Foreclosure Investing For Dummies. Ralph R. Roberts
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agent to obtain a homeowner’s insurance policy for the property.
Pay the property taxes as soon as they’re due. (You may need to pay back taxes when you purchase the property.)DON’T FORGET THE INSURANCEAs soon as you buy a foreclosure, even if you can’t take possession of it right away, call your insurance agent and buy a homeowner’s insurance policy for the property.I once purchased for $75,000 a house that was worth $150,000. By the time I took possession of the property, the previous owners had taken the carpeting, the entire kitchen (including the sink), the bathroom fixtures, the furnace, the central air conditioning unit, the doors, and everything else they could carry out, hoping to stick it to the next owners. I turned the claim in to my insurance carrier, received $25,000, and sold the house to another investor for $100,000. After expenses and holding costs, I walked away with about $35,000.The investor who bought the property decided to rent it instead of selling right away. He refinanced to pull about $50,000 equity out of the property, used the equity to cover repair and renovation costs, and still had a little money left over. Then he rented the property to cover his mortgage payments.
File an affidavit proving that you paid the insurance and property taxes. If the homeowners decide to redeem the property, an affidavit enables you to recover any taxes and insurance payments you made during the redemption period.
See Chapter 16 for details concerning your responsibilities as a homeowner during the redemption period.
Persuading the current residents to move on
As the official owner and soon-to-be possessor of the property, your goal is to encourage the homeowners to move out without trashing the place or forcing you to evict them. You want the property to be broom-clean and in the same condition it was in when you first inspected it — or better. The key to success in this area is providing the homeowners an easy exit. Following are some suggested perks for assisting the homeowners out the door:
Offer cash for keys and a nonredemption certificate — a signed agreement that the homeowners promise not to redeem the property.
Provide a dumpster in which the homeowners can toss anything they don’t want to move.
Offer to pay for a moving van, or pay a portion of their relocation costs.
Offer to pay the first month’s rent on a rental unit.
Cashing Out: Realizing Your Profit
Assuming that you purchase a property for the right price, you’ve already profited from it, but you won’t see that profit until you cash out your chips. Various cash-out strategies are available, as I discuss in Part 5. The following sections provide a brief overview of your cash-out options.
Repairing and renovating the property to maximize its value
The most common way to maximize your profit is to repair and renovate the property and then place it back on the market in the shortest possible time. Time is of the essence, because every day you hold a property costs you — in monthly payments (if you financed the purchase), property taxes, insurance, and utilities.
Marketing and selling to get top dollar
Your goal in selling a house is to sell it quickly at a price that’s close to its market value. To accomplish that goal, follow these marketing guidelines:
Set the price right the first time. Don’t set a super-high price hoping that the fish will bite. Your investment property is likely to linger on the market, during which time holding costs will continue to chip away at your profit. An asking price that’s in line with comparably priced homes is best.
Get the word out through a successful real estate agent. If you’re thinking of saving money on real estate commissions by selling the house yourself, think again. Homes sell in about half the time and for more money through a real estate agent. What you may save in commissions, you end up losing through holding costs and by having to sell for a lower price.
Begin marketing as soon as you take possession. Marketing begins as soon as you begin your renovations, especially if you start renovating the exterior first. Neighbors notice and begin to gossip, and word-of-mouth advertising begins to take off.
Plant a For Sale sign on the front lawn when renovations are nearing completion. A For Sale sign removes all doubt that the house is for sale.
Stage the house impeccably. Clean and scrub inside and out, mow the lawn, freshen the landscape, remove the clutter, tastefully furnish and decorate the interior, set out fresh bouquets of flowers, and let the buyers stream in.
For additional tips and strategies to sell your property quickly and for top dollar, check out Chapter 18.
Cashing out equity by refinancing
When you purchase a property for less than its market value, you automatically have equity in the property. Renovations that bring the property up to its market value may add more equity, assuming that you don’t overspend.
You can cash out the equity by refinancing it for more than you paid for it to realize your profit almost immediately. Keep in mind, however, that by refinancing for more than the purchase price, you take on a larger mortgage, and the increased interest chips away at your total profit over time. Refinancing, however, does provide you capital to fuel your next investment or cover the cost of renovations. For more about refinancing to cash out equity, see Chapter 19.
Profiting in other ways
Selling and refinancing are two of the quickest and most common ways to realize the profit from foreclosures, but other strategies are available:
Negotiate a short sale. With a short sale, you persuade lenders to accept less than they’re owed, which increases equity in the property, providing you creative ways to help the distressed homeowners out of their jam. (See Chapter 15.)
Lease the property to renters other than the previous homeowners. (See Chapter 18.)
Lease the property back to its previous owners. (See Chapter 19.)