I am honored to have a guest author by the name of Mark Graham. Joe and I have worked with a lot of mortgage specialists since we started selling Real Estate in 2004. I could confidently say that Mark could easily be in the top 10 in his industry in terms of market knowledge here in Reno & Sparks NV. His passion is learning based on market-driven statistics (instead of relying just on personal opinion) this makes him truly a rare bird in the mortgage business.
This article is direly needed for more and more people are getting mixed up with this whole foreclosure SALE deals. Mark shares his interesting insight on this topic...
Foreclosure Flipping, all the Rage?
The question I get asked most by my clients, “Isn’t it a great time to pick up a foreclosure?” After all, the local and national news are continually reporting how Nevada leads the nation in foreclosures. And we hear everywhere how up side down home owners can no longer afford their rapidly depreciating home. So if the American Dream is to own a home, it only makes sense that the American Real Estate Investor’s Dream would be able to buy a foreclosed property at a ridiculously under value price, fix it up and then quickly resell it for an outrageous profit. Flipping Foreclosures for Fantastic Gains seems to be quite the rage for learning to how to turn real estate into a great investment stream.
Now don’t get me wrong, you can and will make a good return on investments with buying foreclosures and turning them into long term investments, but it’s the lure of great returns on quick foreclosure flips that everyone seems to be gravitating towards. I mean the airwaves are literally inundating us with 10 to 15 radio commercials a day, spouting how easy it is to make awesome money by ordering their foreclosure flipping get rich quick systems.
Well before you go running to your favorite mortgage broker, a.k.a. your modern day high limit ATM to see how you can possibly finance the answer to your investment prayers, you should probably know the rest of the story on foreclosure flipping in today’s real estate market.
Let’s look at a very typical foreclosure scenario in our Northern Nevada market that many anxious to stake their claim investors will find: foreclosed 3 bedroom 2 bath house around 1200 sq ft about 10 – 20 years old. I mean these are the ones that we all can really clean up on, right?
Well let’s do the math. The example property in today’s market is listed on the MLS around $200,000 - $220,000, but you are able to purchase this property at an amazingly low price of $132,000, that’s 40% below market! Wow, you just bought a home with almost $80,000 in equity, lots of room for profit, how could you go wrong!
Well let’s dig deeper with this scenario in today’s market. I mean your initial investment after all is only $132,000. In order to actually sell this steal of a home that had been previously listed for 6 months on the MLS without even a decent sniff from a buyer, you’ll need to rehab it. I mean your home has probably been around the block a few times, and I’m sure it wasn’t treated with the greatest respect by the recently court ordered to vacate the premises owners, right? Well better plan on putting in a little bit of window dressing in order to bring the property up to date. You’ll spend $15,000 before you blink on just new carpet, paint inside and out, landscaping, and repairing any small damage. Better budget $20,000 just to be safe and that’s just hoping that really the house was in pretty darn good shape to begin with. Your Investment is now up to $152,000.
Financing, you’ll pay 4-5 % on loan and transaction closing costs on the borrowed money, assuming you can get traditional financing in a very tough to qualify for investment loan market. If you can’t secure traditional financing don’t worry, you’re only looking at 6 - 8 Points from Private Financing Lender, budget 6% just to be safe. Investment now up to $161,120. You’ll likely need to set aside a minimum of 90 to 120 days of financing since not too many properties are selling under 90 days in this market. Now up to $165,145.
At last, now you’re ready to sell your “On the road to riches” fantastic foreclosure property find, but how do you price it out? In order to sell it fast, let’s start at a minimum of 10% under market value, which by the way is now at least 5% lower than Purchase Value due to 90 more days of lowering comps in the market. Price you can sell at $179,550.
Price formula as follows: Original median value of $210,000 for property x 5% Decline = $199,500 x 90% (for quick sell) = $179,550. And the final net back to you proceeds is $166,982. This is the amount, you the seller, receive after factoring out the real estate commissions and seller’s cost (7% to be safe), of course this is assuming that you are one of the incredibly lucky sellers that sold a property at your actual asking price, which doesn’t happen too often in today’s market. So after we minus your Total Investment of $165,145 from the Net Proceeds back to you of $166,982, you have an astounding profit of… $1,836.50…Astounding, No, but Ouch-Standing, Yes!
One last thing to consider if you still want to proceed with this high risk, low reward gamble in this current real estate market, if the above math didn’t already convince you. Let’s say the math is off by 10 – 15%, which it really isn’t, but let’s say for argument’s sake it is. Consider that you will be trying to resell your older foreclosed home in an older neighborhood at about $150 a square foot. Did you know that in today’s market you can find brand new, never lived in before, new neighborhoods homes and town homes going for as low as $135 to $140 a square foot. Yet you’re trying to sell a older not as nice foreclosed property at $150 / ft… So that just makes it much more difficult for the fortune hunting foreclosure flipper to find those fancy urban myth profits out in today’s market.
I don’t mean to come across that real estate isn’t a great way to become wealthy, in fact I believe that real estate is still one of the absolute best ways to build wealth, just not with the get rich quick schemes in today’s market. Only an educated well prepared property investor can make the proper decision. In the future I will cover some of safer ways to build wealth through real estate.
In regards to flipping foreclosures, I’ll pose the question once again, is Foreclosure Flipping becoming the rage or just simply outrageous?
Article submitted by
Mark Graham,
Investment Property & Equity Acceleration Specialist
Summit Funding, Inc
mgraham@summitfunding.net
Comments