National home sales rose 2.9% in February giving hope to the nationwide slump in house sales. Savvy home buyers are beginning to realize that one man's misfortune can be another man's fortune. Foreclosed homes are the main force driving this welcome birth in new home sales. Some markets like Las Vegas are reporting that foreclosed homes make up as much as 40% of reported sales in the real estate market.
Many of these purchases are being made by investors large and small. If the housing market were a blue chip stock analyst would be screaming buy, buy, buy. House prices and property values are almost certain to come up in the future leaving those who bought homes today in very good financial shape. This being said, there are a few pitfalls that would-be investors need to look out for when attempting to buy foreclosures in today's market.
1) Location, Location, Location - We have all heard this before but it has never rang truer than it does today. Whether you are buying your home to "flip" or buying your home to keep as a rental property location is your first key consideration. With foreclosures looming in almost every neighborhood you need to look for neighborhoods with the least amount of foreclosures in them. These are the properties that will "heal" first as the market begins to turn around.
These homes will tend to be in the middle to upper priced neighborhoods. You should choose your price range according to your intended use of the property. If your goal is to rent the property, be careful not to buy too much home because most people that can afford to rent higher priced homes can also afford to buy them. Look for lower priced homes in good neighborhoods and close to schools. Transversely, if your goal is to flip the house and you have the capital to hold the home for an extended amount of time larger houses will bring larger profits.
2) Buying "Fixer uppers" - Most would-be new investors that I speak with are looking for this type of property to purchase. It is true that these properties offer a much higher reward when purchased correctly, but they also represent the largest reasons new investors fail. Unless you have "deep" pockets, meaning you can purchase the home out-right or put a substantial amount down new investors should stay away from homes that need a lot of repairs.
Buying a home to fix-up and flip or rent can open up a can of worms that even the savviest investors have problems with. Contractors, inspectors and weather delays are all intangibles that you cannot foresee. Not to mention, if you have this home on a high interest ARM or hard money loan and you hit delays in repairs or renting the property you could lose planned profits for years to come. My advice is to begin with a home in good shape that you can get at a bargain price to get your "feet wet" and move on to distressed property as you build your reserves and experience.
3) Hard Money Lenders - If I had a nickel for every time a new investor asked me for a hard money loan I would be rich. Hard money loans are analogous to commodities in the stock market. Even the most experienced traders get burned with commodities every once in a while, and the inexperienced are almost certain to be burnt. So it goes in the housing market, hard money loans are one step above a loan shark. They loan money on low loan to value homes and wait eagerly for the investor to fail. They follow the foreclosure laws in each state step by step and are extremely efficient at taking properties should the investor "slip".
However, in the defense of hard money lenders they do play an important role in the careers of many investors. If you have ample capital, good prospects for selling or renting the home they can be an indispensable asset to experienced investors. Experienced investors are prepared for and can even anticipate delays in construction, renovations and slow rental markets. For new investors we suggest buying a home through traditional channels to begin with. Once you have ample reserves and some experience you can move to the bridge loans and hard money loans.
There are many other pitfalls to look out for but these three seem to be the top three I see new investors making. For fast mortgage closings and peace of mind we suggest that you find a good mortgage company that you trust and stay loyal. Building good relationships with builders, mortgage companies, and realtors can go a long way to helping the new investor survive in today's real estate market.
