Is Getting Started With An REO A Smart Idea?

Question

I'm a student so I don't really have a ton of cash sitting in the bank. However, looking at some REOs and after recently attending a Rich Dad, Poor Dad workshop, I was told that it wasn't unrealistic to be able to get a $100k house for about $20-40k.
                                    
                                    So I figured I could try to make some bids on some low value properties with a manageable mortgage payment, such as a $100k duplex. If I could score one for relatively cheap, then I could still generate positive cash flow even with ridiculously cheap rents. Then once the market picks up, I figured that I could sell it for market value and make that cash off the top.
                                    
                                    Is it realistic to be able to sell an REO property at market value later on?
                                    
                                    I was also looking at a $300k home, and if I want to take on that I have a willing partner to help me out, so I figured if with a little luck we can get the house super cheap (for the purpose of this convo, I'll say $120k), not only would a $1000 rent seem like a steal to a tenant, but selling it at market value would make $150k cash.
                                    
                                    Is my thinking/strategy flawed by any means? I left out any maintenance costs, etc.
            
            My current living situation: I may sound like a loser, but I'm living with my parents so I can live frugally for now. I have a part time job which I plan on holding onto until I graduate and other than minor expenses such as an occasional lunch and gas, I essentially live for free. So I can afford using all of my wages to the mortgage payment if necessary.

Jon Holdman · Answer

OK, so I have bought a $150K REO house for $62K.  So, I could make that outrageous claim, too.  But, what does that mean?  It means the house sold for $150K at the height of the bubble.  It means I bought it in very poor condition.  I put $16K into it.  With patience, I might sell it for $110K, probably $100K if I wanted it to move quickly.

If you're going to own a rental, you need something like six months payments readily available.  You WILL have big expenses crop up and WILL have vacancies, and you must be able to cover the mortgage and these expenses even without a tenant in place.

J Scott · Answer

There's a lot of misinformation out there for new investors when it comes to REOs (I saw it myself when I started), so I thought I would give some realistic REO numbers and data based on my experiences (and in my market)...

- I've been buying, rehabbing and reselling REOs for about 8 months now in the Atlanta suburbs.

- In that time, I've purchased 9 SFH properties, sold 6 of them (the other three are under renovation), and have racked up about $150K in profits (pre-tax).  The 3 under renovation already have a good amount of interest, so I expect those to sell quickly as well.

- I purchase in the $40-60K range, put in $15-40K in rehab (using all contracted labor), and sell for $105-135K.

- Other than my first property (which was lease-purchased), I've not had a single property sit for more than 2 weeks without an offer.

- I've yet to sell a property for less than 94% of list price.

- Average total hold time for one of my properties (from purchase closing to sales closing) is 92 days.

- What are my "secrets"?

o Don't settle for mediocre deals
o Know your numbers cold
o Make sure you have the nicest house for sale on the block
o Make sure you have the lowest priced house for sale on the block
o Staging, staging, staging
o Turnover is key...do what you can to make the first offer work
o Start marketing *before* you start rehabbing

Hope that helps!

Tom Doan · Answer

I don't think I will be taking out the loan, my mother will either take it out herself and I'll just pay her the payments or she will co-sign for me.

Rich Weese · Answer

I would suggest you get started small, and not risk your moms' status. We often have posts on here from a beginner that thought they could do what you're suggesting. They couldn't and the one that got hurt was mom. Please take it from those of us that have done it and ARE doing it, go slow and start small. I buy at the monthly foreclosure auction here in my TX county  each month. It takes a lot of time, work and knowledge. You need more of the 3rd one and you can learn it on here for free. Rich

Corey Demuth · Answer

Be wary of seminars where they make outrageous claims. I know a lot of people on here have talked about getting psyched up from going to Rich Dad, Poor Dad but I feel like some of the things they get into their head are just wacky.
            
            Will you honestly get REO properties for 50 cents on the dollar, or even less? Not likely. Keep in mind you're not the only investor out there; the best REO properties often have investors lined up with cash offers and proof of funds. The banks can afford to be a lot pickier than you think.

Also to be honest with you, you will likely not get a mortgage until you have had a full-time job for several months. Your credit is probably not strong enough yet either. Trust me on this one, I'm speaking from experience.

Michael Culler · Answer

Hey, a lot depends on your market and your mindset how you should start out.

Some people start out in buy and hold, and later become wholesalers.  Others start out wholesaling only to get into rehab and retail.  It's totally up to you.

For instance, there are people double c closing REO's to end buyers and getting a check for putting it all together.

So when you ask if REO's are a good place to start, I say yes!  Its WAY easier to make offers on REO's than it is to find motivated sellers (individuals rather than banks).

How you decide to approach the deal will determine where you end up though.

Whatever you decide to get into, Good Luck!

Jon Holdman · Answer

Re-selling an REO property for a higher value is entirely possible.  How long it takes will depend on entirely on the market in your specific neighborhood.  I've seen it done in a matter of months in some neighborhoods.

I'm pretty doubtful you can truly buy something at $120K that has an ARV of $300K unless it needs a ton of work.  For flipping, apply the 70% rule.  Buy at 70% of ARV, less fixup, and you'll make a profit of 10-15% of ARV.  So, for a $300K house, 70% would be $210K.  Subtract off the fixup, and that's what you can pay to get a $45K (if things go well) to $30K (more realistically)  profit.  If you need, say $30K in fixup, you could pay $180K.

If you really could pay $120, you can tack that $60K difference onto the profit.  A $150K profit is out of the realm of possibility, even if absolutely no work is needed.

If work is minimal, its harder to justify a big jump up in value, so it has to set (i.e., season) longer before a lender will accept a new value.

Paying $120K (plus fixup) for a $1000 rental will suck cash out of your pocket.  Read in the Rental Property forum before buying any rentals.