Is a foreclosure your best option?

You watch the news and see many companies downsizing and plants idling. Real Estate has all but been written off by the media. I even read in Newsweek that home builders have all but written off 2009. The word foreclosure is now the new marketing “Buzzword” for Realtors. You hear that word and you think, bargain. All around town I see real estate signs that actually say “Foreclosure” on it like it is a good thing. I had one realtor tell me he received a call on one of his listings from a sign and the first question out of the prospects mouth was “Is this a foreclosure, if it’s not I don’t want to see it?” The foreclosure has really come to the forefront of the current real estate cycle that we are in. The foreclosure market is also the media darling at this time, so is this the best opportunity for you?
Before you jump on the foreclosure band wagon you need to ask yourself a couple of questions. Is this worth the time investment that I will have, and is the money it take to complete the project worth it in the end? We will talk about exit strategies more in the next week. I am sure you have heard that just because something is cheap doesn’t make it a good deal. All over the media it is plastered that you can buy houses 60 cents on the dollar, and I had an investor tell me that he purchased a house for 25 cents on the dollar. So what does this actually mean when you are done. To give you some background on me, the last 6 months I have bought two foreclosed properties. I have a client who has bought 13 through me in the past 8 months, and have showed countless other foreclosed properties in the area. I am stating this because I want you to know that I have experience when dealing with these homes.
This first part I want to discuss is time. For every one of these homes that myself or my client has bought we probably looked at close to 20 in person and at least 50 on paper. I spend at least an hour a day reviewing houses and at least 3 hours a week going into and getting cost for repairs together. Next, it is usually a month to get these homes back to market or in rentable shape. So you need to make a real commitment if you are going to find a deal.
Next, cheap doesn’t necessarily mean a good deal. There are so many hidden costs in getting one of these homes back to market. You need to make sure that if you are doing the estimating you have a good handle on the costs, or you could hire an inspector, but that is going to run you about $300. This may be money well spent if you are going to be making a substantial investment in these homes. It should help speed your learning curve, and could save you thousands in mistakes further down the road. If you have a partner that has been remodeling for years, you will have an advantage here.
If you are looking at purchasing one as a home owner, you need to take extra care. Human instinct draws us towards advertisements like “Good Deal,” “Best Deal in Town,” “Discount,” and of course “Foreclosure.” What actually happens when you buy most of that cheap stuff. If breaks, it has some sort of defect that you may be able to live with but would be too costly to repair, in worst case scenarios, you could end up spending a lot more money to cover the mistake than it would of to put the extra money in up front. This can be a real issue in the foreclosure category.
I am going to give a real example of two houses located in the popular “Colonial Village” community. Both are +/- 1100 Sq. Ft. Cape Cods. One is a move in ready Cape Cod that sold for approx 83K and the other was government owned that sold for around 60K. These numbers I am giving are strictly my opinion, but I feel are an accurate representation of my point. The 83K house didn’t need anything, but lets say you didn’t like the color so you spent 2K to change it. Should be high, but it puts you into the house for 87K. You have the other cape cod that you just picked up for 60k. This home has been sitting with out any climate controls for months causing cracking of the plaster and leaving a lot of deferred maintenance. Here are the numbers off my bid sheet. For kitchen update we had $7500. Redo all floorings we had $2.5 per sq ft. This totals out to $2887. Bathroom we had $3100. Paint/drywall repair $3600. Landscape $1000. New Doors/trim $1900. This was because we needed to replace a slider and put trim through out the house. Mechanicals would have been $2200. The roof and fencing also needed maintenance at approximately $2000. This brings the total of repair to just under $23000. Let’s say it takes you two months to repair it. You will have at least a thousand dollars of holding costs or if you paid cash, lost opportunity cost.
If you add it all together it comes out to $84,000 that you would have effectively has into that home. So as a home owner you would have had two invest two extra months living somewhere else, and would have had close to the same money into your home. If you are really handy around a house (which is not me), this may be a great opportunity for sweat equity. If you haven’t done it before, think out your costs. My old football coach always said, “if it was easy everyone would be doing it.” Same scenario here.
This is not meant to scare you, but just to get you thinking. A foreclosed property may be your best bet. And when you look hard enough there are good deals that need minimal work. Be careful when you hear the word discount. Before you buy the “good deal” take time to assess your skills, and write down what your needs are before just finding a house. In other words, think about your lifestyle first, then find the property that suites that. If you have any questions, please feel free to email, or call me anytime. Good luck in your house hunting!