.  Due to the condition of the properties and the neighborhoods, it is not uncommon for many of our tenants to live a number of years in the same property.  In essence, our risk is much lower, and our potential gain much higher.

To learn more about the way our Group invests, please feel free to view our website at www.Fischer-Investment.com . We would be glad to work with your investor clients like we work with many other Realtors across the US. We do pay referral fees to any Realtor that brings us an interested client that ends up closing on any of our negotiated properties.

 

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