Today's Investment Real Estate Market

Underscoring the financial stress facing sub-prime mortgage borrowers behind on payments, foreclosure filings across the United States in the first quarter 2007 rose 27 percent from the prior quarter and 35 percent from a year earlier. (Realty Trac).

The delinquent sub-prime borrowers started the increases in foreclosure filings. However, it is not just low-end homes that are going into foreclosure. A rising percentage of borrowers with homes estimated in value of $750,000 or more are also going into foreclosure.

With the increased number of foreclosures, we will see an increased number of bank or real estate owned or REO properties. A search in the local Heartland MLS here in Kansas City in just Johnson County Kansas alone shows a steady rate of about 50 “as is” houses sold in each year of 2004, 2005, and 2006 for the first quarter of the year. During the same quarter of 2007 the search shows a total of 100 sold.

So what does this mean for the real estate investor? For those that bought homes with very high loan to values or LTV’s, with high interest rates, and in tougher areas to sell it may mean that they are holding on to properties that they planned on flipping. It may also mean they are in the statistics from the paragraphs above.

For those that bought right, with a low purchase and repair to after repaired value ratio, with a very low loan to value ratio and with low fixed interest rates, it may mean falling back on a second or third choice exit strategy of selling lease to own rather than to a cash buyer or holding as a rental until the market turns.

But for all those homes out there that are currently for sale, in foreclosure or are classified as REO in a bank’s inventory it means that there are deals to be made – lots of deals.

First in dealing directly with the home owners. Many are finding that if they have to sell right now, that they may need to sell for less than what the market values were a few years ago. For those investors in the pretty house business, buying these homes Subject to the existing finance or with a Lease to Own Contract or even with a new loan, the “pretty house” investor can build up inventory. Then set theses homes up on Lease to Own Contracts that will be paying out in 2 years, and selling with contract prices that are higher than current values.

Investors may also find homeowners who are in distress with houses that need repair and they can’t sell or owners that are in foreclosure a lot more often than they have in the past. Combine that with banks who are looking at foreclosing on more homes (35% across the country and 100% more in one of our local areas), who will be that much more willing to work with the investors who are buying through Short Sales, and the investors will be finding a lot more deals.
And for those of us who don’t have time to search out the motivated sellers directly and want to have easy access to homes that have no one living in them, that have been cleaned out in most cases, and have clean titles so we don’t have to worry about finding lien holders or waiting 3 to 6 months to work a short sale deal, then talking with your local Wholesale Seller and REO listing agents will net you a lot of great deals.

First, let’s look at the wholesalers. These are the investors who spend the time and money marketing to find sellers, who sniff out the great deals directly from the homeowner in distress, buy the property, and then sell wholesale prices to other investors in the area. The wholesaler makes a little profit, and leaves the bigger profit on the table for the end investor who may be buying to fix up and sell or to rent out. So be sure to find all the people who sell homes wholesale in your area and ask them to add you to their email list of homes.

Then the real estate agents who list REO’s would be our last source of homes discussed here. These agents specialize in managing and listing homes that have been foreclosed and are now Real Estate Owned. These agents will be one of your best sources for homes if you want a list of homes that are just waiting for you to take a look at them and make an offer.

The key to working with the wholesalers and REO agents is to have the necessary funding to acquire these properties, renovate them as needed, and have the ability to hold them long term if needed. As there are so many more houses on the market today than there were just a year ago, the investor may not be able to sell quite as easily as a few years ago, but they are still selling. And those with multiple exit strategies will be able to make a lot of money, because the sub-prime borrowers are going to still want to own a home and selling to them lease to own will be a win / win for both the investor and the buyer.

So find your funding, take a look at home equity lines of credit, unsecured lines of credit from banks and credit card companies, private lenders, partners, renovation lenders, and other loan sources. Get on as many list of available houses from wholesale sellers and REO agents.
Go look at one house a day, work your numbers, and make an offer.

Remember every house has a number, so look at the after repaired value, the cost of repairs, the cost of your money for the length of time it will take you to renovate, lease up, and refinance, and the profit you want to make, and find the number that works for each house and make an offer. Also keep in mind that you can’t buy any houses and earn any profit or cash flow unless you make and offer.

It’s a Buyer’s Market – so let’s go out and be buyers!