Quick Links:

1. What is Foreclosure Investment?
2. Is buying foreclosed homes a good investment strategy?
3. Foreclosure Investing Strategies
4. Exit Strategies
5. Benefits of investing in foreclosed homes
6. Cons or disadvantages of buying a foreclosure
7. Vals Property Management: Your investment foreclosure advisor
8. Finding Foreclosure Homes for sale
9. Financing foreclosed homes for investors
10. Pre-Foreclosure Investing
11. Deed-in-lieu of foreclosure for investment property

What is Foreclosure Investment?

Foreclosed homes are properties whose owners cannot maintain their mortgage repayments. When this happens, the bank repossesses the home and puts it up for resale, usually at a much-discounted rate.

Most foreclosed homes are sold at auction to companies or individuals who purchase them reasonably, renovate them, and then resell them for a profit. This purchasing, renovating and reselling of bank-seized properties is known as foreclosure investment.

It’s important to note that successful foreclosure investment isn’t for amateurs. This type of property investment is for serious investors who have an in-depth understanding of the property market and know what buyers are looking for.

Investors must be familiar with local state, city and county requirements and be aware of the strength of the local business community.

Foreclosure investment has the potential to be highly lucrative, but it entails plenty of hard work and requires well-thought-out strategies. Often these homes have been stripped and have hidden damage.

Is buying foreclosed homes a good investment strategy?

If you are considering buying into the foreclosure investment market, you need to understand everything that comes with it.

Remember that age-old adage, “It takes money to make money”? Well, that is precisely how a foreclosure investment works.

One of the most critical elements is to ensure that you have enough capital, or a clear line of credit with the bank, to finance the entire “makeover” and that you don’t get stuck halfway through repairs because you’ve run out of funds.

Many people mistakenly believe that buying a foreclosed property is a quick and relatively easy way to make money. The reality is that it can be a complicated and risky venture. There are no guarantees, and some unlucky investors lose a lot of money on the deal.

Foreclosure Investing Strategies

A good strategy is probably the most crucial part of your investment strategy with cushions in place for the unexpected.

There is no one particular strategy that works better than others, it just depends on the specific investment.

It is possible to achieve success through any of these strategies, but there are a few more commonly used ideas that we will explore further.

These are 10 of the most widely used strategies:

1. Buy and hold

This is probably the most popular foreclosure investment strategy used. It simply means you purchase the property to hang onto it for an extended period.

The idea is that property value tends to double every seven to ten years so you can get fantastic equity growth by simply maintaining and reselling at a later date.

Rental income also increases as time goes by, so if you are going that route, your rental income will help to cover your mortgage costs, even if you bought the house using a variable interest rate home loan.

2. Renovation

Renovation is mostly used when investors want a resale and profit. Some investors use this strategy successfully, buying properties that need TLC, renovating as quickly as possible, and making a handsome profit on the resale.

However, renovation can bring a profit even if you don’t plan to revamp and sell. A simple cosmetic “makeover” can increase the rental income and generate increased income for years.

3. Subdivision

This is splitting one property into two (or more) properties. This means that you start off owning one large property block and end up with two separate, smaller titles.

Subdivision is an expensive exercise that can cost between $500 and $10 000.

However, there is much scope for a profit with this particular strategy.

You will be able to sell, rent out or occupy your properties, giving you Australia’s different opportunities to make good on your occupancy.

Dual occupancy simply means getting two (or more) rental incomes from one title. This can be accomplished in several ways.

For instance, building on a granny flat or dividing a double-story home into two homes by separating the upstairs and the downstairs into two self-contained units.

You can then rent out all your units or live in one, using the rental income from the other/s to assist with mortgage repayments.

4. Development

Development requires extensive cash outlay before any profit is forthcoming.

Large-scale developments, like townhouses, can be individually strata titled, allowing you to make multiple property sales on one block of land.

This has the potential to be highly lucrative but is also very risky.

This means that the more experienced investors are usually confident enough to take on these projects.

5. Positive cashflow properties

These are properties bought exclusively for the extra income they generate.

A positive cash flow property means that your rental income is more than your expenses on the property, allowing you access to a passive income that will grow as the rental amount increases and your mortgage amount decreases.

This can leave you set up for life if you do it wisely.

6. Negative gearing

Negative gearing is the opposite of a positive cash flow property, meaning that your expenses exceed your rental income.

This requires you to take monthly money out of your pocket to keep up with your mortgage payments. Bear in mind that this is a long-term investment strategy.

The hope is that, although you’ll lose money for a while, the property value will significantly appreciate.

In time you will be able to resell at a much better price, thereby making good on your investment.

The other option is to hang onto the property until the rental amount increases and the mortgage repayments decrease as you pay off your loan.

This will see you turning a profit in years to come.

7. House and land packages

This strategy involves purchasing a home that has not yet been built.

What you are buying is a piece of land with approved plans for a home and a building contract already in place.

The only difference from a traditional buy is that you still have to wait for your house to be built. This is quite a common move with developers.

This way, an investor can sell all the units planned for a townhouse development before any building has started.

8. Land

This will probably be negatively geared as it is challenging to produce an income from an empty piece of land.

The great advantage of this strategy is that it costs less than buying a plot with a home on it. This gives you more capital growth at the end of the day.

It is also possible to change the zoning of your land. A standard residential property could be rezoned as a commercial property in the future. This makes for a great investment opportunity.

9. Commercial Real Estate

Commercial property usually requires a much higher down payment. You can probably expect to pay between 20% and 30% down.

Commercial leases tend to be longer than residential leases giving you more financial security.

Also, the tenant is expected to cover most expenses like repairs and sometimes even property taxes.

This can mean more money in your pocket every month because your costs are lower.

Exit Strategies

One of an investor’s most common mistakes is not having a good exit strategy.

Every real estate investor should have an exit strategy as part of their business plan.

For instance, if they cannot maintain the property, they will need an exit strategy before the bank forecloses, causing a major loss of funds.

Here are five exit strategies commonly used by Australian real estate investors.

1. Estate planning

Most investors will pass their properties on to their heirs, so having a solid will and/or trust is essential. If your heirs are not interested in taking over your business or maintaining your properties, you may decide to liquidate your assets.

In any event, it’s wise to consult an attorney and an accountant regarding specifics, like CGT.

2. 1031 Exchange

If the properties involved meet federal requirements, investors can exchange a property for a different one and avoid paying CGT (Capital Gains Tax) at the time of the trade.

A 1031 exchange is, in effect, a tax provision that allows investors to sell one property and buy another while deferring CGT.

3. Lease options

A lease option combines the sale of a property with a rental agreement. This exit strategy allows increased cash flow and property sales without the expense of realtor commission.

Investors must have legitimate and valid advice before entering any tenant agreement.

4. Sell

Buying on a low and selling on a high is the goal of this exit strategy. A traditional sale is the simplest but not always the most profit-generating strategy.

Ideally, the investor should plan the sale of the property before entering into the purchase agreement.

Some investors are forced to sell due to financial difficulties. In this event, they should first seek advice from their accountant.

5. Cash-out refinance

It’s possible to access cash by using a property to do a cash-out refinance. This means you can get cash by increasing the amount of your mortgage loan.

In effect, you’ll be taking out a second mortgage using the same property as collateral.

There are recommendations about maintaining a set amount of capital after refinancing.

For example, investors need to ensure that the rental income can cover the new mortgage payment.

It’s a good idea to have more than one exit strategy option and to be prepared for any eventuality.

Benefits of investing in foreclosed homes

As with everything, foreclosure investment has pros and cons. Let’s start by looking at some of the advantages of this type of property investment.

Advantages

1. Good savings – you can avoid realtor fees by purchasing the property at auction. Foreclosed properties also commonly sell at anything between 20 and 50 per cent under market price.
2. Potentially huge return – some investors get lucky and buy a home in good repair at under-market value, reselling it quickly at the correct market value.
3. Less competition – traditional buyers tend to go for conventional homes and don’t usually go to foreclosure auctions meaning less competition when it comes to bidding.
4. More room for negotiation – Negotiation is relatively common when the previous owner has left the home in bad repair. Buying the property “As Is” can get you a better deal.

Now we’ll dive in and explore some of the cons of foreclosure investment.

Cons or disadvantages of buying a foreclosure

Every investment opportunity brings an element of risk. Foreclosure investment is no different. Knowing the risks is the best way of guarding against buying a “lemon”.

Disadvantages

1. Risk of buying “As Is” – the risk of buying “As Is” means that you won’t get the chance to inspect the property. Make sure to ask for maintenance records if possible.
2. Possible major repairs – foreclosed homes often need extensive repairs. You may think you have a broken door, only to find out that you are dealing with a termite infestation.
3. Liens against property – the odds are good that the former owners would have taken out loans against their property to try and maintain it. The lien holders will probably try to collect from you as the new owner.
4. Risk of illegal squatters – if a house has been abandoned, it could be occupied by illegal dwellers. This can mean a long and complicated court procedure to evict them before you can make good on your investment.

Knowing the pros and cons of foreclosure investment will make it easier for you to decide whether or not this is the kind of investment you are interested in pursuing.

Vals Property Management: Your investment foreclosure advisor

Most investors enter into foreclosure investments to make money. An excellent way to do this is with properly-managed long-term rentals and house flipping.

Any savvy investor will engage the services of a professional investment foreclosure advisor because it gives them more of a chance at a successful venture.

Val’s Property Management is familiar with all the foreclosure investment strategies, like generating passive income and acquiring favourable cash flow properties.

They can advise you on what options are best suited to you and which strategies will help you reach your financial goals more quickly.

A professional foreclosure investment advisor like Val’s will be able to inform you when promising foreclosed properties are put onto the market and where to locate them.

Hiring an experienced advisor is definitely the best way forward if you’re a first-time investor.

Finding Foreclosure Homes for sale

Finding good investment opportunities on the foreclosure market is not always easy.

If you go it alone, you could find the best deals already snapped up before you’re even aware that the property is for sale.

Val’s Property Management has access to inside information from banks in the South Bend, Indiana, area, allowing them to let you know about the best foreclosure properties as they hit the market.

Even better, Val will have access to lists of pre-foreclosure properties. This ensures that you have the best possible chance at a lucrative purchase.

If you want an edge on the buying competition, hiring Val’s Property Management as your professional foreclosure investment advisor will give you the advantage of sourcing viable properties quickly and easily.

Financing foreclosed homes for investors

There are numerous ways to obtain finance when purchasing a foreclosed property. If the house is in sound condition, you may even be able to acquire a conventional loan.

Some lenders offer a “renovation loan” to purchase and repair foreclosed properties. There are also private loans available.

Another advantage of buying a foreclosed home is that the bank or lender is usually in a hurry to sell. This can often mean lower closing costs and interest rates.

Less common is the situation where the terms of purchase are required to be cash, as sometimes happens in an auction. If this happens, you won’t be able to get finance unless through a private loan agreement.

Pre-Foreclosure Investing

A pre-foreclosure home is a distressed home usually still occupied by the owner. The lender has not yet repossessed this home, and some investors actively seek out desperate owners in this position.

They then offer to settle the owner’s mortgage with the lender and purchase the house off the market for an incredible discount. Pre-foreclosures are not listed on the ML, which means less competition from other buyers.

Investing in pre-foreclosed homes could be the best decision a new investor could make, especially when acting on the advice of a professional foreclosure investment advisor like Val’s Property Management in South Bend, Indiana.

Deed-in-lieu of foreclosure for investment property

What is a deed-in-lieu of foreclosure?

A deed-in-lieu of foreclosure is simply a document that turns the property’s title over to the lender in exchange for the mortgage debt cancellation.

It’s a last-ditch resort way of avoiding the actual foreclosure process and protecting yourself from some of the foreclosure costs involved when your property is repossessed.

As always, there are pros and cons, though there are more good points than bad points for the distressed owner when choosing the deed-in-lieu of foreclosure option instead of foreclosure. Let’s dive right in and examine these pros and cons.

Advantages

• The distressed owner is released from debt obligations to the lender in exchange for handing over the title.
• The owner can avoid the publicity, expense, and time involved in lengthy foreclosure proceedings
• The distressed owner doesn’t have to go through the embarrassment of being evicted in the event of a court order.
• The lender may offer the option of a lease, purchase, or first right of refusal.

Disadvantages

• The apparent loss is to the owner. They lose their property and probably a fair amount of money on their investment.
• The owner’s credit will be damaged, making for higher borrowing costs. Having a deed-in-lieu of foreclosure on your credit record will also make it more challenging to obtain a mortgage.

Having read this article, you will have discovered that investing in pre-foreclosed or foreclosed properties is a fantastic investment opportunity, provided you know all the ins and outs and have a good strategy.

If you’re interested in foreclosure investing in the South Bend, Indiana area, contact Val’s Property Management without delay for the best professional advice and heads-up info on property investments.