After purchasing a property at a foreclosure sale, investors have the following opportunities to monetize their investment.
Flipping a home involves a quick renovation of the purchased foreclosure property and then selling it on the open market. This allows investors to sell the property at a higher rate than they purchased it for after making upgrades. Flipped properties are an attractive asset for home buyers since they are renovated properties that are listed at a lower price than new homes, which allows the buyer to save money and the seller to still make a substantial return on their investment.
Buy and Hold: Renting an Investment Property
For patient investors, renting a property purchased a foreclosure sale, allows for a steady income stream, though the initial investment will take time to be recouped. If the property is significantly renovated prior to rental, this can be attractive to renters who may be wary of moving into a more distressed property.
Turning Foreclosures Into Rentals
Following the real estate market crash, The Columbus Dispatch reported, “The crash pushed tens of thousands of central Ohioans from their homes, which investors gobbled up to cater to an increase in renters. In the past four years, more than 20,000 central Ohio homes have been turned into rentals, according to the Census Bureau’s American Community Survey.”
This trend has continued across the United States with the Joint Center for Housing Studies revealing that many single family homes have become rentals. Since 2006 the number of tenant-occupied single-family has risen by a third, from 9 million to more than 12 million, which accounts for 29 percent of all rental housing.
Wall Street property investors have also taken note of the trend.
“We don’t have any plans to sell the homes we own,” said Andrew Gallina, a spokesperson for Dallas-based Invitation Homes. “We’re creating a new industry. We’re professionalizing the single-family home-rental market in a way that’s not been done before.”
Wholesale: Buying and Selling Foreclosures Quickly
Wholesaling a property bought directly from the homeowner, from the bank or at a public auction means finding a buyer willing to sign an assignment contract and purchase the property. An assignment contract awards the investor’s right in the contract with the seller to the new buyer for a fee. The key is to buy and sell quickly in order to avoid carrying costs.
Benefits of Wholesaling
According to Lex Levinrad, the CEO of the Distressed Real Estate Institute, “You are essentially flipping a property without ever closing on it or really owning it which means that you do not have to come up with any cash or pay any closing costs or incur any liability or expense. You are not really flipping the property you are actually flipping the contract that gives you the right to purchase the property. This is what wholesalers do and it can be extremely lucrative.”
Purchasing a Foreclosure to Wholesale
The down payment on a foreclosure intended for wholesale consists of the deposit amount that you agree to on the purchase contract. This amount should be held in escrow with a title company. The lower the deposit amount the better since it reduces the risk since if you are unable to sell the property, the seller will retain the deposit.
Inspecting the Foreclosure Property
Purchase and sales contracts allow for inspection period so the buyer can assess the property before making a final decision. Most wholesalers will use the inspection period to market the property and sell it to a cash buyer.
“If the wholesaler cannot find a buyer for this property then they can simply cancel the contract within the inspection period and get their deposit back. If there is a problem or delay in getting the deposit returned (like the seller won’t give it back) or if the buyer has cancelled after the expiration of the inspection period then the deposit will not be returned and will be forfeited. It is for this reason that you should use the least amount possible when placing a deposit on a property that you plan on assigning,” Levinrad says.
BRRRR: Buy, Renovate, Rent, Refinance, Repeat
The BRRRR method of investment involves buying discounted distressed properties, renovating them within a set budget, finding reliable tenants, refinancing the appraised value of the renovated property, recouping your investment, and repeating the process with the profits generated.
BRRRR is effective because it reduces the amount of the investment. When you purchase a property with a loan, the bank will lend according to the market value of the property at the time of the loan. When you take a loan out on a property after it’s been renovated, the bank allows for a larger loan. Therefore, when you buy a property under value, renovate it, then take your money out, you increase your ROI.
“Wealth is built fastest by increasing the value of an asset. Period. Whether it’s rehabbing a house or turning around a failing business, the best wealth builders are looking for opportunity to add value. When talking about real estate, that means adding equity through buying right and rehabbing right,” says David Greene, a real estate investor.
Renting to Own with a Tenant
After purchasing a foreclosure property, an investor may opt to enter into a rent-to-own agreement with a tenant. A rent-to-own agreement includes a standard lease agreement, and an option to purchase, meaning the title will remain with the investor until the tenant exercises their option to purchase the property. The option to purchase allows the tenant to buy the property within a set timeframe in exchange for a fee, which is usually paid up front. Rent to own properties are usually rented at a higher price than traditional rentals. Part of the rental may be applied to the purchase of the property. If ultimately the tenant does not exercise their option to purchase the property, they will forfeit the option fee.
“Lease option agreements, if properly drafted, by and large are an effective way of enabling people to buy who are having trouble arranging financing or coming up with down payments,” says Lawrence Jacobson, a Los Angeles real estate attorney.
Since rent-to-own contracts are usually expected to close within 12 to 36 months, it allows buyers the chance to try out the home and neighborhood without making a definitive commitment. However, the biggest advantage is being able to build up a down payment and improve their credit rating in order to obtain a mortgage.
For example, if buyers purchase a $200,000 home, pay $5,000 up-front and a rent premium of $400 a month on top of their $1,000 rent, they will save $9,800 after one year and $19,400 after three.
Some experts, however, warn against the rent-to-own model.
“The best option is boring, but tried and true,” says Brandon D. Smith, a senior analyst in Los Angeles. “If you’re renting, and can afford higher payments, don’t rent-to-own. Put the difference in an interest bearing account and build up your credit. Have a stable income. If you’re a first time home buyer, you only need 3 percent as a down payment. Then buy a house with a long term, low fixed rate loan. At some point you may be able to fool some sucker into renting to own from you.”
Melinda Estridge Long, a real estate broker in the Maryland-Washington, D.C., area agrees, “It is a complicated deal and very speculative. I have gone down this path with a few clients and have found it to be a large risk for both buyer and seller, as both are required to agree on a price in the future — always a crap shoot,” she said. “It is almost better to do a rent with a possible option to buy when the time comes.”
For some, investment in foreclosure properties may seem like a simple process yet it is necessary to be smart before committing to a investing in foreclosure properties. This means, researching properties available for purchase, as well having a budget in place. Prior to bidding or making an offer on a foreclosure property, investors should take into account all the expenses associated with the investment, including the cost of renovations, legal fees and carrying costs. They should also have a deposit ready and financing in place to make a solid offer. For more information on investing in foreclosure properties, consult our related articles below, which examine foreclosure investment in more depth.