By Charles Sells
As the real estate market gets more and more competitive, many real estate investors still interested in flipping properties are starting to look more carefully at bank foreclosures. Bank foreclosure properties have long been the most common type of foreclosure acquisition, but they do not get much attention when there are other ways to acquire properties for flip deals or longer-term renovation strategies.
As long as flippers can do deals by using off-market leads, investing in pre-foreclosure properties, or even via foreclosing on the secondary market by taking over a foreclosure-eligible debt from another investor who does not want to complete the foreclosure, bank foreclosures are going to remain at the bottom of the list when it comes to ways to acquire investment properties for deals. However, when inventory gets tight, investors start looking more closely at the opportunities bank foreclosure properties afford.
Because these properties may often be acquired at deep discounts, they are very attractive to flippers in particular. However, there are three things you must know about bank foreclosures before you buy. Fail to factor in these three characteristics when you do your evaluation of a potential purchase and you could find yourself in possession of a full-fledged money pit you simply cannot get off your hands.
#1: Bank foreclosures are the most common type of foreclosure acquisition.
When a borrower stops paying their mortgage and does not bring the loan current before the lender (a bank, in this case) opts to foreclose on the property, then the bank starts the foreclosure process. While real estate investors are often very familiar with the foreclosure process from a variety of other perspectives as private-money lenders or from dealing with motivated sellers, they often completely overlook the fact that the vast majority of foreclosures happen in the “conventional” way when the bank takes back the house. However, that number is still very low compared to the number of properties in the United States. At the height of the housing crash, just over 2 percent of all mortgages were in some stage of foreclosure.
Here’s the pitfall:
Many investors assume that since there are so many bank foreclosures available, they must all be good deals. As a result, they make deals that do not necessarily make sense in order to grab one or even dozens of these properties. Not every bank foreclosure is going to work for your investment strategy, so be sure to consider every angle before making an investment.
#2: Not every property makes it to the auction block.
Have you ever heard the term “cherry picking”? In real estate, it is the process of picking a select few properties or deals out of a larger bundle of deals, then selling off the rest. This is a very common practice when it comes to bank foreclosures because it is much easier for a bank to work with a known investor who has already proven to be a reliable buyer than it is to auction off properties individually. In cases where a bank opts to sell to a known entity in large quantities, you may hear the process referred to as a “bulk REO (real estate owned) purchase.” In the case of bulk REO deals, the investor making the initial purchase may choose to “cherry pick” a few great properties off the top, then sell the rest of the properties off in bundles or individually. Often, investors able to work directly with the bank are able to acquire the best bank foreclosure properties long before the rest of the properties ever make it to auction.
Here’s the pitfall:
If you are buying at auction on a one-by-one basis, you may very well not be seeing the best the bank has to offer. Someone with more buying power and a connection to the bank likely already acquired those properties. Investors getting started with bank foreclosures will do well to establish a relationship not just with banks selling foreclosures but also with investors or investment groups that already have those relationships. They may represent a good source of bank foreclosure deals for you.
#3: Nearly every bank foreclosure will require some level of repair, possibly an eviction, and a deep level of knowledge and experience in order for an investor to be successful.
Make no mistake: Lots of real estate investors make a great deal of money by investing in bank foreclosures. However, take a minute to think about the bank foreclosure process. There are a few things you should be sure to consider:
- It’s relatively long.
Even in states that permit fast foreclosures, a bank is not a fast-moving entity in most cases. Foreclosures can drag on, which means the property may have been sitting vacant for months or years before you acquire it. If the property is inhabited when you acquire it, the odds are good that the former owner stopped putting a lot of effort into maintenance if they knew they were going to go through foreclosure anyway. - Even squatters have eviction rights in some states.
Most investors have heard the horror story about a house with a squatter that was impossible to evict. They think to themselves, “I would never make that type of mistake. I would just serve those papers and out they would go!” Most investors who have lived the squatter horror story thought that too, only to learn that the state in which they were investing had renters’ rights legislation that could be twisted by a savvy squatter into months or even years of free residence in the property. Violating renters’ rights is a crime even if the “renter” in question has never paid you a dime. You have to work within the system, and sometimes that can take some time. - The bank has one goal, and it’s not looking out for you.
If you have ever purchased a foreclosure property from another investor or even directly from a motivated seller facing foreclosure, you know that the process is not always easy. Property owners facing foreclosure do not always know everything they should about their property. They may lie because they are embarrassed or because they think if they tell the truth about a property’s condition, you will refuse to buy it. Generally speaking, however, it is far easier to work with an individual in foreclosure than a bank because the bank is simply not in this for you in any way, shape, or form. In many cases, the lender does not have the bandwidth to answer questions about a property, and public information may be outdated. You will likely be unable to walk through the house or inspect the inside before you buy. Acquiring bank foreclosures requires a special type of analytic skill and expertise because you must be able to make educated assumptions about a property without a lot of access.
If all of this information has you writing off the idea of acquiring bank foreclosures, do not be discouraged! There are many ways to learn about bank foreclosures from the secure position of a passive investor by working with an investment firm that already has experience with bank foreclosures and, to make the situation even more attractive, has the buying power to acquire those foreclosures at deeper discounts than any investor purchasing these properties one at a time can hope for.
A reliable investment group should be able to provide you with the following before you invest so that you know your funds are being used wisely and carefully and the investments made for you are strong:
- Personal references from other clients
- A detailed history of past investments
- Evidence of expertise in your investment strategy of choice
- Explanation of the market of choice in terms of market conditions and investment strategy
- Detailed information about alternative exit strategies
- Access to a transparent platform where you can monitor your investment capital
An investment group that is truly dedicated to evaluating every market before moving into that market and selecting only the best deals for its clients will easily be able to provide you with this type of information because the materials will already exist. Some groups even have systems in place that enable passive investors to retain full ownership of acquired properties even though the passive investors do not handle acquisition, management, or liquidation of the investment property.
Charles Sells is the founder and president of PIP Group, one of the largest real estate investing agencies of its kind with more than 700 investors worldwide. PIP Group represents investors large and small, doing hundreds of thousands of transactions representing tens of millions of dollars each year. Learn more about PIP Group, bank foreclosures, and push-button, turnkey servicing for your investment properties at PIPGroup.com.