Does Anybody Really Make Money on Foreclosures? - Posted by Thomas Brown

Posted by HR on January 27, 2001 at 07:27:38:


Good question. There certainly is a lot of hype surrounding rei; there is a lot of money to be made, too.

If you are just starting out, check out books by Robert Allen and McLean and Eldred’s excellent book, Investing in Real Estate, 2nd Edition. These will help you sift the hype from the reality. I really like Allen’s Creating Wealth and Multiple Streams of Income.

I remember reading something Joe wrote on the board once that foreclosures are the fast track of rei. Not for newbies. I would agree. Let me give you an example.

I’m buying a huge duplex/4 plex from a mortgage company any day. It’s a raised duplex with two unfinished spaces underneath. Each apartment is 3 bedroom and 1 bath. The house was a reo and sat on the market forever. Hmmm… I wonder why? Could it be that it’s a block from a project in a bad neighborhood? Could it be the fire damage the house sustained? The cracked slab? The 8 water leaks and holes in the roof? The settlement? Probably so. I agree with Rick, though: if you know how to fix these problems, you can get unbelievable deals.

When you walked in this place, sheetrock was hanging from the ceiling. You could look thru the ceiling, thru the attic, thru the holes in the roof and see daylight. You get the idea. The whole roof repair, though, cost just $600 to fix (I budgeted $1000).

The fire damage is cosmetic and will only cost about $300 to fix. The settlment I will live with; the house is 60 years old and it’s been there a long time. It won’t go much more. The cracked slab is not part of the original structure of the home; it’s a chain wall. It as poured on the first floor to avoid mud. Hence, that damage isn’t much. Since I’m going to wall and sheetrock off access from the second floor apartments to these first floor spaces, and then use the first floor as storage for my rehab company – clawfoot tubs, scrap wood, left over tile, cabinets, etc – these problems don’t bother me.

My “back door” (“Never go thru the ‘front door’ until you know how you will get out the back door .”) on this property is to keep it as a rental, section 8. Those apartments upstairs will rent for $600/month each side (tenant paying utilities and supplying all appliances and window units). To redo the plumbing, electrical, some inner sheetrock work, redo 1 kitchen and 2 baths, and vinly the outside of this 4000sf monster should cost me about 25k.

I figure I’ll be in this for 30k total. I’ll pull out an extra 10k on this and refi for 40k (a no money down, cash back at closing deal) and PI on 40k, 180 months, 8.25%, will be $388/month. TI will be around $150/month. I’ll put aside another $200/month aside ($100/unit) for vacancy and repairs, and I’m left with a cash flow on this of: $1200 - 388-150-200= $462/month.

This is actually going to be a fourplex for me, because my rehab C corp will rent one downstairs unit from the owning LLC and my realtor wife will rent the other downstairs utit, to create more income to the home and more expenses to these two businesses. My corp will pay around $200-500/month and my wife will pay around $100-400/month, depending on how much we need to bleed out of these two entities. Hence the cash flow will be even better.

There have been title problems on this house. The bank that claims they own it never recorded their act of sale when they bought the note from another mortgage company. Hence, legally, I have a mortgage company selling me a house they don’t own. (That was a nice surprise). Here’s an example of the fast track. One better have pros on one’s team that can deal with this stuff: from the fire damage to the title problems. My wonderful re attorney/closing agent can solve all this, so this potential deal killer is just a minor delay to the sale.

Thomas, I’m buying this cash machine for $2000. The mortgage company, to sell this house, is having to come to the table with $1500! They are having to pay to sell their asset (because, believe me, they don’t see this as an asset, which it isn’t to them).

So, can you get some great deals? Oh yea. Do you have to have some serious expertise to get the really great steal deals? In my opinion, yes. On this property, one must be comfortable with a major rehab and have the knowledge, vendors, cash, and crews to do it, as well as the ability to manage section 8 and their tenants. If you can do all that, hey, this was a great deal that fit my needs exactly. If not: this house was just another tear down (which was how it was listed in the mls). Not for me!

Hype is hard made easy. This biz takes knowledge, skills, and a good team. Develop that and you will make money. Don’t, and you will sit on the sidelines and conclude that it was all a bunch of nothin’. Personally, I like the latter conclusion. (It gives me far less competition).

Good luck!


Does Anybody Really Make Money on Foreclosures? - Posted by Thomas Brown

Posted by Thomas Brown on January 26, 2001 at 23:23:35:

Aside from the hype, courses, etc., does anyone here really make money consistently by buying, rehabing and selling foreclosures? I know it would take a lot of knowledge and experience, but it’s something I’d like to try, providing it’s not just mostly hype.


Tom, don’t tell anybody where I live! - Posted by Bill Taylor

Posted by Bill Taylor on January 27, 2001 at 20:54:31:

Tome we have buying foreclosures at the auction. We have not been so sofisticated yet as to buy before the auction but hopefully not long from now. We bought a house in Oct. for 35000 and sold it on a l/o within 30 days for 65000. This house was immaculate when we bought it. I think the guy must have remodeled it when he was leaving and cleaned the carpet on the way out the door. he also made sure he left the garage doors opener so we would have those. hard to believe but all true. I ended up buying 13 homes in in 2000 but we only made about 250000 on those. So please whatever you do don’t tell anybody where I live.

Re:Anybody Really Make Money on Foreclosures? - Posted by Thomas Brown

Posted by Thomas Brown on January 27, 2001 at 12:28:01:

Thanks for all the great input! I’ve bought a couple (actually, 7) books on repair cost estimation and foreclosures, and have made a contact with an experienced broker who will “share” with me (e.g., put up some money) if I find a good deal.

I can see it’s gonna take lots of learning and work, but for some reason it appeals to me.

Thanks aain,

Re: Does Anybody… Make Money on Foreclosures? - Posted by Charles Steed

Posted by Charles Steed on January 27, 2001 at 11:19:14:

In my neck of the woods I consistently check legal notices. One Wed. I saw that a house was going to acution that Fri. The balance was around $32K. Houses in the neighborhood were selling for around $70. Drove out to the property to look. New roof, new exterior, paint…unreal, all the place needed was carpet and yard clean up. The neighbors told me that an older guy lived there and died. He had no heirs. The bank initiated foreclosure, and the sale was 2 days away.

I drove to the trustee’s office (a local attorney handling the sale for the bank), and had a chat with him. He verified what the neighbors had said, and told me the title was clean to the high bidder. He gave me the exact default figure which was $32K and some change. From here, I visited one of my “money guys.” Told him I’d give him $3K for the use of $35K for six weeks secured by a 1st mortgage against the property. He said sure (we had done many deals and he knew I knew values etc.) No appraisal, credit check, etc. I understand it takes time to build this kind of credibility, but that’s what this business is about.

Two days later I showed up at the courthouse, the only bidder. I offered $1 more than what was owed, and gave the trustee a cashier’s check a few hours later. Within a week the yard was tip top and the carpet was installed. The following day, I had it under contract for $62K. Three weeks after that my buyer moved in after cashing me out with conventional financing. I sold the place $8K under market to move it quickly. My payday for four and a half weeks was about $27K. Not bad.

Here’s the part that blows me away. Many of the neighbors knew the entire situation. They knew all the numbers. The banker had been out to the house several times. He had put the word out that anyone willing to put up $10K could assume the existing financing for the amount of the default, around $32K. They all knew values in the area because most were homeowners. Not a soul acted on this great opportunity.

I see new investors on this board chasing deals with little or no equity and wonder why? For the same amount of time and trouble they could be getting well paid. Simply by first having the ability to recognize value (knowing their market) and having the ability to tie up a good deal when it presents. From there, the money will almost magically flow to it.

There are 3 stages of a Foreclosure… - Posted by Rick Wheat

Posted by Rick Wheat on January 27, 2001 at 04:49:42:

And I’ve made money from ALL of them.

  1. Pre-foreclosure - the period between when a payment has been missed, and the time of the sale. This is my favorite stage. I get to work with the sellers, solve their financial problem, save their credit from a MAJOR derogatory, and make money by making up a few payments. requires the least capital.

  2. Foreclosure Sale - the time the property is sold at the Courthouse steps or Trustees Sale. This is where most of the properties that reach this stage go back to the bank, since most of the really good deals have been bought by investors like me BEFORE THE SALE. This usually takes quite a lot of capital, and you have to be careful about how much you bid (“auction fever”). The house I’m living in was bought at the Courthouse sale, and I got it for 60-65% of the market value.

  3. REO - “Real Estate Owned” by the bank or mortgage company is the final stage. There can be some good bargains here, but a lot of the semi-good houses, those needing “cosmetic repairs”, are frequently spruced-up by “asset management companies” working for the banks nowadays. They take the property, secure it, complete the repairs, and sell it for full market value. However, if you have the knowledge and ability to get some MAJOR work done, the more difficult distressed REOs can be SUPER properties to make money on.

In short, there are literally hundreds of ways to make money in Real Estate, the three stages of foreclosure being only a few. It takes knowledge and effort - this business isn’t a “Get Rich Quick” deal. But if you have that knowledge and put forth that effort, you can become VERY successful.

Make Money on Foreclosures? - Posted by Rolfe Kurtyka

Posted by Rolfe Kurtyka on January 27, 2001 at 01:16:59:

My most recent foreclosure fix-up sale netted me about $25,000. I’ve got three under renovation right now - two will be held as rentals, one will be sold. Refinance mortgages at 75% -80% of the renovated FMV on the rentals will cover all my costs - purchase price plus rehab - essentially creating a no-money down deal. Between the two rentals, I’ll have created about $50,000 in equity, a good cash flow, and a solid asset in an appreciating market. The property to be sold will probably net about $10,000. That totals $35,000 cash, and $50,000 equity, after 4 foreclosure deals. Plus any future rents, mortgage paydown, taxsavings, and appreciation realized on the rental properties.

Good Luck!

Money on Foreclosures? - Posted by JoeKaiser

Posted by JoeKaiser on January 27, 2001 at 24:32:31:

We picked up a $26k check yesterday on a foreclosure deal where we figured out the best play was just to let the property go to sale. No money invested, just a little brain power, a little creative negotiating, and there you go.

Hang around the foreclosure arena for any length of time and you can figure out ways to pull that off too.

If that’s hype . . . then I’ll take all I can get.