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Clients often ask how to make money in real estate really quickly and
with no money down. Usually they want to know more about real
estate foreclosures -- how to buy them and how to profit from such
homes.
Foreclosure properties can be a good place to invest for exponential
growth (or loss!). There are some deals out there for little or no
money down, but potential investors should take precautions because
foreclosed properties can involve significant risks.
There are various ways to invest in foreclosure properties. The first
and probably most popular is to purchase a property, fix it up and then rent
it out, hopefully creating a positive monthly cash flow. The investor
then becomes a landlord, with all the responsibility of an investment property
owner.
The second way to invest is to seek out foreclosures or "handyman"
specials, buy them, invest more money to fix them up and then sell them,
hopefully making a tidy profit once the house is sold. A third approach
is to purchase a foreclosure that is under-priced and sell it immediately at a
higher value.
One way to sell homes for a higher value is to take back a mortgage.
For example, let's say a house worth $100,000 is sold at a foreclosure to an
investor for $50,000. The investor may put down 10% ($5,000) and
assume or create a new mortgage for $45,000. The investor then
advertises the property at a discount, say $80,000, offering 100-percent
seller financing (remember, we're figuring that comparable homes are worth
$100,000). The owner hopes to create a sense of urgency by
under-pricing the house and pulling in buyers.
If successful, the investor takes a promissory note from the new purchaser
for $80,000. He has now created a $35,000 note for himself (the
difference between the $80,000 sale price and the original $45,000 mortgage).
The new buyer makes payments to the investor for an $80,000 loan and the
investor makes payments on the original loan for $45,000. In real
numbers, here's what it would look like.
If the original loan is for $45,000 at 8% over 30 years, the principal and interest
is $366.88. When the second buyer takes a note for $80,000, the investor
may charge a bit higher interest since he's offering 100% financing (which is
normal in the mortgage world). Let's say he offers an $80,000 loan,
9.5% over 30 years. The monthly payment is $672.68, creating a
positive cash flow of about $306 per month.
If the borrower stays in the house for 30 years, the investor will make
$88,295 in interest and $30,000 in capital gains after he's paid his own
interest on the first note for a total return of $118,295. Not a bad
return on a $5,000 down-payment. Keep in mind that not all
mortgages allow an owner to "wrap" a second mortgage onto the original
loan. Most loans today contain a "due-on-sale" clause, meaning if
the property is sold, the first trust must be paid off immediately.
Wraparound financing is popular when investors purchase foreclosed
Veterans Affairs (VA) properties as the VA allows wrap-around loans in
such cases.
Before you go out, checkbook in hand and ready to bid away, take some
precautions. First, if you decide to invest in foreclosure properties
with a spouse or with other investors, be sure everyone understands this
form of investing. You are about to enter a world of high finance,
property management, calls in the night from tenants and other risks that
regular homeowners never experience.
Second, get educated. Reading this report does not constitute preparing
the first-time investor to start bidding on properties. Visit the
bookstore for guides by reputable authors who know investment intricacies.
Third, be realistic. Consider the following:
- Not all foreclosures are good deals
- Not all foreclosed properties are available at discount
- If you take back a loan your buyer could default
- Most loans today prohibit wraparound financing
- Repairs might be far more than you expect
- Not all tenants pay their rent on time, and some don't pay at all!
- Renters sometimes damage property
- Changing interest rates could impact your bottom line
- It may not be possible to re-sell the property without extensive -- and
costly -- repairs
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- Not every deal yields a profit
- If you have a profit you may face taxes
- If you only look at foreclosures you may miss other investment
opportunities.
Keep in mind that if making money with foreclosures was both easy and a
sure bet every time, no one would bother with the stock market, or jobs!
Fourth, get professional help from your Real Estate agent, lenders, attorneys,
accountants, home inspectors, and others. And don't worry, foreclosure
properties are not about to disappear. The mortgage industry is
already reporting that delinquencies on mortgage payments are up these
days in the latest economic slowdown, meaning, if anything, we'll be seeing
more foreclosures on the auction block.
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