Flipping Real Estate?

[mykidslovedogs]

I was just wondering if any of you have ever been involved with this relatively new "get rich quick" idea involving "saving" people from foreclosure by purchasing their houses way below value and then turning around and either reselling at or slightly below market or renting the house with a lease option to purchase contract?

One of my siblings is checking into this as a money making opportunity, and I was just wondering what some of this forums' comments are on the subject....what the biggest risks are, etc... Apparently, there are just thousands of people out there that have gotten themselves into big messes with potential real estate foreclosures, and there are all kinds of people now taking advantage of the situation. I keep seeing seminar advertisements on how to get into this "market".

Has anyone had any sucess with it or failures? Just curious.

Oops! Did I put this in the wrong forum? Sorry if I did. I'm kinda new.

 

[mathjak107]

usually people that are so far behind are behind on their taxes too as well as the house usually in need of big buck repairs. we have a friend who buys tax liens. its now 2 years he is trying to evict the old owner with all the court delays. lucky hes a builder as there is soooooo much needed in the house . 2 years of current taxes are over 12,000 bucks plus all the back taxes he had to pay off. its really not an amatuers game because by the time you hear about the forclosures its because the big players are passing on it.

 

[jazz4cash]

I can't imagine it's all that new, but in my area there is an upsurge in signs on telephone poles that say "we buy homes for cash", and then there's Ugh on late night commercials.

There's not much of a "get rich quick" mentality around here, so I would agree this is probably the wrong forum.

 

[d]

There's not much of a "get rich quick" mentality around here

... more like: slow 'n steady

 

[wabmester]

I don't think it's so much "get rich quick" as it is W-O-R-K. Most people around here like passive investments, and making money from preforeclosures is basically a J-O-B.

I'm sure you can make money at it (one of my friends does), but there's a ton of work involved, and a declining market may give you more preforeclosures to choose from, but you'll have to get the discount and timing right to make a profit.

 

[Craig]

There will probably be money here again, but I doubt most of the country is in enough of a down market to make this even very doable right now ... it will never be truly easy. And, there are many more competitors ... the word got out on fixup houses.

I don't believe in the flipping mentality either. The TV show "Flip That House" is really terrible. If you notice, they don't actually "sell" the house on that show ... they just have a realtor tell the sucker investor what the place is supposedly worth after their fixup expenses. [It is the rare realtor who is honest in value estimation ...] They not only do not tell you what the house really sells for, they leave out the buying and selling fees, commissions and expenses, as well as the holding costs each month ... taxes, interest, utilities and maintenance. Bogus.

We'll probably buy some foreclosure real estate in the next couple years, but we'll recognize the brain damage, probable extended holding / renting period while the market recovers, and the fact there are many expenses between the purchase and ultimate sale.

One of the nice things about real estate, by the way, is the 1031 exchange ... an ability to move investment real estate dollars from property to property, without incurring income taxes. Cool.

I think most of the folks making money on flipping houses traveled from hot market to hot market, and moved quickly ... plus those wonderful folks on late night TV convincing everyone how easy this all is.

 

[Nords]

I was just wondering if any of you have ever been involved with this relatively new "get rich quick" idea

I don't think it was new when P.T. Barnum was marketing it. But the seminar people are doing a "land office" business.

Don't fall into the Kiyosaki cesspool. Do your own research, starting with: (1) Investing in Real Estate, 4th edition or later, by Andrew McLean & Gary W. Eldred (who's taken over the new editions) and (2) Landlording by Leigh Robinson (7th edition or later).

You'll be able to make a more objective determination of "easy", and then you can decide how "quick" you want to make it happen...

 

[cube_rat]

What cracks me up about "flipping" is that young investors think they've invented a new way of making money in real estate. I worked for people who were doing this back in the 80's. They didn't call it "flipping" either. :

 

[lazygood4nothinbum]

you can pick up my inherited house at $2-300k below it's alleged mid-2006 value. you can try to get if for less but we'll just play a stand-off game and wind up renting it out to cover costs. ok, for you, maybe we'll come down another $50k.

there's been some local articles on purchasing preconstruction condo contracts at cost. don't know how all that works. my feeling is that they won't flip, but rather you'd have to hold for a while. the condo market here is only starting to fall & i think it will fall a lot farther than our houses. there's also vulture funds forming. one guy in west palm beach (i think) wants $5mm per investor to buy in.

after this little lesson in the illiquidity of real estate, i might never own again. on the one hand i suppose it doesn't normally tank as fast as the market can. but on the other, if it does, there's no way out. so basically, i've inherited a very expensive house, that unless someone buys it, is just an expensive burden. not so easy to flip.

 

[mykidslovedogs]

there's been some local articles on purchasing preconstruction condo contracts at cost. don't know how all that works. my feeling is that they won't flip, but rather you'd have to hold for a while. the condo market here is only starting to fall & i think it will fall a lot farther than our houses. there's also vulture funds forming. one guy in west palm beach (i think) wants $5mm per investor to buy in.

My Dad just bought a condo in Breckenridge, CO this year, and he said it is already worth $400K more than what he bought it for. But, then again, that was my DAD talking. You never know sometimes if he is stretching the truth! He had pre-qualified for it in the pre-construction phase, and he just closed on it a few months ago. So far, it has been renting well, but I still have my doubts as to whether or not it will end up having been a good investment.

 

[lazygood4nothinbum]

well people did seem to be making 200% in two days in the day. lottery lines outside condo sales office at 3 in the morning. complete insanity. even with hurricanes and insurance & tax issues south florida is still a lot more desireable and a lot cheaper than many metropolitan areas around the country so our population will still increase and money will still be made, but instead of flipping flapjacks, we'll just be turning omelettes for a while.

 

[Texas Proud]

I had heard that one guy at work had to do the 'Ugh' thing....

BUT, they DON'T buy your house... just a contract to purchase... then they make payments etc. for awhile, fix it up if they can.. try to sell, try to rent etc... if they can't do it quickly... then they just let you have your house back...

BTW... they don't pay you much for the house... it was at a discount to the appraised value.. (believe it or not, some people actually have equity in a home that is forclosed... I have seen it when I was a trust officer in single family housing bonds)...

 

[lets-retire]

My wife has an uncle who had done this for several years and grew very wealthy and retired because of it. Once he got out of the Coast Guard I think this was his full time job. Normally he'd find the houses, fix them, then rent it for a couple of months, before selling it. I don't know why, unless he was hoping for a little extra appreciation, or he was selling them to the renters. He was saying during the bad markets he would just hold the property for a few months before selling and be a landlord, until the market started to recover. This was during his last few years flipping, so I don't know if he would have done it while he was cash poor.

 

[mykidslovedogs]

My wife has an uncle who had done this for several years and grew very wealthy and retired because of it. Once he got out of the Coast Guard I think this was his full time job. Normally he'd find the houses, fix them, then rent it for a couple of months, before selling it. I don't know why, unless he was hoping for a little extra appreciation, or he was selling them to the renters. He was saying during the bad markets he would just hold the property for a few months before selling and be a landlord, until the market started to recover. This was during his last few years flipping, so I don't know if he would have done it while he was cash poor.

My sister says that what she has been taught so far is you can take over the mortgage, with no downpayment if you have good credit. (she is in the mortgage business, so she has contacts who can give her leads on the pre-foreclosures). Then, what the buyer ( I mean the person who takes over the mortgage) will do is rent the house with a lease option to purchase, which means they get a premium from the prospective buyer (the lesee) to purchase the house at a set price after a certain period in time. If the person (renter) is unable to purchase at the end of the contract period, the landlord keeps the lease option money and then turns around and either sells the house at that point in time or re-rents with another lease option tagged to the contract.

From what I understand is you can use the lease option money to fix up the house (if it needs it) between rentings without having to put much of your own money into the house at all.

What she's telling me is there are people doing seminars who already have systems in place to help their students suceed. They give you their contacts for good realtors, contractors, appraisors, etc.. who they have been working with successfuly. You use their contacts to start your business, and that way, supposedly, you don't have to do all the research on your own. I'm a little suspicious, because, if these guys are so successful, why would they want to do seminars and create competition for themselves? My sister says that "they" say there is plenty of pre-forclosures to go around, so it's not going to hurt them to create competition for themselves. Supposedly, the biggest upfront cost is figuring out how to market yourself so the people who need to be bailed out can find you.

 

[brewer12345]

My sister says that what she has been taught so far is you can take over the mortgage, with no downpayment if you have good credit. (she is in the mortgage business, so she has contacts who can give her leads on the pre-foreclosures). Then, what the buyer ( I mean the person who takes over the mortgage) will do is rent the house with a lease option to purchase, which means they get a premium from the prospective buyer (the lesee) to purchase the house at a set price after a certain period in time. If the person (renter) is unable to purchase at the end of the contract period, the landlord keeps the lease option money and then turns around and either sells the house at that point in time or re-rents with another lease option tagged to the contract.

From what I understand is you can use the lease option money to fix up the house (if it needs it) between rentings without having to put much of your own money into the house at all.

That's all fine and well, as far as it goes. I think what should be thoroughly examined in any sort strategy involving leverage (out the wazoo , in this case) is what happens if things go wrong. I can envision a scenario in which you buy a pre-foreclosure that turns out to have expensive problems, or having a tenant who doesn't pay rent and forces you to hire a lawyer to evict them, etc. Best to plumb the downside here very thoroughly.

 

[ZMAN]

This is a dangerous way to try to make money. The people I know who do it well, do it full time and do nothing else. You need to buy way under market (and you better really know the market) to factor in legal contingencies such as bankruptcy filings resulting in a "stay" of your rights, foreclosure costs, eviction costs and title issues. You really need an all purpose lawyer on board for all these issues and have a bunch of guys to do the fix-up work.

In New York State you need to be aware of the difficulty of the foreclosure and eviction process. The Attorney General, at least in my upstate area, is always on the lookout for predatory lending and flipping issues. Last but not least is the possibility of being pulled into housing court for some violation or another, and being subject to that circus.

I say go with Vanguard and save yourself the headache.

 

[Martha]

There are a variety of twists on taking advantage of the foreclosure market.

In a declining market, buying from the owner and assuming the mortgage has some risks. One risk is that the buyer is in fact upside down on the mortgage and the property is worth less than the mortgage balance. Also, if you get a lender willing to have you assume the mortgage, be sure that the mortgage allows the property to be occupied by tenants. Many mortgages don't allow that. Also, be sure you know your rental market. In some markets rents are not high enough to cover mortgage payments. This seems to be common in California where the housing prices exceeded rental value.

I know some people who buy properties that they believe have value over and above the mortgage balance. They usually do it by either bidding at foreclosure sales or buying the lender's position if the lender got the property at the foreclosure sale. In my state, there is a six month redemption following the foreclosure sale. There are people who carefully watch pending foreclosures to see if there may be a deal. The deals are few and far between.

A neighbor down the street was facing foreclosure. She worked hard on selling her property before the foreclosure. No luck. She finally lost it to foreclosure and the lender has the property for sale now. The neighbor owed about $310,000. The property is now for sale at $229,000. No bites yet after about six months on the market. If the property doesn't sell, the lender may drop its price until it does or may auction the property, or sell it as part of a package to someone else who will sell it.

 

[mykidslovedogs]

A neighbor down the street was facing foreclosure. She worked hard on selling her property before the foreclosure. No luck. She finally lost it to foreclosure and the lender has the property for sale now. The neighbor owed about $310,000. The property is now for sale at $229,000. No bites yet after about six months on the market. If the property doesn't sell, the lender may drop its price until it does or may auction the property, or sell it as part of a package to someone else who will sell it.

See, that's what I was wondering about is...Why would someone facing foreclosure not first try to sell slightly below market and get out vs. letting someone assume the mortgage or buy you out and take an even bigger hit? The fact that the person facing foreclosure is having trouble getting out should be your first clue that the house might be a bad investment. But, what I am being told is that many of the people facing foreclosure just can't take the risk of waiting to sell the house...instead, they would rather take the big hit than let their credit be destroyed?

Yes, I imagine this whole concept can be pretty risky....I'm not planning on jumping in anytime soon. If anything, I'll wait and see how my sister fares with it before I jump in. I'm going to give her a printout of everyone's advice too. Being that she is in the mortgage industry, one thing she has to her advantage is that she is aware of the risks of assuming mortgages, so that at least gives her a little bit of advantage and I'm sure she would be careful about checking into everything on that side before jumping into anything.

 

[califdreamer]

Another consideration is most mortgages are not assumable. Investors often take the seller's loan "subject to". If the lender finds out the property has been sold "subject to" and the loan is not assumable, they can demand payment in full. One way lenders find out about the sale is through the appearance of the new owner's name on the hazard insurance policy.

 

[brewer12345]

Another consideration is most mortgages are not assumable. Investors often take the seller's loan "subject to". If the lender finds out the property has been sold "subject to" and the loan is not assumable, they can demand payment in full. One way lenders find out about the sale is through the appearance of the new owner's name on the hazard insurance policy.

Fixed rate mortgages generally aren't assumable, but most ARMS are, especially if you have good credit.

 

[lets-retire]

Fixed rate mortgages generally aren't assumable, but most ARMS are, especially if you have good credit.

I've always had fixed rate mortgages and all of them have been assumable, subject to the investor's (organization providing MI) approval.

 

[brewer12345]

I've always had fixed rate mortgages and all of them have been assumable, subject to the investor's (organization providing MI) approval.

Sure, but the holder of the note is unlikely to want to give you the approval if the rate is below market. ARM note holders have less incentive to say no because the note is usually at market.

 

[lets-retire]

I misexplained. It wasn't the note holder requiring approval it was the provider of the mortgage insurance.

 

[Martha]

Gee, I am not at work so I can't check, but I believe that the standard HUD form mortgage is not assumable.

 

[tryan]

idea involving "saving" people from foreclosure by purchasing their houses way below value and then turning around and either reselling at or slightly below market or renting the house with a lease option to purchase contract?

The assumption with this scheme is that the owner has equity in the house and is willing to part with some equity to facilitate a sale. If the purchase price is below the loan amount, a short sale has to be negotiated with the lender - good luck with that! The "creative" lending practices of the last few years will ensure most owners facing foreclosure have no equity.

Where I've had better luck is shopping REOs post foreclosure. Idea being that the lender has tried auctioning and marketing the place .... thier REO manager is tired and motivated to move the oldest of his holdings. A low-ball offer will be entertained if they've held the place 6 months or more. Then all the fun previously mentioned takes place: evicting dead beats, rehabing, insuring the uninsurable ...

Good Luck!