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RSS Feed11 Myths of Real Estate Investing |
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What you Need to Know Before you Invest.
Once again the new year is upon us and many of us are thinking about what they can do to make 2007 a successful money producing year. When someone mentions real estate investing and foreclosures and you think you might want to delve into this lucrative field. Yet, before you take that leap get educated first and learn the many myths about real estate investing.
Myth 1: You can get the best deal buying a foreclosed property.
Homes listed in Northwest Arkansas are usually priced at market vaule and banks are generally not willing to accept much less than asking price. However homeowners on the verge of foreclosure might be willing to accept much less than asking price or sometimes only what is left on the bank note. Other possibilities are determining if the bank would be willing to do a short sale* to prevent the process of foreclosure.
When a foreclosed property is listed for sale the Real Estate Owned (REO) determines the price based on a professional appraisal and a Realtors Competitive Market Analysis (CMA). REO properties are not prices to 'give-away'. The REO wants to recoup their costs, which include real estate commission, legal fees, customary closing costs, and property preservation expenses.
Myth 2: Writing a contract on a foreclosure is the same as writing a contract on a non- foreclosed property.
When buying an REO property the buyer may not always be able to set the expiration time on the contract. Since the bank is not emotionally involved in the sale of the home and are looking for the largest payoff on their investment, some REO properties may set deadlines of up to a month for accepting contracts. Until that day comes to pass all contracts will be accepted and only at that time will the REO decide which contract to accept and which to decline. This is unlike a non- REO property in which the buyer typically extends 24-48 hours for the seller to make a decision.
Myth 3: You can make all the repairs.
Buyers are not allowed to make repairs to the property until the property has sold. If you are getting a loan, the property either needs to be in working condition or you may need to put more money down on the loan. In most cases the lender owning the property (REO – Real Estate Owned) will not authorize any repairs and most foreclosures will not go FHA or VA lending because of condition issues.
Myth 4: You can do inspections.
It depends on the REO. Some lenders will not cooperate with having the utilities turned on so that you can see what works or doesn't work.
Some lenders will let you do inspections but if you want out of the contract you must provide them with a full copy of the inspection report detailing why you will not go through with the purchase. You have now spent $350.00
Myth 5: Follow the "hot" areas.
Stick to what you know, buying property in an area or price range you are unfamiliar with could end up costing you money. Knowing the area and price range will help you determine what modifications and upgrades may be necessary and what the buyers are looking for. Know the market. There is a reason it was foreclosed on instead of selling.
Myth 6: I can get it for pennies on the dollar.
If the seller had any equity they would have sold it. An REO is not going to give it away to you.
Myth 7: I'll wait to talk to a lender until I've found a property.
In order to compete with cash buyers you will need a preapproval letter from a lender stating that you have been approved for a loan amount specific to the amount you are contracting for. Also, it must state that there are no other stipulations except an appraisal and clear title.
Myth 8: REO will have a property disclosure.
The officer handing the REO will not have seen the property. The REO knows nothing about condition. With the exception of a lead based paint disclosure if the property was built prior to 1978 do not expect any disclosures. It is "buyer beware:.
Myth 9: I can change contract terms after the offer is accepted if I need more time.
If there are multiple offers on a property there is probably another buyer waiting to jump in if you can't make your deadlines. There is also usually a hefty per diem fee for failing to close on time, and if you can't close you could loose your earnest money.
Myth 10: I've got cash so I can offer a low price.
A qualified buyer with a pre-approval letter and offer of more money than your cash offer can trump a low cash offer. The REO is looking for a net number and the REO does not care whether the funds come to the table as a loan or cash. A dollar is a dollar regardless of the source.
Myth 11: I can buy an REO and flip it and make money.
Since most REO's are priced at market you can't buy one and put money into it for a profit. When selling the home, post flip, you will have closing costs, carrying costs, and commissions. Unless you have gotten a steal, it is difficult to flip an REO property.
* Short Sale: If the market value of your property is less than what you owe on your mortgage, you may qualify for a legal, lender approved solution.
