How to Buy and How to Sell Them

Everyone loves a fixer upper - everyone, that is, who can recognize a bargain and appreciate the rewards that come to those who are prepared to work. Almost every neighborhood ha at lease one house that falls into disrepair for one reason or another: divorce, bankruptcy, the death of the breadwinner, economic changes that have closed industries. Such changes are all opportunities for the buyer of distressed property.

This case study describes the purchase of a run-down property that, with a few improvements, could become a highly desirable property that virtually sells itself - at a handsome profit.

In the course of reading the case study you will learn:

• How to make a 100 percent return with very little cash investment
• What action the County Assessor takes if you neglect to pay your personal property taxes (Certificate of Delinquency)
• What action the state can take for nonpayment of state income taxes
• About personal property tax and how you find out about it
• To turn those negative termite and roof inspection reports to advantage 
• Who will buy your fixer-upper before you lift a hammer or a paint brush
• The benefit of using a conservative appraiser
• To price the property to sell
• To be a marketing genius

Location defaults and Trustee's Sales in the major investment in time that the foreclosure buyer must make. Legal newspapers, county records, internet, professional service companies that specialize in researching records all will help you find these unusual properties.

Sales of distressed property are not part of the normal real estate market. most agents don't want to handle distressed property. they consider this business, which is essentially one of solving the distressed owner's problems, beneath them. Take advantage of this market. Only a few hard workers will spend the time to seek out the bargains. It does take time because in most circumstances, you will find properties in which there is no equity or that require extensive repairs, modifications, or financing. These you will reject. But if you do have the patience to follow the market, send letters, make telephone calls, knock on doors, hang door hangers, and generally pursue the foreclosures, your persistence will pay off.

A CASE STUDY    

The following case study describes the purchase of a foreclosure property in California that, with very little money, yielded a profit of more than 100 percent in less than six weeks.

The customer responded to a direct-mail letter and what we found was a real fixer-upper. In spite of looking bad, this property had the potential to produce significant profits for the investor who was willing to work, investigate local values, and research the buyers' needs.

When sellers, the defaulting homeowners, respond to direct mail, we always complete a Property Evaluation Questionnaire and attempt to make an appointment to visit the property. Such visits will allow you to assess the neighborhood and the actual structure. If the neighborhood is deteriorating and the home is beyond repair, you will just cancel the appointment and not attempt to write an Equity Purchase Agreement. However if, after talking with brokers, checking the MLS for comparable sales and talking with homeowners in the vicinity, you find that the neighborhood is improving and property values are likely to rise (upward appreciation), you'll want to pursue the purchase further. 

We knew that the mortgage payments on the property had been in default for a number of months. after the owners had signed the Equity Purchase Agreement, we asked them to obtain from the mortgage holder a breakdown of the outstanding amount. According to the reply from the mortgage company, the owners had not paid the mortgage since September of the previous year, a total of eight months. This letter confirmed one of the major costs our proposed purchase: more than $10,000 would be needed to cure the default.

After the five-day right of rescission, which is required by the California Civil Code, had expired and the sellers had chosen not to cancel the Home Equity Purchase Agreement, a more detailed Preliminary Title Report was requested. The report confirmed the loan was in default and had been so for more than four months.

Tax Liens

The Preliminary Title Report also included other documents pertaining to the ownership of the property. We were particularly interested in information about taxes. We already knew that the second installment of the city and county taxes was still to be paid. But we know from experience that homeowners in default have numerous problems. Unpaid taxes, unpaid alimony payments, child support, and a myriad other encumbrances are normal. The title officer continued to search the county records and found more liens. Five certificates of Delinquency of Personal Property Tax and a State of California Franchise Tax Board Lien were on file.

It is important that you, as a buyer, research and understand the lien situation on any property you are buying. It is possible for the seller to have an encumbrance or lien against himself or herself personally that does not encumber the real estate. As always, the three-letter word is ask - ask the title officer, ask your attorney, ask your CPA, or you could make the big mistake of buying property with more liens than value.

SETTLEMENT

Settlement day with the seller is something the foreclosure buyer should consider carefully. At the time the Home Equity Purchase Agreement is signed, the costs of buying the property are largely unknown. The seller is likely to have a fixed notion of the sum to be paid for his equity and will tend to discount the subsequent costs. If the seller is prepared and kept informed of your findings, he will be prepared for the results. 

If you purchase a home with known defects such as termite damage or roof leaks, you are considered an informed buyer in consenting to the purchase. Most buyers would require the seller to credit them with the amount of the repairs at the escrow or they would require the repairs be completed. Foreclosure buyers want the credit at the conclusion of the contract and then they will search for contractors or a handyman to perform the repairs at lower prices and by doing so improve their profit margins.

HOW DID WE SELL IT?

In selling the house, we kept three things in mind:

1. We had to know our buyers.
2. We had to make our advertising count.
3. We had to price the house to sell.

Knowing the Buyer

Ask yourself: Who does this house appeal to? Why would they buy this home? Where would they look for a bargain? Is this a bargain? If so, can we prove it?

Advertising to Effect

Determine which newspaper the bargain hunter will read and advertise there - in local newspapers and penny saver. Write an ad that appeals to the buyer looking for a fixer-upper.

Young couples and bargain hunters are the most logical prospects for fixer-upper house. The young couples understand that profits can be and will be made by using so-called sweat equity. For those few who are willing to work and willing to clean up and fix up the problems of others, the properties that are in disrepair provide the place to start. Almost everyone has a relative, friend, or acquaintance who purchased a house, fixed it up, and sold it for a large profit. If a wealthy investor and almost always will be a person who can work with his hands and has saved enough money for that first down payment. This same skillful person is willing to accept less than perfect just to get started in the world of real estate and homeownership. Another prospective buyer might be a handy person who understands home repair and how to do it economically.

Pricing the Property

Price the property to sell; forget top dollar. The Property Profile you receive from the title company will show selling prices in the neighborhood. From these, you can evaluate your appraisal.

Summarizing

The costs to purchase included curing the default on the first loan, one month's mortgage payment, and fees for the appraisals and home inspections:

COST TO BUY

• Mortgage Company (to cure loan and penalties)                        $10,000
• Termite Report                                                                            250.00
• Roof Report                                                                                250.00
• Cleaning Costs                                                                            500.00
• Home inspection report                                                               300.00
• Appraisal fee                                                                               300.00
• One month Payment                                                                   2,200.00
•     TOTAL                                                                                  13,800.00
• Balance, on re-sale                                                                      47,000.00
•    PROFIT IN 42 DAYS                                                            $33,200.00