REO Bank Foreclosures
Bank foreclosures are one of the more popular ways to buy real estate for pennies on the dollar. I have found that it’s more like quarters on the dollar in most cases. There is a huge inventory and many resource with which to find bank owned properties. These are properties in which the buyer has defaulted on their mortgage and the bank has repossessed the property through foreclosure.
If you want to invest in these the first step is to figure out how to get enough of these deals coming across your desk to analyze. You will have to sift through quite a few to find the one that fit’s within what you would consider to be pennies on the dollar (less than 50% market value). There are a bunch of REO websites online (Realtytrac is the main one I know of) and those are a good place to start.
Grabbing a realtor who specializes in REO’s is another good tactic. This is good because they are familiar with the market, have access to the MLS, and are most likely skilled at short sale negotiation (short sales are basically when the bank will consider selling the property for less than what is owed). With those three hubs to your REO strategy you will have more than enough deals coming across your table.
Be careful not to accept just any deal. You may be tempted because it will seem like none of them are pennies on the dollar, or all the ones that are have already been taken. Do not fall into the temptation of getting into a contract for a property that is outside of your criteria. Understand what you want and stick to it. Communicate those wants to all involved. It will take time, but you will find what you’re looking for.
In my opinion tax foreclosures present a better opportunity to buy real estate for pennies on the dollar. With tax foreclosures there is usually an upset sale, tax deed sale, or something of the sorts. This means that the local government, in order to settle the tax balance owed on the property, will perform an auction of that property to be sold for the amount of the taxes owed.
The good thing about this type of acquisition is that you will be able to truly buy real estate for pennies on the dollar. Sometimes you can buy a property for one tenth of it’s actual market value. This gives more options to the investor because of the amount of built in equity. For example, the property acquired could be wholesaled to another investor at a price well below market and money is still made. For example, some counties in some states hold tax deed sales every month and the taxes owed on the property are sometimes under $10,000. The market value of these properties can be $40k – $100k in a lot of those cases. If you were able to acquire one of these properties for $10k and wholesale it to another investor for $15-$20k you would still make $5-$10k per month doing it. The other strategy is to sell it for the full market value once it is presentable. In the latter scenario you will hold onto the property longer and have more money invested in it, but will still make more money off the deal.
The challenges with this type of deal is that there are unknowns about the property we are buying. I, for example, bought one of these for $8,000 and later found out there were squatters in the house. A family was living there rent free, and I eventually had to go through an eviction process to get them out of there. One of the other challenges is getting clear title. It takes time to do this unless you have a system set up to expedite the process. The title must be quieted and a quit claims deed will be issued once that process is successfully completed. A quieted title basically means that no one else can any longer establish rights to the property – including the previous owner. There are no encumbrances remaining after the procedure. There is a chance that someone will come back to claim the property, but they would have to pay you back the money for the property in order to reclaim it. This can only happen during the quiet title procedure period, which could be up to 90 days. To me, it is still a better deal than REO’s, especially if you’re willing to do your homework on prospective investment properties.
Tax Lien Certificates
Tax lien certificates allow you the best of two worlds. Not only can you potentially buy real estate for pennies on the dollar, but you can gain an interest income (tax free) if that doesn’t happen.
Both tax liens and tax deeds are auctioned, but there are some differences between tax lien certificates and tax deed certificates. In essence, with tax lien certificates, we are loaning money to the municipality for taxes owed by the property owner. They, in turn, forward those interest charges to the property owner. If the taxes aren’t collected after a certain period of time then the property is awarded to the lien holder. The interest gained on these certificates are tax free & the percentage of return can range from 10%-40% depending on where you are located. The money invested is tied up for a period of one to three years, also depending on where you are. This scenario is the worst case. You’re money is tied up for three years and you gain 10%-40% interest on your money as a trade off.
The best case scenario is that you buy real estate for pennies on the dollar. You will get a property worth much more than you invested. A powerful strategy is to combine this tactic with a self directed, tax sheltered retirement account. You can develop your retirement money through this strategy (via Roth IRA) and have complete tax free gains and it’s a very safe investment strategy.
The two downsides to this strategy is that it ties up your money and the investor is expected to pay the taxes in full within three days of the auction. If liquidity is a major part of your strategy then you’d need to steer clear of this one. This is a good strategy if you have a good amount of cash saved and don’t mind having it tied up for a year or more.
If you like income and growth strategies for investing then discount mortgages are a great strategy to buy real estate for pennies on the dollar. This is a cash flow strategy. Sometimes savvy investors, or home buyers, are able to negotiate flexible terms on a purchase. Sometimes these terms include a seller “holding paper” on the deal. This means that, instead of the buyer getting financing from a bank or other lender, the seller essentially becomes the lender on the home. The buyer will pay a mortgage to the seller instead of the bank and the seller will hold a lien on the property until that mortgage is paid off.
Unless you’re in the cash flow business it can be unattractive to have someone paying you incremental payments for a home you wanted to sell outright. As a discount mortgage investor we can provide a solution. Usually we can offer a lump sum of cash for the payments being received by the seller. The lump sum we offer is normally 70% or less of what the face value of the note is. Time value of money is a big factor with these discounts. I suggest not paying more than 60% if the note is high quality.
A high quality note is one that has a buyer with an excellent payment history, good credit and a stable income. The benefits of doing this are (1) we can pretty much pick the rate of return we want to receive on this investment and (2) if things go south we could end up with a property worth much more than we have in it. This also is a good retirement strategy because it could be a source of income for us later on, if we decide to hold onto these good performing notes*. Just like in tax lien certificates it would be powerful to combine this with an tax sheltered retirement account.
The downside of discount mortgages, like tax lien certificates, is liquidity. It provides a monthly cash flow but it ties our principle up for a good amount of time. There are transfer/assignment options for the note, but most likely the face value would take a hit if we were to cash out to another investor. This is a longer term strategy. We must be comfortable receiving the cash flow in return for the lump sum. Also, to be in this business we need to do our homework to understand the finance behind the strategy (future value, time value, interest, etc.).
Distressed Properties (Motivated Sellers)
This is a buy real estate for pennies on the dollar strategy that requires some keen negotiation skills, and some bird dogging. Finding distressed properties is an art in and of itself. There must be a system for locating these, otherwise the deals will be too few and far between. A distressed property is a property that has been abandoned, run down, sitting on the market for too long, or has an owner with personal issues that cause them not to be able to deal with the property at the present time.
The good thing about these kind of properties is that we can sometimes get them at a great discount. More often than not, though, it will be hard to gain a discount of 50% or more. The other thing to be aware of is that there will be a lot of work involved in cases such as abandoned homes, run down properties, and other such fixer uppers if we are looking to capitalize on the full equity. Wholesaling, and bird-dogging are good strategies for those who don’t wish to put that type of time into it. Bird-doggers can find these properties and flip them to other investors for a finders fee.
I’ve found it more difficult to accomplish a win-win negotiation with sellers in these situations. When it comes down to it they want to sell the property to get their money, and my goal is to get the property for pennies on the dollar. The key here is to identify seller who are motivated by other reasons and focus on those as opposed to the money. For example, they may be living far away from the property, have had a hard time selling, and no longer want to deal with traveling back and forth or continuing to pay money for taxes and maintenance. In this situation we can focus on the time & money they will save from us taking it off of their hands. This is a good strategy for someone who is handy, or has a good network.
How to Buy Real Estate for Pennies on the Dollar (Summary)
Robert Kiyosaki points out that we make money when we buy. Using any, or a combination of these strategies will help us to do just that. Built in equity is the ultimate goal when investing in real estate, for me. Other people have different goals for real estate investing such as tax deferment, depreciation and other such tax strategies, as well as wealth building with the expectation that the property value is going to rise. These are okay strategies as well. I tend to like to buy real estate for pennies on the dollar because, to me, it provides greater protection from risk. There is a lot of built-in equity with which to work. I hope this discussion is as beneficial to you as it is to me.