I’m not going into some infomercial scam. I’m not buying tapes or sitting in seminars for $100’s of dollars. It’s much simpler
I don’t have house-fixin knowledge. I’ve got a VERY good guy working on my basement who is young, has a buisness degree, and has been fixing up houses with his dad for probably 15 years (since he was 10 I think…it is his families profession). I implicitly trust the guy and know he won’t try to screw me.
We’ve talked seriously about joining together to buy forclosed homes, fix them up a bit, then rent them out (or sell them depending on conditions). He has found a couple of examples (these are just examples and may not be what we actually get into). One is listed for $80K and is assessed by the city for $140K. The other is about $70K with a comparable home being sold for about $100.
Now, I’m always suspicious; it’s just my nature; but I’m pretty ignorant…which is why I’m here. What are potential pitfalls that I need to research that might come up and not make this a decent investment? Do I need to look for liens against the properties. for example? Would title searches take care of this issue? What else do I need to look out for?
Just for starters, empty houses are very difficult and expensive to insure, taxes must be paid, there may very well be liens on a foreclosed house. Tax assessments and appraisals don’t mean much, it’s what someone will pay that determines the real value. Being a landlord is no picnic and if you have $80K in a house you need to get between $700 to $800 a month to justify your investment. Depending on your area, the bottom of the market may be a long way off.
Buying fixer uppers can be lucrative, if you know what you’re doing and the market is stable. I wouldn’t attempt it in a soft market. Put you money into a good mutual fund and avoid the headaches and pitfalls of real estate.
You have about 6 different issues here, that can be inherently difficult.
1)Partnership. Partnerships are like marriages, with all the attendant problems but no sex. Who makes decisions? Who contributes more money? Who decides which houses to buy? Who does the work? Who decides how much to sell? How about renting to his brother because he’s out of work? The questions and problems are endless. First thing I’d recommend not doing. Sure, you can work together, but don’t be partners.
2)You have no house fixin’ knowledge. There are people who have been doing this for years, and make costly mistakes. I would not get involved or invest in an industry I didn’t have the slightest knowledge about. Further, if he’s so great, why isn’t he successful? And if he’s modestly successful, why does he need you?
3)Have you noticed that there is a huge downturn in the housing market? Yes, it might make sense to buy now, but do you have the capital to sit on these houses for years until the market comes back?
4)Anyone have any experience in being a landlord? That’s a whole different set of problems that I don’t want to get into here.
5)Is he a licensed contractor? Anyone have liability insurance, worker’s comp?
I’m not telling you this is a bad idea, but rehabbing and renting houses is a hard way to make a living, especially in a soft housing market, and the rental market is still a little soft, too. I have no idea where you live, that can change the equation significantly. I have no idea about this guy, either.
Beyond what Fisha said, consider that anyone with 15 years experience is somebody who has NEVER spent a day working in a real estate bust. All that guy knows is the boom. His “intuition” is 100% calibrated to boom. It may be 20 years before you can sell one of those houses for what the last mortgage or city assessment was.
The time to buy real estate & build your empire on the next boom is still well in the future.
Incidently, he has been “successful” considering that he’s paid his way through college doing this…he hasn’t been “more” succesful because he has just graduated.
I do have a little experience with being a landlord; but frankly, it isn’t enough to be accurate.
He is licensed and insured, and has workmen’s comp.
If ever. Here is a graph of inflation adjusted housing prices over the last 116 years. We are now on the backside of a very anomolous boom, and I would not be surprised if many homes lose 50% of their value that will never be recovered.
I meant in nominal terms. In inflation-adjusted dollars you’re right. Most houses will NEVER again be worth what most people paid for them.
A significant anomaly in house pricing is that people buy a monthly payment, not a price. But they sell a price. As a result, historically low nominal interest rates alter the relationship between the selling price & the buying payment which make up the two sides of one transaction. This favors buying more sticker price, and leads to sellers trying to pocket the increased buying power by raising prices.
And when this goes in reverse, a lot of people’s once-rising boats are high and dry, miles from the financial water.
If in some future scenario nominal interest rates get low enough, we could see a return to price escalation in the early stages as the payment/price ratio is falling. Once it settles at a new equilibrium, the effect disappears & prices are where they are.
To echo fisha; what does the guy need you for? What is your supposed role in this?
If it is just to co-sign loans, then I suggest you and the guy make a solid business plan first. Show it so some investor banks to see if they’d be willing to invest in it. If they are willing to bank on the profitability of this business plan, then you might want to invest some of your own money. But not before.
Yes, you do need to look out for liens. But a title search will identify them, and whoever sells you the house (presumably, the bank who acquired it after the foreclosure) will pay those pre-existing liens. That’s why you get title insurance: to insure that you are buying the house free and clear of any existing encumberances.
Of course, you are then subject to whatever liens/costs come from the point of acquisition on. Thus, you should factor in the cost of taxes, assessments, etc. as carrying costs that you will have to bear until you are able to sell the property, which are in addition to the costs of repairs.
Also, you will be buying the foreclosed house “as is”. Sure, you’ll have a right to inspect the house before closing, but you are always taking a risk when you buy a property that someone else was evicted from. How much care or upkeep did they do once they knew they were on their way out? Were they possibly vindictive, and maybe created some problems?
Having said this, I’m amazed at the deals out there in foreclosed properties. For me, though, it might be a worthwhile investment if you would consider living there, putting out extra money to fix it up, and waiting a few years before you are in a position to sell for a (modest) profit.
I have lived in one that my landlord bought at auction 2 years ago, one of 10 to 20 he owns on such a basis. I seriously wonder what he will say/do when I tell him the roof is starting to leak and the rusty plumbing needs some serious work in the 33-year-old ranch.
You didn’t mention how big the pot of money you are sitting on is. If you borrow the money, will you have the cash flow to pay on it while the houses are getting fixed? Do you have enough for the repairs already mentioned. Enough to wait to find renters - I’d guess that lots of houses are going on the rental market now as people try to get some money our of their houses that way.
How are the neighborhoods? If there are lots of foreclosed houses, the market may be depressed well beyond the assessment price, or even comps.
In my neighborhood, even before the crash, people were trying to make money by flipping houses - selling for a lot after a major restoration. I don’t know how they did, but they sat empty for a long, long time.
Two more things. If you have a pot of money, do you have other investment options that are a lot safer, especially in the short term? Also think about how many other people are going to have the same idea as you, and flood the market with foreclosed homes. Last summer, at our town street fair, the real estate training schools had switched from getting a license to earn big bucks on the hot market to how to handle foreclosed properties. And we’re in pretty good shape, relatively speaking.
From what I see, there are no big bargains in foreclosures-unless you are in a good neighborhood. In marginal or slum neighborhoods, you can easily wind up with an unsellable wreck-and repairs can easily exceed the value of the house. I’d stick with a multi-unit building (preferably one that you can live in)-having rent income while you removate is valuable. Plus, in addition to taxes and liens, wathc out for judgements agianst the former owners.
