With real estate prices softening and ARM rates hitting new highs, some investors are betting on a new round of foreclosures to bring great investment opportunities. Many investment advisors, self help books and web sites encourage ordinary investors to think of this as the ideal way to real estate wealth. 2007 is being called the year for foreclosure bargains.
But before you whip out your checkbook, just remember – this has always been a risky area, and more so now than before. As the property market went through a boom, most of the good deals have already been picked up. And the environment today is a lot different from before.
If you’re waiting for a spate of defaults, you’ll have a long wait. While many homeowners who invested at high prices or with ARM / HELOC’s are facing higher monthly payments, they aren’t yet facing disaster. Anyone who invested more than two years ago has seen enough of an equity buildup to allow them to refinance or sell out if necessary. While it may take time, or involve a small loss, it isn’t likely to be a disaster.
Plus, with jobs continuing to hold up, people still have cash flow available; there still is room to cut expenses to the bone for some time, to weather the transition. Coupled with this, lenders have also realized that foreclosure isn’t necessarily the best option; it’s more profitable to give borrowers a short term moratorium on payments, or reducing the rate, rather than throwing it into foreclosure where they also lose.
There could be regional variations, especially where high priced condominiums, retirement communities or vacation homes haven’t seen sustained interest. Even here, you’re unlikely to find a good deal; with the glut in supply, it isn’t enough to get a good price if you aren’t able to rent it out to cover payments.
The second factor that plays a part is pricing; with everyone and his brother getting into the act, foreclosed homes no longer go for pennies on the dollar. A recent study by the First American Real Estate Association showed that on average, foreclosed homes sold for between 5 – 15% less than the prices of comparable homes in nearby areas. Most of these tend to be properties that have significant deterioration, so the discount isn’t as good as it seems. By the time you’ve factored in the costs of repair, you may not break even.
Last but not least, there still are significant problems that you’ll need to attend to. Traditionally, there were three routes to buying distressed property; from the original buyer before foreclosure, from the lender who had repossessed the property, and from auctions.
Buying from the original buyer is challenging – few people want to acknowledge that they have trouble, or are willing to accept a loss. Repossessions were the favored route earlier – but with fewer repossessions and a larger pool of investors, these again are few and far between.
Auctions are by far the riskiest route; you may not have the option of doing a detailed inspection, or having full information on taxes and liens on the property. Novices can also find it challenging to bid in a heated auction where experienced investors are participating; the chances are you might end up paying more than the property is worth.
Last but not least, finding properties is becoming more challenging. With multiple online sites recirculating information, a number of the listings are soon out of date; weeding through the chaff to find a suitable opportunity can take far more time than you think. Look for local contacts, realtors and listings in the county paper; and be prepared for a lot of work to find something worthwhile.
