Buy foreclosure, renovate & close with equity ?

Question

Hi all,

I am new to the real estate game and would appreciate anyone’s thoughts here.  I’d like to secure a few investment properties over coming several months in various cities across the US.  Over the past 4 months I’ve done extensive due diligence and one of the more interesting pitches I’ve been given is as follows:

A RE investment firm in the mid-west helps investors buy homes in foreclosure (property goes from bank’s name to mine).  The RE firm then renovates on my behalf for a fixed fee, markets the property, secures a tenant and, if I choose, will manage the property on an on-going basis.  The value add here is that the gentlemen I’m speaking with says this process will allow me to “close with equity” through the renovation + buying below market via a foreclosure sale.

This process however requires all cash.  I originally planned on buying properties via conventional financing, but he’s explained that forecloses are cash deals.  What I can do post-closing is work with his lender to “cash out” which, in the end, would provide similar economics to conventional financing.

Any thoughts on this process?  Appreciate foreclosures in the US are also now at lower levels not seen since 2006 … so not sure how he can necessarily secure a property “below market”.

Thanks !

Bryan L. · Answer

Jason A.

Let me explain this differently.  And a note here to the moderators - this is not a solicitation.  This is for demonstration purposes only.

I'm currently going through a refi on 7 of my houses.  Six of these have good cash-flow.  They have already been rehabbed and have good renters.  I can prove good results with tax returns.  These would be great turn-key properties.  And I will gladly sell all 6 of these or any of these to the OP (or anyone else) at 90% of the appraised value.  Based upon a very recent appraisal that I got for the loan refi.  And I will even provide copies of the appraisals.  So, great turn-key properties with proven results of good cash-flow (proven by tax returns) and instant equity proven by a recent appraisal.  Any takers?

Walt Payne · Answer

Why do good wholesalers leave profit for their clients? Because profit for both people makes for repeat business. This may or not be a good deal, but I don't think that you can rule it out with such an oversimplified answer. There are several sources of available, legit profit in such a deal. Purchase, rehab, PM, so a long term relationship with an honest, legit person could provide profit for all. Due diligence would obviously be important.

Bryan L. · Answer

Jason A.

- If this is such a great deal, then why is this guy selling it and leaving equity in it for you?  Hmmmmm.

Walt Payne · Answer

Jason A. Welcome to biggerpockets!

Several thoughts. Foreclosures are down some, but some areas are actually not anywhere near dried up yet. Foreclosures are indeed a cash buyer's market. They are enough in demand that the only ones you will get without cash or owner occupancy are pure dogs.

Deals such as you are discussing can range from honest, legit ventures to outright scams. I would suggest you post the name here on BP and ask for comments about their integrity. Odds are someone here has dealt with them or at least heard of their reputation. They may even be members here.

Matt McConnell · Answer

One thing you might want to consider is some economics due diligence here as well. If you are looking at a price anywhere near your example of $360,000 you will need to know you can cashflow once you are in the property. Based on some quick math, that means you would need to charge at least $800 per unit in the triplex consistently to break even. You would need to charge about $1000 for any decent positive cashflow.

Jason A. · Answer

thanks to everyone for your thoughts.  i have some more homework to do.

Bryan L. · Answer

@Walt Payne

- I don't like generalizations either.  But some are very appropriate (in general).  Like, "buyer beware".

Walt Payne · Answer

@Bryan L. My short answer is two words ... due diligence. But I guess that is where it would seem we disagree more than we actually do. A new investor here can and should seek advice on a deal they are about to get involved in. You are questioning the deal based on general bias, based on your experience. Fair enough. I am saying be skeptical, but bring the facts to light and let's see if this might be a legit deal. Who is it, what property, where. There are legit turnkey operators. There are scammers. We don't where on that spectrum this falls, that is all I am saying. All of your points are valid, just not as 100% generalizations.

Bryan L. · Answer

@Walt Payne - The point here is "if it sounds too good to be true, it probably is".  I could sell these as "turn-key" and provide official appraisals to prove the "equity" that is there, but I know deep-down inside that those appraisals came back very generous.  And I could sell those at 90% of appraisal, providing 10% equity to the buyer, but I know deep down inside that, in reality, that buyer would really not have any equity.

Walt Payne · Answer

@Bryan L. I am not sure of your point there. For someone from out of area, in a market they can't make work for them, that might actually be a good deal. There are a lot of factors, and if  you were willing to back the numbers with tax returns that makes due diligence easier. Good cash flow, well that could mean anything. Good tenants, a bit subjective. But again, with due diligence it could be a great start for someone with limited knowledge or involvement. Especially if you could manage the property. Turnkey can be a ripoff, but done right, by people with integrity it can be an opportunity for someone who could not do all of the research and work you have done. And if that worked to your mutual profit, that would be great.