Buying foreclosures is an opportunity to create wealth on any income. I made the decision to use real estate investing as part of my wealth creation plan and I knew that becoming a foreclosure investor, especially in this market, could be a once in a lifetime opportunity. I want to share with you the steps I took in order to acquire my first investment property.
Technically this was not to be my first property since I already owned a different property I was renting out at the time. But that property was a house I used to live in and then I moved out and rented it. So it really was not purchased as an investment property but fortunately it worked out that way.
This time I wanted to specifically acquire an investment property. My goal was to keep increasing my portfolio of real estate investments - purchasing at least one property per year. I knew that buying foreclosures was the way to go because it provided the best opportunity to buy a house under market value.
I prepared to become a foreclosure investor by doing a lot of “homework”. I began my education more than a year earlier by getting my education in real estate investing and then some. All this work was crucial in minimizing my fear, giving me confidence and identifying the opportunities available. Foreclosure investing can be tricky so you want to be prepared.
Now it was time to take action!
Buying foreclosures doesn’t mean to just go out and buy any bank owned property. My objective was finding a long-term hold that I was going to rent out. I had no plans of “flipping” it and I wanted something with appreciation potential. I learned you have to define your criteria. Mine was:
- A house with at least three bedrooms and two baths. This is the most typical floor plan in my area and less than this makes it less desirable to potential renters or buyers.
- Something that would rent for $1100 per month or higher. In my research and talking to other investors I found that you are more likely to find more stable and less problematic tenants at this rent range.
- It had to cash flow at least $200 per month. Meaning that the rent will pay for mortgage, taxes and insurance every month and leave you with $200+ to “spare”. I cannot overemphasize how crucial it is for a property to cash flow from the very beginning.
- Good area. By this I mean, low crime, solid middle-class working families, well-kept neighborhood, good access to major highways and good schools.
- A house that after repairs would be worth around $150,000. This in turn drives the rental rate and for my area, provides a good indicator of a good area.
- Not too old. Preferably built in the late 80’s or after. This in the hopes that I would have to worry less about major maintenance issues.
- No more than a 30 minute drive. I know there are people investing in foreclosures out of state. But I wanted something I could see and touch and stay in contact with. In order to do this it cannot take me an hour to get there, it needed to be close to me.
The Search Process
Searching and buying foreclosure properties requires a different approach from traditional properties. There are quite a few services out there that specifically track foreclosures but usually you have to pay for them. You can find foreclosures for free by looking at the MLS listing for your area and then looking for “keywords” like REO, foreclosure, corporate owner, sold as-is, bank owned, etc.
However the way I found this property and also recommend, is to partner up with a real estate agent and have him/her look them up for you. Now you have somebody working for you that has a lot more access than you do. Plus they will be able to open up the houses for you to see, look for comparable listings and much more.
I narrowed down to two properties that met my criteria above. The first one I put an offer on the bank accepted it, however during the inspection process I discovered some problems in the crawl space and I went back to the bank to lower my offer. They refused and I walked away. That reinforced the importance of both an inspection and a due diligence period in your contract when buying foreclosures.
That left me with my second choice. The second house actually looked worst than the first one. Here are the pictures..
When buying foreclosures do not expect to walk into a house that looks good. These houses have been vacant for a while, probably with no utilities running and possibly the previous owner was less than careful with a house he knew was going to be taken from him. However this house was actually in pretty good shape in terms of major systems. It was just dirty and not taken good care of.
Now I had to decide if this would make a good investment, how much to offer and of course the all important question…how am I going to pay for this?
Because this is so important I will discuss it in the second part.