A friend of mine has inherited some money. She’s a really great interior decorator who works with some brilliant architects. She wants to try that thing you hear about on latenight TV: buying auctioned houses, fixing them up, and then selling them. Is that a scam? or is it a good idea? if so, how do you go about it?
I’m no expert in the field, but I did find some cheaper houses on the market several years ago when I was house hunting. The houses that you are going to get a real deal on are the “fixer-upper” type houses. In this case, you usually need to be more of a handyman than an interior decorator. Can your friend hang drywall? Can she fix plumbing and electrical problems?
Some examples that I looked at, and rejected because the house had to be “livable” when we moved in (I didn’t mind doing work on the house, but Mrs Geek and the kids had to survive in it):
House #1: Kitchen looked like it was from the 1940’s. Ancient appliances, old cabinets with missing doors, lenoleum on floor was peeling up badly. Bedrooms desperately needed painting. Some interior doors were missing. Basement was half dirt floor, needed concrete poured. It didn’t have enough bedrooms for me, and the kitchen was too far gone. Otherwise it was a really good house (structurally) at a really good price. I’d call it an ideal candidate for a fix-up and re-sell.
House #2: Someone had removed a wall to combine the living room and dining room into one big room. Unfortunately it was a supporting wall (meaning it held up part of the 2nd floor). Roof was sagging. I didn’t bother to look at much else. Stay away from homes with serious structural damage.
House #3: Sat on a very large lot (4 acres). House was priced at the value of the land it sat on, and once you went inside it was easy to see why. Floorboards were missing. The ceiling in the living room was collapsing (just the plaster - the joists looked ok). Needed far too much work for me and wasn’t inhabitable. Someone could make a HUGE profit on this house by fixing it up and selling it, but they would be very busy for many long nights getting the house back into shape.
Houses #1 and #3 would be very fun to work on (if you enjoy this sort of thing, which I do) and could turn a serious profit. House #2 really needed to be bulldozed and started over from scratch.
If you have to pay someone to do the drywall, ceiling repairs, etc. then the repairs could easily exceed the profit you’d make from reselling the house when you were done.
I don’t know the laws in Washington, but there are a lot of states that are starting to crack down on this very legal practice. It’s called “flipping.” You buy a house cheap, fix it up, and sell it fast to make some money. Nothing wrong with that. However, some people do minor cosmetic fixes and then resell them to unsuspecting customers. That is causing the overall laws to screw everyone. If there are any predetory lending laws in your state, you may have to follow some stipulations. (One in NJ is that you must hold the house for at least 90 days before reselling it.)
Anywho, if there aren’t any of those kind of laws, it’s a great way to make money. Try tax auctions. Sometimes you can get a house at a fraction of it’s cost at those. , Go for a loan, and do whatever repairs need to be done. The beautiful thing is, you don’t need to put the inherited money all in one place. If you go with an FHA loan, the first property you buy will only require a 3% down payment. (You can only have one FHA loan at a time.) A lot of people will tell you about the 203k loan, but you can’t use that for investment properties.
Anyway, this is a very disjointed post, but the bottom line is, it’s not a scam. Tax auctions can yield very cheap housing. There are loan programs that will allow you to put very little money down, and if there are no laws prohibiting the specifics of the transaction, you can re-sell that house for a profit legally. Also, in order to avoid the tax on capital gains, you can take all of the profit from the first house and put it into the next house you buy.
As stated, a lot of houses that are being forclosed on are people who have fallen behind on their payments (obviously) and are otherwise normal houses. I have some experience with this and you’d be surprised, some of these homes are in nice areas and are perfectly livable.
If I were going house shopping, I’d check these out myself.
I am actually planning to do this myself when I get older. I hear that in some areas there is some tax thing that allows for no taxes on investments for capital gain. Someone more knowing than myself may be able to explain further but I just wanted to point that out.
The late night TV stuff? Definite scam-o-rama. Those people will make more money selling their “how to” systems than anyone will ever make trying to implement them.
At a recent fraud seminar I attended, (yes, I am a title and mortgage industry person), one of the speakers was a Fannie Mae representative. He outlined a scam that is currently popular… companies that try to line up people to take out loans on a “fixer upper” property, sometimes even claiming to have a tenant lined up for the improved property. Many of these people are duped into buying property sight unseen. You should have seen the photos of the actual property, compared to what the appraisal stated it was :eek: One poor guy was sucked into over a million dollars worth of loans (on properties that he could supposedly “flip”). It’s just sickening.
That said, you can make money on legitimate “flips”, as The_Llama said. But you must know what you are doing. Some states and some lenders will not allow a property to be re-sold in under 12 months, and the rules on how a flip is to be done are very strict. This is supposedly to cut down on fraud (which I could tell you stories about for hours, unfortunately). And I would agree that tax sales are a good place to start.
But remember…there are people who make their living doing this sort of thing, and those are who you compete against in a legitimate transaction. Less than 2% of forclosed properties ever hit the open market. Some realtors deal with the Fannie Mae/Freddie Mac forclosures (at a record high, BTW). As the buyer, it costs you nothing to deal with a realtor. Might be worth it to have someone who can help you find that 2% and cut down on the time and effort.
Thus concludes the “War and Peace” post, and my two cents.
Thanks for all your help.
But where do you find these houses? Where do you find tax auctions, or foreclosure sales, etc?
There was a lot of this about in the UK during the property market crash in the nineties (I was buying at that time) - there were some genuine bargains to be had; some of the pitfalls included damage to property done by the previous owners as they left - including holes kicked in doors and walls, broken windows and in one case we looked at, the water supply had been turned off and all the pipes removed. I have also heard about cases where the previous owners repeatedly returned and vandalised the property after it was sold.
You can’t be too careful. It’s easy to get in trouble with real estate.
But if you do some homework and want to give it a go, consider buying a modestly trashed house. (Maybe an ex-rental.) Figure on living in it for a couple of years while you work on it. When you sell it, there are tax benefits for having lived in it. And you take the profit to buy another fixer.
For one thing, get the kind of home people want. (A 3-bedroom in a good area.) As others have described, don’t buy someone else’s problems. Avoid a place with a weird floor plan. (There are a lot of them, which surprises me still.)
And don’t trust any sort of free advice. (like this) Confirm it; maybe starting at the library.
I was interested in this a few months ago and did a lot of research into it. What I found didn’t look very promising. A few years ago, buying and reselling forclosed property was a good investment. Foreclosures were not regurarly listed in the realestate listings. You had to get a list of properties from the county clerks office. So few people new about them.
Now, thanks to all the infomercials telling peope they can make money this way. Everybody knows about it. Plus some realestate companies list foreclosed property in their listings at higher prices than they would normally sell at, because everybody’s looking for foreclosures.
I remember a sad story. A young couple had inherited a few thousand. Wanting to do the right thing, they bought a house. Soon afterward a glitch in the economy cost him his job and housing prices (which were inflated) dropped.
This guy had to sell the house, lost his inheritance, wound up in debt, his wife left him.
If he had done the same thing a year later, he’d have done well.
Which hasn’t much to do with the thread, except that Hillbilly had mentioned market timing and I remembered this fiasco caused by bad timing.