40% Profit When Buying Foreclosed Homes... REALLY??

In this post you'll find a lot of information but it's not meant to be a comprehensive, step by step guide to investing in foreclosures. If you are a serious investor or just beginning... and you want a comprehensive step by step guide to investing in foreclosures then (whether in California or not) you'll want to CLICK HERE.  The information, in this post, is intended for those investing in homes in California.

Okay... my last two posts were laying down the basics, or "foundation" to keep the analogy within housing, and not really about how to buy foreclosed homes.  Post one was What is a foreclosure or foreclosed home, and post two was Can I use financing when I buy foreclosed homes?

We are going to get into the meat and potatoes... or... structure (again, keeping the analogy within housing)

There are two investment strategies when you buy foreclosures.  Those strategies are:

• buy and hold
• buy and flip

Each foreclosure investment strategy has its purpose, ups, and downs.  Each strategy will usually attract a certain investor mindset too.

Subsequently there are two ways to buy foreclosures.  You can:

• Buy foreclosed homes that are being marketed on the open market, through a Realtor, or some other source (but you are not going to get a huge discount going this route)
• You can buy greater discounted foreclosures by going to a "trustee sale" at the courthouse steps.
• trustee sales are performed in California and a handful of other states. This information relates to trustee sales in California.  Some states perform judicial foreclosures, some perform non-judicial (trustee sales) and some perform both.  See a list of states with trustee sales here.

So... if you're going to buy foreclosures on the open market... your best strategy may be to buy and hold.  And it's okay to buy a foreclosed home this way since an immediate profit is not your primary concern.  You'll probably be buying that house at the current market value and your primary goal is to get a good "rentable" home.  This investor mindset is typically happy to, at least, break even.  However most will cash flow a couple hundred dollars a month.  I'm not suggesting that as the BEST foreclosure investment strategy... but it is one.
 
Although we're in, what I call, a wholesale market you can still get deep discounted "blue light" specials when you buy foreclosures at a trustee sale auction.   Again... I want to stress that this information only applies to California (and perhaps other states that liquidate foreclosures through the trustee sale, non-judicial foreclosure, process).  Look at my What is a foreclosure or foreclosed home blog to get more information on that.

So, when investing in foreclosures, the buy and hold strategy is great and has its purpose.  There is typically an initial outlay of money and not a huge immediate profit.  here are a couple examples to see how your money is made when you buy a foreclosed home and hold on to it.

But this post is about making 40% profit when you buy foreclosed homes. How can that profit amount be possible?  Is it legal?

Well, I already said that we're in a wholesale market and you'll probably realize a 40% increase in the future, when the values go up (again... think California and not Antarctica) but I'm not talking about appreciation over a 10 year span of time... I'm talking about cash in your pocket now!  (and YES, of course it's legal)

To realize this kind of profit today and not have to wait for the market to return you'll want to buy at deep discounts and then flip those homes at, or greater than, market value for the immediate profit.  You've got to do your homework but buying at a trustee sale may be the best way to see this kind of immediate profit.  I've been tracking homes bought at the trustee sales, here in Corona California and have seen an average of 32% profit from the purchase to the sale.  I've seen these profits as high as 63% and an average high of 41%. By the way... that's a gross profit, you can probably assume about 11% - 12% total cost to prep and re-sell.  

So what are the mechanics of this and how do YOU make that kind of profit? 

I recommend that you study a specific area and stick with it.  If you know the market trends and pricing in a specific area it'll make it easy to spot a good deal, even if you haven't done the research.

You'll want to view the properties beforehand if possible.  One way to see the homes is to check the MLS.  Some homes that are listed on the MLS will not be sold through the market (for various reasons) and will end up being sold as a foreclosure home, on the courthouse steps.  If you can peek into a vacant home or find another legal, tactful, courteous way to see the inside of homes, you really want to be able to assess any repairs that will need to be factored in to your bottom line.  There's a belief that you need to buy a fixer and restore it to make money... NO WAY!  I'd buy a home that doesn't need much work, if any at all.  That way you get that house on the market fast and you minimize your risk. I recommend to make it better than it was when you bought it but that may only need to be paint and carpet... and that's a good investment!

You'll want to ensure that the liens will be wiped out in the foreclosure sale... YOU MUST MAKE SURE THE LIENHOLDER FORECLOSING IS IN FIRST POSITION*.  Yes... all junior liens are supposed to be wiped out in a foreclosure sale (if the first position lienholder is the foreclosing party) however some Homeowner's Associations (HOA's) will hold their services ransom until they "get their money".  Since you're buying a home in their neighborhood... you may have to pay them.  It sucks but... just do the research so you're not stuck holding the bag.

*You can invest in 2nd's that are foreclosing but there is a lot to know about it and this post does not get into that foreclosure investment strategy AT ALL*

Another potential pitfall could be IRS Liens... they should not "follow the property" but it could take some time to get the IRS to remove the lien which could hold up your "flip" sale.   

You must figure an amount to pay the current occupants to entice them to leave and not destroy the home on their way out.  This also brings up another good point... if at all possible, avoid properties with renters*.  Many banks do this... it's called "Cash for Keys" and many Realtors have a form available to them from their local board.  I'd budget $2,500 to $3,500 but certainly start your enticement at perhaps $1,000.    

*The tenancy laws have recently changed and you may become a "buy and hold" investor when you didn't really want to.

Here's a hot tip: If you're finding it difficult to get someone to cooperate... rather than filing for an      eviction try to sweeten the pot by adding a weekend getaway.  You can usually get some kind of package for a couple hundred bucks.  

When you go to the foreclosure (trustee) sale you'll want to have done all your research.  You MUST know the market value for the home.  It gets crazy when the bidding starts. You need to have figured all your costs and have a decided stopping point for your bidding.  You'll base this on the market value minus your projected costs (and figuring a little extra for unforeseen challenges) and all this will be based on your target profit.

You Must Pay Cash (actually... cashier's checks) You have to show up with cashiers checks when you buy foreclosures at a trustee sale.  It's recommended that you think of these cashiers checks as money and get different checks for different denominations.  In other words... if you plan on spending $100,000, then bring a check for $50,000 a $20,000 a couple $10,000's and a couple $5,000's.  This will make sure you don't have $20,000 tied up if the house you buy is only $80,000.  They don't make change on the courthouse steps.  You'll have to wait for the trustee to receive the paperwork and cut your check... it could be weeks.

You'll definitely want to work with a local, competent, Realtor so you can make sure you have a good assessment of the value of the home.  You should definitely work with a Realtor who knows the foreclosure market.  You may also want a good contractor too so you can asses you potential repairs.  You've got to have a good contact at a reputable title company so you can get data on the liens that may be against the property.  I personally know of a good realtor who knows Corona Real Estate, I’m a little biased but I think you’ll like the service you get by working with me… um… him.
 
I know I've over simplified it, at the interest of making this post easy to read, but when you buy foreclosed homes... I want you to know that you need to be ready to roll up your sleeves and work!  Initially this is not easy money, but once you have a system down it will get easier.

You'll find that there's a lot of work when you buy foreclosed homes, but the upside is the profit and Joy you get when you help another family get info a nice house... one that you bought, fixed up, and on which you made a profit.

If you have any questions about this post, about foreclosure investing, investing in real estate, or want to contact me for help when you Buy Foreclosed Homes in Corona or Riverside, go to my website and contact me there.

Enjoy and Go Make Some Money!