Every week, I receive at least half a dozen calls from so-called investors who want to buy foreclosed houses and flip them at a profit. While I am all in favor selling property to anyone who wants to buy it, and I am thrilled when my buyers make a profit from an investment I sell them, I find myself discouraging these first time foreclosure flippers almost every time.
Why? Because they have no idea what they’re doing financially. First of all, the word foreclosure simply means that a bank repossessed the property and currently owns it, and second, foreclosures are not necessarily sold at large discounts. In fact, many foreclosures today sell at well above asking price if they’re in good condition or in appealing neighborhoods, because of competitive bidding by interested customers.
So, the first rule of investing in foreclosures is: do not get so excited that you buy the property just because you think every foreclosure is a bargain.
Second: check the comparative prices in the neighborhood thoroughly. That way, you will know for sure whether there is enough margin between your buying price and the price at which you expect to sell after fixing up the property.
Third: make sure you obtain accurate estimates from at least two contractors on what the fix-up costs are likely to be. If you are someone who is able to do the repairs yourself, add up the cost carefully and then add 10% for the unexpected items that always arise just before you finish the rehab.
Fourth: Property investment is purely about numbers. It’s simple arithmetic.
Think about foreclosure costs in this manner. Let’s assume that other houses in the neighborhood in which you want to buy the foreclosure typically sell for $100. You will want to make at least $20 on your foreclosure. And you will probably spend between $20 and $40 fixing it up. So let’s do some quick arithmetic.
Houses in the neighborhood sell for $100, but they sit on the market for months.
Therefore, you need to sell for $90, so you can take your profit and move on to the next property.
You need to make a profit of at least $20 in order to justify doing this in the first place.
So, you can’t spend more than $70 on this property from purchase through rehab.
However, the reason it sat for so long that it reverted to the bank is because it needs a kitchen, bathrooms and a roof.
These cost $25.
So, you must buy for no more than $45.
TAKE-AWAY: to make a profit on a foreclosed property, you typically need to purchase for approximately 45 cents on the dollar. If you use this formula, and follow the suggestions above, you have a good chance of making a profit on a foreclosed property.