Monday, September 10, 2007

Real Estate Investing - The Perfect Scenario

Most people haven’t got a clue when it comes to investing. I used to fit in that category. The good part is that you don’t have to be because there are people out there to teach you. One of the directions I found is Real Estate. The market across the country is prime for investors right now. Some areas are a little more prime than others. Colorado seems to be leading the curve for the rest of the nation so I will focus on the Denver area for the purpose of this article.

The foreclosure rate seems to be out of control in most areas; bad for mortgage companies and general consumers; good for investors. In the Denver area, we having been seeing a record amount of foreclosure filings; approximately 500 – 1000 per week. The two types of investments are “flipping” where the investor buys a property at a severely reduced price and does a little cosmetic or repair work and then sells it for a profit. (I’m sure you may have seen the TV shows dedicated to the professionals in this arena) and rental properties.

Flipping:

In my opinion, the “flipping” type of investment should be left to the professionals. They should and, in most cases, are very experienced in the art of finding the perfect house, repairing and dressing it up to sell at a competitive price in a short amount of time. Usually they can estimate down to the penny, however, there may be some unforeseen issues with the house that could knock their margin completely out of line. Plus in a slow seller’s market, the price may have to be very low in order to get it sold quickly.

Rental:

I like the thought of rental properties right now. For every foreclosure, there is a person and/or family in need of a place to live. Therefore, the rental market is gradually increasing. These families are most often good people who pay their bills on time but got caught up in the mortgage fiasco of ARMs, interest only and Neg Am products that were introduced to the public a few years ago. These people were sold something that they did not understand and then got whacked by a huge increase in their payment. Most of these people are going to be looking for housing comparable to what they just left but in a more affordable realm. When a foreclosure is filed by a mortgage company, the home owner has a couple of options; they can work to get the payment together a continue to move forward; they can try to refinance, but with the mortgage guidelines being revised, it’s much more difficult to get a loan; they can walk away and let the bank foreclose (usually leaving the house in shambles); or they can negotiate with the bank for a “short-sale”. This is my favorite.

A short-sale could be the investor’s best friend. The seller just wants to get out and the bank just wants to get as much as they can (a foreclosure costs the bank a ton of money). The investor steps in, makes an offer, and purchases the house at a discount from the “true” market value and then with minimal repairs and/or changes, is able to put it up on the market as a rental. The housing market will turn (we have already seen a little evidence of it here in Denver) and in a couple of years or so, the equity will be at a point where selling the home makes sense. The investor makes a profit and moves along to the next opportunity.

Having a professional Realtor who is experienced in investment properties is critical to the process. There are certain nuances to investing in Real Estate. Time frames are an aspect of short-sales that most people don’t expect. Sometimes a bank can take up to several months to approve the acceptance of a proposed payoff, although if the process is followed, a much shorter time-frame can be realized. Knowing how to structure an offer to get it accepted by the bank is also very important.

Here in Denver, the investment opportunities are huge. I’m sure the rest of the country will soon follow if they are not already there. Real Estate is still one of the most solid investments that exist; if it is done correctly.