A few times a month I get a call from a friend about a screaming deal on a foreclosure in their neighborhood. I love my friends, but always find the calls to be hilarious. I ask them about the property and they explain it is worth $200K and can probably be purchased for about $185k and it will rent for $1100. Then they ask if that is a good deal and they are salivating because everyone is buying foreclosures and they are comfortable buying in their neighborhood. Any investor however that buys at 92.5% LTV and with likely negative cash flow such as those numbers will not be investing long.
So how do I respond to my great friend who tips me off on a potential opportunity? I politely pass and recommend they never speak of this phone call ever again! Respectfully of course because I do appreciate the intentions, but those are not good numbers. The foreclosures are creating tremendous opportunities, but how do you buy right?
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Here are 6 tips for buying foreclosures
- Use cash or get pre-approval from the lender you are buying from – Cash is king. Many banks will take a cash offer before they even consider a financed offer. If you are getting a loan, get pre-approved from the lender you are buying from.
- Don’t get caught up in bidding wars – Competition will bid up the price, do not get caught paying too much in a bidding war. Stick to your criteria. 70% LTV max with strong cash flow.
- Evaluate lots of deals – Some fall in love with one deal and do whatever they can to make it work. It is highly recommended to fall in love with having tons of great deals to evaluate and purchasing the best ones. Make sure to always have great deals in your pipeline.
- Contact the lender directly – Creating relationships with asset managers can give you an inside track on short sales or if the bank takes the property back it can result is a deal without other bidders.
- Target fixers – Move in ready homes will have more competition, targeting fixers will allow you to buy at large discounts and add value through rehab. Make sure you have a contractor look at it, do your inspections and due diligence.
- Talk to the listing agent – Asking the listing agent if you should write an offer and at what price sometimes will give you an edge. They may tell you what the other offers are at or that there are no offers and you may be able to find out the banks bottom line. If the listing agent represents you then they have extra motivation to get your offer excepted as they have the incentive of a double commission. I have even heard of buyers paying their buyer’s agent outside of escrow and letting the listing agent get a double commission to improve their chance of getting the deal.
Photo: Alaskan Dude