Cautionary Tales for Real Estate Investors
I was just going by some channels on the television (because I was bored), to find a program encouraging me to act now to become an investor in foreclosures. Last week I was introduced to some programs on cable which dealt with buying, repairing, and selling homes for profit. I was glued to the tube. I felt that these shows were really giving a wonderful picture of buying and selling for fantastic profits, which were just fantasy. It was incredible to me that there is an audience for these programs. With the unfolding story of mortgage problems nevertheless taking center stage in some news casts, you may start to surprise about if there are opportunities to make money in this market.
Firstly, you should never start any financial adventure without educating yourself on the aspects of what can go wrong or right. Recently, I have inspected more homes which were foreclosures, and I think maybe you can learn something from what I observed. There were four homes in the past few weeks which will make my points.
You have heard the old real estate adage: location, location, location. Well for appraisals, this is apt. When looking for a character to buy/sell, you need to understand the values attached to that character. Notice that I have a plural on the information value. One value is the tax appraisal. This figure is given at your county’s tax office, and you can likely find this on the county’s web site. An appraiser breaks up the value to what he sees the land as being worth, and what the improvements are worth (improvements are buildings and equipment additional to the land). This value is used to asses the tax on the character. The appraiser may not already come to the location to determine a value. The appraisers in the tax office look at values of homes and land in the area, construction records, the neighborhood, and other factors to determine their numbers. Location consequently plays a big part in this course of action. One home that I examined was really nice. The lender had the home repaired before placing it back on the market after they had foreclosed on the character. Just from walking around the house, I could tell that it had been inspected and repaired to that inspection. However, the home would never have the value that someone would want for a sale. In this case, the value is the amount the house’s sale price, not the tax appraisal value. Well, although the two values are different, they both rely on location to set the stage for their value. The home was built four years ago in an area where most houses were built in the fifties. No matter how nice it looked, the building was surrounded by old houses. If the neighborhood was in change, this might be another story. By fixing up the house, the lender may have recouped some of their loss, but the tax value and sale price would never match the value an investor would hope to acquire. It was perfect for the buyer, since he wanted to live there. He had a nice house in the area that he wanted.
My next house also had a positive aspect for the buyer and possibly for an investor. The neighborhood was good, and on the surface the tax value was matching other homes in the area. The sale price was set to recoup the lender’s losses, so it was below the price of other homes for sale by $20,000. ultimately all homes develop concerns, and I would guess that the buyer would have to use around $5,000 to really fix the house to be in good condition. Like many foreclosures, the former residents yanked out what they wanted and ran, leaving damaged appliances, walls, and doors in their wake. This would make a nice $15,000 profit for an investor. Most investors seem to be of the opinion that they need to make a killing on each deal. The TV infomercial promised $60,000 profits, and investors on the cable shows hoped for $100,000 profits. You may buy the character cheap, but will there be someone ready to pay a premium for the home? I would take one of two actions with this house if I had bought it: 1) sell it and be happy with the $15,000 (who sees that kind of money every month); or 2) I would rent it until the markets settle down to, and I could make a great profit by selling it later. If you are in it for the great profit, most foreclosed homes will be like this one.
The third house was a great deal, being around $30,000 to $40,000 below market value. It was in a neighborhood that was improving, so prices would be going up. Houston has had a rise in foreclosures, and there have been fewer homes sold, but interestingly enough home prices did rise in the past month. Maybe a huge profit of over $50,000 was possible. Termites were nearly finished with their meal in the garage next to the house, and ants were already in the house. Wood trim on the inside and outside was decaying away, and on closer inspection I saw that joists and studs were starting to suffer from the same problem. Doors needed to be replaced; walls repaired; plumbing redone; electrical work; appliances replaced; and maybe a new air conditioner. Should I continue? There was more work to be done, but a quick calculation revealed that the investor was looking at close to $20,000 in repairs. A look at sales prices revealed that homes in the area were not currently selling well, so the price may have only been around $20,000 to $30,000 under market value. At this point, you may be thinking negotiate. If the lender is already taking a hit on their investment, they may not be willing to come down, which was the case here. The investor was not willing to rent and wait for better market conditions, because she was finding dealing with tenants at two other similarities were time consuming. I have had this scenario play out for other investors in addition. Really good deals may have some expensive problems. Most people in foreclosure do no have money to continue there homes.
The last story is a positive one. I swear. As mentioned above, homeowners in financial trouble do not take care of their homes. The lender had appraised the house and realized that they would not be able to make their money back, so they did not try. They came down in the price over foundation and roof concerns. The homeowner had tried his best to keep the house in good repair. He knew some carpentry and other building skills, so he did what he could. Some of his repairs where questionable, but they were easily rectified. The investor was not looking for a big killing, so he made off with a nice profit of close to $20,000. Looking at this home wisely, gave the investor a good return with few headaches.
Do not be fooled by any show or course that leads you to believe that there are fantastic chances out there, anywhere you look. Real estate investing takes knowledge, patience, and realistic expectations. I am approaching this topic from an inspection point of view, but look at a book that goes over investing in real estate (and that does not potential you can buy homes for no money down), and you will see that there is a good deal of work involved. Have a good inspector with you, or at the minimum learn how to inspect the house yourself before starting on this endeavor.