Saturday, February 18, 2006

Buying Foreclosures: A Good Investment for Young Professionals?

Robert Kiyosaki, of "Rich Dad, Poor Dad" fame often tells us how important it is to have positive cash flow rather than just relying on capital gains. This is why he advocates real estate investments such as rental properties rather than just buying stocks and index funds and watching them appreciate. I personally don't think that his way is the only way to accumulate wealth, I think that I would be just fine with my current strategy (401(k), index funds, some stocks, my home), but I do think that it would really help. My personal motto is something along the lines of "you can never have too much money," so I think that getting into real estate investing could only help me accumulate more wealth faster.

One good way to invest in real estate (separate from your main residence) is to find good values, fix them up, and sell it for a profit. Well, what better way to find a good value than with a foreclosure. For those that don't know, a foreclosure is basically what happens when people get in over their head and cannot pay off their mortgage. The bank just wants to get back as much of their money as they can, so they auction the house off at a discount. There are three types of foreclosures, you can buy directly from a homeowner in trouble, buy from the bank that has repossessed the home or buy at public auction. According to the Money Magazine article entitled "Foreclosures: Bargain hunters beware!" houses that have been foreclosed sell for an average of 15% less. Not too shabby a start.

However, buying foreclosures apparently isn't all sun and profits. According to the article, many of the best real estate values have already been bought up because more and more "regular people" are getting into real estate investing and flipping houses. I hopefully haven't missed the party, but it stands to reason that once TLC has a show about it, the party has at least been started. The article points out a few common misconceptions to steer clear of in order to still turn a profit buying and selling foreclosures.
  • Myth no. 1: A big spike in foreclosures is right around the corner.
    One would think that because of the housing boom over the last 5 or so years that a lot of people may have gotten in over their head with their mortgages, especially with some of the exotic mortgages. What happens when that adjustable rate mortgage rate rises to an unaffordable level? Used to be that the banks would quickly try to take their property back to recoup some of their money, but not so much anymore. Now banks realize that it is better for them to help people having trouble paying their mortgages rather than go through the long foreclosure process.

  • Myth no. 2: Foreclosed houses sell for far less than their market value.
    In certain "hot" areas, foreclosures may not be discounted at all. The other part of the foreclosure equation that needs to be taken into account is how much it will cost to fix the place up.
  • Myth no. 3: Anyone can make money in foreclosures.
    Obviously not true...otherwise everyone would be doing it. There is always a chance that you will overpay or have to put too much money into the property to fix it up. The article points out that foreclosure auctions can be especially risky. Rick Sharga, vice president of marketing at foreclosure listing site RealtyTrac.com says of auctions, "You are buying the property sight unseen, and you will be responsible for any taxes, liens or second mortgages still on the property." The article also points out that you could be responsible for evicting someone still living in the house.

So, the question remains...is buying a foreclosure a good move for a Young Professional? I am still not sure, I think that there is a lot of issues to take into consideration and many potential pitfalls. It could also turn out great and net me some extra money. It is something that I would like to try at least once, just to see how it goes. If anyone has any experiences that they would like to share, I would love to hear about it.

9 Comments:

Blogger Dus10 D said...

I really like the idea of buying from the homeowner. I was actually in this situation myself, back in 2000. I had owned my home for just over eight months, and catastrophe occurred. The bank allowed me to sell the home for far less than what was owed on the property.

One thing to consider with this situation is that the family still needs somewhere to live. So, since they already live in the home, pehaps you can buy it at a substantial discount, and lease it right back to them. Maybe they had some issues and they got behind, but they can make the payments... it is just difficult to catch up. Well, since you purchased the property, the old debt is gone, and you already have a tenant. After a couple of years of rebuilding their credit (something you could help them with), perhaps they can purchase the home back from you at a good profit. The family keeps the home that they were going to loose, and you get paid for helping them.

2/21/2006 8:42 AM  
Anonymous allen cooper stock analyst said...

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9/29/2008 2:53 AM  
Blogger Brijesh said...

This blog is really nice and informative. We are pleased to know this blog is really helping people and it’s our pleasure to post informative content on this useful blog created by webmaster.

Here’s our market view on American stock market for 10th October, 2008

The stock market has collapsed - since Sept. 19 the DJIA is down 25% and the S&P 500 is down 28% and down 42% from a year ago.

How can this happen so quickly and so dramatically when so many good things have occurred? Oil is down to $82 a barrel; interest rates are very low; the dollar is up; valuation levels are extremely attractive among many blue chip stocks.

What's the real problem? The problem that is killing the stock market is a lack of hope about the future.

Hope springs from optimism that is based on facts and history. Look at the history of America and really all of mankind. Life is full of setbacks and problems - that's just the deal. But this too shall pass, as all scary periods have.

Doomsayers have been around forever and their batting average is zero. Buying stock is based on hope - hope for the future. If one doesn't have hope, they shouldn't be in this business.

So what is the best service we, as professionals, can provide for our clients?

First, discuss the fact that we are dealing with serious problems but it is not at all like 1929. The Federal Reserve and the Treasury Department are doing many things to restore confidence in the financial system. There is global coordination in attacking the problem, which is lack of confidence.

Tell your clients to look at history of our great nation and what has happened since 1776 when we faced very serious problems. The stock market actually rose steadily about six months after Pearl Harbor and until the end of WWII even though the outcome was not at all clear for several years.

No one knows when the stock market will bottom and a new bull will commence. We do know that stocks and mutual funds offer the best values we have seen since Black Monday, Oct. 19, 1987.

Almost all Americans have hope about the future of our nation, but they need help to control their normal fears.

ThePowerStocks.com Team
Get 56 days free trial on ThePowerStocks.com exclusive newsletter. Offer Limited.
http://www.thepowerstocks.com

10/14/2008 2:51 AM  
Anonymous ThePowerStocks.com Team said...

This blog is really nice and informative. We are pleased to know this blog is really helping people and it's our pleasure to post informative content on this useful blog created by webmaster.

Here's our market view on American stock market for 13th October, 2008

You all know my opinion - we have the characteristics of at least "a" bottom. Look at the scoreboard - Dow and S&P 500 down 18% last week, in only a week. If that doesn't show irrational dumping the only other environment that probably would is an official end of the world pronouncement from on high.

The VIX Index (69.96) soared to a record high; bears at extreme high levels, bulls no where to be found; valuation levels the best since Black Monday, October 19, 1987. And back then you could buy AAA long term munis yielding 10% or better vs. around 4.75% today.

No one can call bottom in advance with confidence, but we can correctly report that the conditions for at least a bounce are in place, assuming we are not headed for a 1929 depression.

We are not, but don't take my word on this. Last Tuesday, Oct. 7, Gary Becker the 1992 Nobel economic laureate, professor of economics at the University of Chicago stated in the Wall Street Journal - "we're not headed for a depression."

He states, "World economic growth will recover once we are over the present severe difficulty." Also he states, "Although it is the most severe financial crisis since the Great Depression of the 1930's it is a far smaller crisis, especially in terms of the effects on output and employment."

ThePowerStocks.com Team
Get 56 days free trial on our exclusive newsletter. Offer Limited.
http://www.thepowerstocks.com

10/14/2008 8:49 AM  
Anonymous ThePowerStocks.com Team said...

This blog is really nice and informative. We are pleased to know this blog is really helping people and it's our pleasure to post informative content on this useful blog created by webmaster.

Here's our market view on American stock market for 16th October, 2008

Stocks sold off sharply yesterday and the major averages have given back more than two thirds of the advance from last Friday's lows to Tuesday's highs.

The session got off to a bad start as investors began to react again to economic news: specifically, pre opening, the September retail sales and October Empire Manufacturing index were disappointing and stock futures sold off.

Pressure on the market came throughout the session on light volume in what we think was a classic buyers' strike after the significant volatility the past few sessions.

Many market participants were just content to stand aside and let the dust settle. Adding to the selling pressure was further second guessing of the government's rescue plan that we spoke of Tuesday carrying into yesterday's session.

The CBOE Volatility Index, the VIX, rose more than 14 points to 69.25, just shy of its record close reached last Friday at 70. The CBOE NASDAQ 100 indicator reached a new new record close at 72.93.

The number of bulls in the Investors' Intelligence survey fell to another multi-year low at 22.4%. The internals of the market were overwhelmingly negative: NYSE issues 8/1 negative and 97% of the volume to the downside. NASDAQ issues were 6/1 negative and 98% of the volume was to the downside.

Based on the extreme fear and dramatic sell-off on big volume last Friday, we believe the market has probably seen its lows for this bear market but a full retest is underway. Today - Worldwide markets were down overnight and U.S. stock futures are signaling flat to lower opening. Today will be a big test for the market.

ThePowerStocks.com Team
Get 56 days free trial on our exclusive newsletter. Offer Limited.
http://www.thepowerstocks.com

10/17/2008 3:21 AM  
Anonymous ThePowerStocks.com Team said...

This blog is really nice and informative. We are pleased to know this blog is really helping people and it’s our pleasure to post informative content on this useful blog created by webmaster.

Here’s our market view on American stock market for 17th October, 2008
The major stock averages had another dramatic day of swings yesterday, the Dow reversing from down 380 in the morning to close up 401 points. The averages finished just shy of their highs of the session and the NASDAQ Composite led the way.
Stocks briefly rose at the opening, then reversed lower as a plunge in the October Philly Fed index (reported -37.5 v. estimated -10) and disappointing reading on September industrial production (reported -2.8% v. estimated -0.8%) weighed heavily. Follow-through selling from Wednesday was also a likely factor adding to the pressure on stocks.
The measures of fear again reached record levels in the morning plunge. The CBOE Volatility Index, the VIX, and the CBOE NASDAQ 100 volatility indicator both rose to new intraday all-time highs of 81.17 and 84.62, respectively. Stocks steadily slid to their late morning lows. At that point, the DJIA was down 380 and the NASDAQ 62 point and the internals of the market were overwhelmingly negative for both the NYSE and NASDAQ.
From the lows, the Dow rallied more than 500 points in an hour, gave back 200 points from their early afternoon peaks and settled into narrow ranges. A late acceleration sparked another 500-point rally up to the close. With the stock market successfully holding onto to their gains, the VIX and NASDAQ Volatility indexes eased back into their closes. The broad market finished solidly positive. Volume picked up substantially from the previous day's low levels.
Today - Volatility will also rise as a significant amount of options expire in a triple-witching session. The opening looks lower.
ThePowerStocks.com Team
Get 56 days free trial on our exclusive newsletter. Offer Limited.
http://www.thepowerstocks.com

10/18/2008 6:38 AM  
Blogger james hill said...

Excellent content - as you always provide and inspires me to come again and again. You are on my RSS reader now so I can read more from you down the road.
By the way, there is one more valuable resource I'd like to share with others readers. It's called Secrets of Successful Traders that teaches you…
How to turn $1000 into $ 1MILLION in 5 years or less using nothing but...
" a brokerage account (so that you can trade),
" $1000 in a pocket
" And one 'jealously guarded' strategy that won't even require you to spend 20 minutes a day.
For more info & special discount, visit: http://www.2stocktrading.com/discount.html

11/01/2008 3:55 AM  
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7/21/2010 2:02 AM  
Anonymous triple net lease properties said...

There's no doubt that buying foreclosure can be done, but it can be very challenging. Two important tips to remember when buying foreclosures is to always have your cash ready and determine what your maximum budget is. If you have money ready to invest, then you are ready to start looking for the right foreclosure to make an offer on.

3/15/2011 2:20 AM  

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