Investing In Residential Real Estate: What the media or the gurus won’t tell you

I’ve been repeatedly asked by people how to invest in residential real estate now; they all want to take advantage of the historical foreclosure casualties of the current real estate crisis. People often asks me how to get a list of foreclosure homes in the area where they live. Unfortunately these people are not throughly researching their plans and, if not properly advised, they will be just another victim of the real estate crisis; thus losing their hard-earned savings.

I still haven’t figured out why is that many people believe that investing is a common sense type of activity. People believe that in order to make money in real estate, the stock market, and other type of investments, all they have to do is buy low and sell high and no further formal education is needed. So you see college educated individuals and professionals with great academic credentials discussing the latest fashionable investment of the week, and some of them go beyond talking and actually invest money in trendy investment vehicles that are poised to boom and bust. A large number of these educated individuals fail to recognize that money is not made only by buying low and selling high. In my view, any professional and sophisticated investor, beyond knowing that he/she needs to buy low and sell high, must know when to buy, how to buy and when to sell and how to sell.

I’ve been a residential real estate investor full time since 2003, and I have been involved indirectly in a few commercial transactions; I will concentrate this discussion in residential real estate investing. I’ve read many books, I have listened to tapes/CDs, I have read many online forums/posts, and I have attended several investing seminars. My advice to you: Be very,very, very careful about the creative real estate “gurus” and specially their get-rich-quick seminars. There are dozens of artful salesmen who preach fancy financing, “no money down,” flipping properties quickly and numerous other strategies to get rich buying and selling real estate. My conclusion: Most of the information sold in seminars, home study courses, etc is absolutely usefulness! Unfortunately it costed me about $15,000 to come to this conclusion because nobody told me about it, and I didn’t to a comprehensive research on the topic. Please don’t let this happen to you.

There’s an excellent article about this topic titled “Nothing quick about getting rich with real estate” Read also the informative report titled “Dreams Foreclosed: The Rampant Theft of American’s Homes Through Equity-Stripping Foreclosure “Rescue” Scams” by the Consumer Law Center and learn how some of these “gurus” and their students despicably operate. The only professional and truly educational courses that I highly recommend are the ones provided by the CCIM Institute and the Urban Land Institute; both highly respected institutions in the professional real estate investment community/industry. I’m sure there are other reputable institutions in the investment real estate education industry, however my research indicates that the two mentioned above are probably the best in the US. I have attended two courses from the CCIM Institute and they were superb.

The worst about the mass media, the get- rich-quick seminar industry, and best seller books from extraordinary salesmen like Robert Kiyosaki, is that they give people who desperately want an easy solution to their financial troubles the illusion that such easy solutions exist, and in the process they suggests what most financial and investment experts would consider bad advice. Financial education is not taught in most US schools; it’s not taught in college or in universities either. Any financial education you may have usually comes from your family and friends, and unfortunately these individuals are not necessarily the best, most skillful and professional financial advisors. Based on the general population’s lack of solid investment education, I can see how the get-rich-quick seminars and books have so much appeal to the general public and there’s immense amount of money in the self-help personal financial industry. But what most of these seminars and books such as Kiyosaki’s Rich Dad, Poor Dad will not teach you is the critical thinking skills that you need in order to become financially successful.

As author T. Harv Eker, in my opinion, author of one of the best material in financial education says, “If you’re going to work hard anyway, you might as well get rich…and the quicker the better!” I highly advise you to educate yourself well and read T. Harv Eker’s book titled “Secrets of the Millionaire Mind” and attend one of T. Harv Eker’s introductory educational FREE tele-seminars; his teachings can easily change your financial life for the better. T. Harv Eker is one of the few little known educators who teaches personal finances and business building from an emotional, spiritual, mental, and physical approach.

Investing in Pre-Foreclosures:

One of the most common questions that I see is in regards to how to find a list of homes in pre-foreclosure stage so that one can buy them from the homeowners and get a great deal. If you’d like to obtain a list of homeowners facing a foreclosure lawsuit in your area (pre-foreclosures or also called Lis Pendens), all you have to do is go to your local county court house (Clerk of Courts – Circuit Civil division usually) and as a matter of public records accessible to everyone, you can ask for all the mortgage foreclosure cases filed within a certain time period. Be aware that there won’t be a list of foreclosures readily available that you can just pick up and leave; you will have to go manually through all foreclosure cases filed within an specified time period and get the information that you need from each individual case. There are local companies that do this work for you and sell you a subscription service that provide you with foreclosure lists; the small local ones have employees who go on a regular basis to local county court houses across a region or throughout a specific state or states and compile these foreclosure lists for you. One of these local companies is IRSFL in Florida. You should be able to find these local companies by asking someone at your local real estate investment club (http://www.reiclub.com/).

There are nationwide companies such as Foreclosure.com that buy data from local, regional, and nationwide list providers and provide a very user friendly online interface to the foreclosure list user most of the time providing MS Excel export capabilities so that you can conveniently create your direct mailing pieces. According to http://www.all-foreclosure.com/scams.htm, there’s a huge variety in the types of list services offered, so let’s look at common threads. A company charging a large up-front or sign-up fee with low monthly payments is going to have a greater interest in signing you up than keeping you as a customer. If all they charge is a one-time fee, it’s fairly obvious they make more money the sooner you go away. Companies charging a reasonable monthly fee with a low or no sign-up fee will have a greater interest in keeping you as a satisfied customer. Current monthly rates for compiled lists of bank REOs (Real Estate Owned – homes that banks have gotten back at foreclosure auction and are now in their books to sell) seem to average right around $40.00. This will provide you with older information than many of the pre-foreclosure information companies, but it is significantly cheaper. Companies providing information at a cost lower than this are most likely pulling information from the free REO websites. When you’re thinking about subscribing to a company, ask for some samples of complete property information first. Note when the company entered the property into their system, then go to your County Recorders office or your Property Appraiser’s office and look up the date when the bank took the property back. You’ll get an idea as to the freshness of the data and if you request samples from different companies, you’ll get an idea about completeness of the information from each. If a company is unwilling to provide 5-10 samples, you be the judge as to whether you want to be a customer of theirs. Pre-foreclosure data providers are usually pretty reliable. You can obtain very current REO properties from many of them, but the monthly fees start around $80.00 per county and can be significantly higher. The biggest concern here is completeness and timeliness of data. Again, ask for samples, compare the data from different companies and against the data at your local court house; and balance price vs speed and accuracy. Most of these companies want you as an ongoing customer and provide service accordingly.

Once you have created your own list or have obtained the list from a subscription service, you then have to contact the homeowners/defendants in every mortgage foreclosure case by direct mail, telephone, etc and see if you can buy their homes at a discount. Be aware that getting the list of foreclosures in your county is the easy and inexpensive part of the whole process. Once you have this list, you have to invest a considerable amount of time and money sending letters to the homeowners facing foreclosure lawsuits and/or call them and/or knock on their doors to make them sell their homes to you at a favorable price to you. Do you have the time, money and disposition to do all this? Do you know that real estate investing is just like any other business in which you have to invest capital, time, etc? You could also engage a Realtor to help you locate pre-foreclosure properties in MLS (Multiple Listing Service). In most listings, the selling agent will specify that the home is a “pre-foreclosure.” In my experience, MLS is not the source to find great residential real estate deals. Sending letters, calling and/or knocking on doors don’t guarantee a good deal either; it requires persistent effort, money, dedication, and great negotiating skills to find a decent property to buy. You will probably have to analyze 20-30 properties before you find a decent candidate home to purchase. Keep in mind also that what is a good deal to me, doesn’t necesarily mean that it’s a good deal to you; we all have different criteria to judge deals based on our risk profile, personality, financial position and financial goals.

Building a business purchasing residential real estate is where the journey begins…not where it ends. The overwhelming majority of businesses fail and a real estate investing business is no exception – and of those that endure, the overwhelming majority of those are nothing better than a glorified job for the owner. Almost all small businesses don’t reach the potential that they could. It doesn’t matter whose statistics you look at. Some statisticians say that 80% of business go out of business in the next five years. Some statistics leave only 4% of all businesses surviving, meaning 96% will go out of business. Let’s also not forget that out of the “lucky” one that stay in business, most of them will be nothing more than glorified jobs for the owners. When you look at statistics like that, it becomes increasingly clear that the choice is between being a slave to your business (if you’re lucky enough to survive) or actually growing your business, which certainly requires uncommon sense. I highly recommend the teachings of Mr. Rich Schefren at Strategic Profits, and I highly advise you to read his material on the Internet Business Manifesto, available for free. Also watch this free video of Rich Schefren speaking brilliantly about building a business.

According to the U.S. Small Business Administration two-thirds of new business survive at least two years, and 44 percent survive at least four years. Dun & Bradstreet also released a study that revealed that of the small business that fail, 90% do so because of lack of skills and knowledge on the part of the owner.

Buying Short Sales:

What about buying a home facing foreclosure through a short sale? From BusinessWeek in an article titled “The New Exit Strategy: A short sale:” “For all the homeowners who are upside down and can no longer make their mortgage payment (because of either a job loss, divorce, or an option ARM that’s resetting higher), up to now the only option was, well, letting the bank foreclose. That’s not a good option since a foreclosure sticks on your credit record for at least 10 years. But some experts are now advocating a “short sale.” This is a case of a distinction with a difference: If your bank agrees to a short sale, you then hire an agent to find a buyer for the house, you sell the house for a loss, and with the bank’s blessing, they agree to eat the loss (although they could still demand the homeowner make some kind of payment or share the loss).”

I don’t really see how a short sale will guarantee you a super great deal. I’ve done about a large number of short sales in my investing career and in my experience it’s extremely unlikely that you get a super deal; most of the lenders discount at around 95% or so of the fair market value of a home. I have had some great super deals with short sales, but they are the exception to the rule, and in order to get those super deals, the property must be in need of extreme repairs, I had to make friends with the real estate agent doing the BPO (Broker Price Opinion) and had to do play the lender’s game to a great extend.

If you find someone who claims to be a specialist who deals with short sales, that doesn’t guarantee that you will get a great deal because if it’s a great deal, he/she would probably keep it for him/herself. If you go to your local real estate investment club (http://www.reiclub.com/), you should be able to find a wholesaler; these so called investor “wholesalers” target beginner investors to sell their properties to. Be very careful! There are some very sneaky and deceptive “wholesalers” out there. Most of them will perhaps make you believe you’re getting a super great deal. Do comprehensive research before buying. Be an educated buyer; compile all the facts and seek expert advice before making a decision.

Buying REO (Real Estate Owned by banks):

This includes government agency foreclosed homes, including property owned by HUD, VA, Fannie Mae and Freddie Mac; asset managers, who will usually have foreclosed homes listed from different lenders; and listings provided directly by the banks or institutions owning the property. In my experience, it’s very unlikely that you will find a super great deal buying this type of homes. The above mentioned institutions make the process very user unfriendly with complex and you-lose-I-win contracts; furthermore, they price their homes at fair market value or close to it. Most of these homes are listed with a real estate agent and you can find them in MLS or at Realtor.com. These institutions have gotten these properties back after foreclosing on them and it makes business sense for them to sell them at the highest price the market can bear so that they can recoup their investments (loans to homeowners) plus legal fees, carrying costs, etc. Most of the time, the employees at these institutions handling the sale of these homes are compensated with bonuses based on how high they sell them. There is a sub-industry in this category; some of the above mentioned institutions package their most undesirable homes (usually in very bad areas) and sell them to bulk/wholesale buyers who most of the time are individuals or companies with access to large amounts of capital, who in turn with little investment on the homes, sell them to minority buyers with easy and sometimes deceptive terms involving seller financing.

When to Buy and When to Sell:

You also have to take into consideration the timing of your real estate purchase. Here’s where the knowing when to buy and when to sell come into play. It’s not advisable to purchase any asset that is deteriorating in value as (residential and commercial) real estate is at this moment. As stated by the prominent economic research H.S. Dent Foundation in its Special Update dated October 30, 2006: …“deflation is the worst environment for most assets, especially stocks and real estate! From 2010 onward, stocks and real estate will enter a major, long-term decline into around 2022 or so”… “Real estate is likely to lag the stock market by a year or so; hence home prices are likely to start weakening seriously from late 2010 onward, specially from late 2012 into early 2015 when unemployment levels and bank failures are likely to be the highest (like early 1932 to 1934 in the Great Depression)…”The crash that follows will be similar to the long-term bear market in Japan from 1990 to 2003, and the American Great Depression of the 1930s. So, as bullish as we have been in recent decades, our fundamental indicators suggest an extended slowdown in the US and most Western economies that will last from around late 2009 into 2022 or so.”

H.S. Dent is not the only prominent economist predicting an upcoming Great American Depression; there is even a documentary that touches on this topic (http://www.whatawaytogomovie.com/). You can also check a sample of Amazon.com’s selection of recent books by respectable economist and researchers that talk about the upcoming Greater American Depression and its depressing repercussion on real estate.

Please don’t believe a word of what I say in this article. I don’t know everything that needs to be known in real estate or investing. Do your own research and make an educated decision. I sincerely hope this article inspired you to think twice about taking residential real estate investing as a hobby. Real estate investing is most of the time a business in which you have to throughly research information, dedicate large amounts of time and effort, and require capital investment in marketing, operations, inventory, etc.

To your success,

Julio Martinez-Clark

www.JulioMartinezClark.com

www.Beat-Debt-Collectors.com 

Tags: foreclosure, greater american depression, pre-foreclosure, real estate investments, reo, short sale