Real Estate Q & A
Where To Find Good Realty Investments
By
Jan 28, 2006, 23:39

Sources of potentially good realty investments are almost boundless; you only have to know where to look for them. Nevertheless, if it was easy to locate and purchase bargain priced real estate, everyone would be doing so. Since it is not, you need perseverance to first locate and then buy the right property for you.

On average, two-thirds of all the real estate for sale is listed with a Realtor. But you also have a wide selection from other sources: such as For Sale by Owners (FSBOs), HUD (Department of Housing and Urban Development) property, and various other types of foreclosure property.

NEWSPAPER ADS

You'll find homes and multiunit buildings listed in the classified section of your local newspaper under "Real Estate for Sale." Start by circling with a pen the properties that appear interesting, then cut them out and staple the circled ad to the left-hand margin of a plain piece of paper. Now you have adequate space to make notes adjacent to the stapled-down advertisement.

For Sale by Owners will require you to deal directly with the owners. Begin by calling the numbers in the cut-out advertisements. Inquire into the available financing and the down payment requirements. Ask about the square footage, lot size, condition of the property, and reason for selling. Get as much information as you can. Then, if the property still sounds promising, make an appointment with the owner to
visit it.

WORKING WITH A REALTOR AND THE MLS

A top-notch real estate agent is a priceless asset. A competent agent is looking out for your interest. He or she makes available to you properties you otherwise would not have access to. When you do locate the property that deserves an offer to purchase, your agent will present the offer and help with negotiating the final agreement between buyer and seller.

Once a satisfactory agreement is reached, the agent will follow the transaction through its normal channels, securing any loose ends that might otherwise jeopardize the final closing. To work effectively, the agent needs to know exactly what you're looking for. Thus, give your agent specifics of exactly what you want--for instance, a fixer-upper priced below $100,000, with assumable fixed-rate financing at below 10 percent, requiring a maximum down payment of $7,000.

These are specific guidelines for the agent. An agent has access to the multiple-listing service (MLS), which covers every home listed for sale with a Realtor in your area. It's the agent's responsibility to keep abreast of what's on the market and to be looking for property you are interested in. Furthermore, the agent is important to you because he or she has the key to the lock box that opens the door to all
properties listed with the MLS.

Real estate agents who belong to the MLS have available the M LS book, which is usually published every other week, maintaining up-to-date information on all listed properties. It is an invaluable tool to investors. Once you get to know an agent, ask him or her to lend you last week's MLS book so you can study the listings. 

Once you have a recent MLS book, carefully go through it while noting properties of interest. On a separate sheet of paper, note the property address and MLS page number. Then. later when you call on or drive by the property, you can make notes on the reference sheet. Also, important information regarding recent sales prices is usually listed in the back portion of the MLS book, and this information will help you to get a feel for values in the local market.

HUD PROPERTY

Residential property owned by the Department of Housing and Urban Development (HUD) is a great source of investment. These properties have previously been foreclosed on, were financed under VA and FHA loan programs, and are now owned by HUD.

HUD lists its properties for sale with licensed real estate brokers. Buyers may not submit offers directly to HUD except in circumstances where they cannot obtain the services of a licensed broker. All HUD properties are sold as-is, without warranties. It is the buyer's responsibility to determine the condition of the property.

HUD properties can be financed with or without HUD mortgage insurance. For properties listed "with HUD insurance," the buyer may seek an FHA-insured loan from a private lender and use the mortgage proceeds to buy the house from HUD. For properties listed "without HUD insurance," the terms are all cash to HUD in 30 days, with no contingency for financing.

Certain real estate brokers specialize in HUD property. If you care to inspect a particular HUD property, a HUD master key and lock box key can be obtained from any of the Area Management Brokers. They will usually advertise numerous HUD offerings in the Real Estate for Sale section of your local newspaper.

The listing price of each property is HUD's estimate of fair market value. However, HUD will accept offers for less than the listing price.

Investing in HUD property can be a very rewarding experience; however, you should be aware of certain shortcomings. You have to remember that you're dealing with the federal government, which means lots of bureaucratic red tape. HUD requires all kinds of special forms, contracts, and procedures in order to purchase their property. Therefore, if you're interested in purchasing HUD property, it's advisable to deal directly with a real estate agent who is familiar with selling it.

FORECLOSURES

Another great source of investment is distressed property, such as property in foreclosure. Distressed property has always been a popular investment, especially since it is often sold at substantially below market value. (Incidentally, if you're interested in a more detailed guide to the subject of foreclosures. 

The process of foreclosure goes through three phases, and an investor can purchase the distressed property in any one of these phases.

Phase one: The owner of the property is in default of the loan obligation. During the default phase, the lender notifies the owner that it is initiating legal procedures that will eventually lead to a foreclosure sale.

Phase two: The public auction of the property takes place. Unless the owner makes the loan payments that are in arrears, including late fees and penalties, the property will be sold at public auction. The lender who is foreclosing initiates the bidding, usually at the price that represents its interest, including late fees and penalties. The highest bidder pays off the loan (in cash) and claims the property.

Phase three: This phase is the REO stage. If the property does not sell at auction, it reverts to the lender, and if that lender happens to be a financial institution, the property then becomes Real Estate Owned (REO) of the lender. Purchasing distressed property during the first phase of foreclosure can often get you a real bargain. However, the many difficulties associated with such property can often lead
you to something you never bargained for. For instance, there may be liens against the property, and you may find that, although you were able to purchase the property quite easily, you must also buy it back from the IRS, county tax assessor, or some other entity that has attached a lien to the property. Unless you do exhaustive research before getting involved in foreclosure property, you could get stuck with valuable working capital tied up waiting for liens against the property to be cleared up or for a title search to be conducted. In the end, your so-called bargain may cost a lot more than you had contemplated.

Should a property have problems, you automatically assume them when you purchase it. Property purchased during the first phase of foreclosure requires much research and time, and even then you may end up with your funds tied up in escrow for an extended period.

When you purchase property during the second phase, at public auction, you're faced with similar problems, and you must thoroughly investigate the property before you bid. Furthermore, you are required to pay cash for the property.

It is in the third phase--when the institutional lender has title to the property as REO--that the property emerges as an extremely attractive venture for the investor. But before going any further, you should be made aware of an institutional lender's attitude toward REO: they don't want anything to do with it!

Institutional lenders are in the business to earn money by lending out their funds, and in so doing to earn interest and points. They take in savings deposits, then lend these deposits out on long-term real estate loans. Of course, the property itself is used as collateral to secure the loan against the possibility of default by the borrower. Occasionally the institution is required to foreclose on a property when a loan goes sour. The property is essentially unwanted. The lender would prefer to sell the REO and use the proceeds to fund another
loan; therefore, institutional lenders will usually offer attractive terms to an investor to relieve the institution of the unwanted property once it's on the books as REO.

One aspect of REO that makes it a superior investment when compared with property in the other two phases of foreclosure is that all clouds on the title have been removed through the act of foreclosure. In the process of acquiring the property, the financial institution has literally eradicated all outstanding liens, except for back taxes, The lender now owns the property free and clear. If you acquire REO, it will be free of encumbrances, except for deferred maintenance. You can usually buy REO property with a small down payment. The purchase can often be financed at interest rates below the going market rate, especially since the lender is also the seller and eager to unload the property. Sometimes it's possible to defer the first payment of principal and interest for up to six months, which will allow you to renovate the property and generate some income before the first payment is due. Also, it's not uncommon for the REO buyer to acquire an
additional loan to pay for the cost of such renovation. And the financial institution will usually assume most of the closing costs.

The important thing to remember is that everything is negotiable. Nothing is carved in stone regarding standard procedure for the buying and selling of REO. To succeed at investing in REO, you need a special technique for dealing with REO managers. This is not an easy task, because there has been a great deal of public interest in foreclosure property in the recent past, and potential REO buyers are constantly inquiring. Typically, an inquiry from an uninformed member of the public is in the form of phone calls to REO departments, asking if any foreclosure property is available. So many people phone in that REO departments now give a stock reply: "Sorry, nothing available."

REO will usually be sold through an established real estate broker and to known investors the lender has done business with before. Thus, if you want to invest in REO, approach the REO department in person and meet its manager. Establishing such a personal relationship is the only viable way to have access to these potential bargains.

OTHER SOURCES

In addition to distressed property, want ads, and the MLS, great bargains can be found just by "cruising" the neighborhood. This means selecting and driving up and down the streets, taking notes. This includes noting listed properties as well as FSBOs. While you're at it, keep an eye out for property that appears likely to be for sale. Telltale signs of potential bargains are vacant properties, unattended lawns, boarded-up houses, and homes that require paint. Once you have a substantial list, you can obtain ownership records from your local county courthouse or the property tax collector's office.

Also consider inserting an advertisement in the local newspaper, such as "Real Estate Wanted." You'll surely receive a few flaky calls, but, you never know, one good bargain could pay for three years of advertising.