Real Estate Investor Insights

I attended a real estate investor seminar and thought of putting together some thoughts. Above all, what I really liked in the whole conversation was how they described fear and ignorance to be the sole determinant of success vs frustration. Gist of that was, if you do not look into the details of something that you are unclear about... you would probably refrain from looking into opportunities that exist. For example, I fear from buying something that is a foreclosure or a REO as I do not know what fixing of a property entails. Well, I realized that its usually not a big deal and most of the properties can be fixed for $5k to $25K (depending upon the property).

So, here are the four strategies that were discussed in the seminar. Please pay attention to changing numbers in each case.

Short Sale: When a buyer or investor can not make mortgage payments on a property, the property is put for sale by a owner. Bank basically agrees to accept less than they lended. Here is a brief on how this works out:


Home original purchase price: 260,000
-------------------------------------------------
Home current retail price:    240,000 (Value went down)
Owner Sale Price               200,000
Morgage and Tax Backlog   10,000
Closing Costs                        5,000
Total Cost to buyer             215,000

Approximate equity on purchase date: $25,000

Now, if you want to live in this house for 3 years, then you get $8000 credit as well. If you put in "green" appliances, some more credit ($5,000 or so?).

Was the effort worth 25K? you decide for yourself!

Foreclosure: When a buyer or investor can not make mortgage payments on a property, the property is foreclosed by bank (Morgage Comapany). Now, bank tries to sell it. Here is a brief on how this works out:

Home original purchase price: 260,000
-------------------------------------------------
Home current retail price:       240,000 (Value went down)


Bank Sale Price                     170,000
Morgage and Tax Backlog       10,000
Closing Costs                            5,000
Cost to Fix the property           15,000
Total Cost to buyer                200,000

Approximate equity on purchase date: $40,000
Now, if you want to live in this house for 3 years, then you get $8000 credit as well. If you put in "green" appliances, some more credit ($5,000 or so?).

Was the effort worth 40K? you decide for yourself!
Please Note: A property may sell in short sale, if it attaracts appropriate number of buyers and they feel its worth 215K. So, it may not ever be foreclosed.


Auctions: a) When a buyer or investor can not make mortgage payments on a property b) Property was not sold during short sale and c) the property was not sold when foreclosed by bank (Morgage Comapany).

Now, government body tries to auction it to recover taxes etc. Here is a brief on how this works out:


Home original purchase price: 260,000
-------------------------------------------------
Home current retail price:        240,000 (Value went down)

Auction Sale Price                  140,000
Tax Backlog                             10,000
Closing Costs                             3.000
Cost to Fix                               30,000
Total Cost to buyer                183,000

Approximate equity on purchase date: $57,000

Now, if you want to live in this house for 3 years, then you get $8000 credit as well. If you put in "green" appliances, some more credit ($5,000 or so?).

Was the effort worth 57K? you decide for yourself!

Please Note: A property may sell in short sale, if it attaracts appropriate number of buyers and they feel its worth 215K. Most properties sell during foreclosure. So, it may not ever be auctioned. Also, think of the property that did not attract buyers on two major price reductions.

REO (Real Estate Owned): a) When a buyer or investor can not make mortgage payments on a property b) Property was not sold during short sale c) the property was not sold when foreclosed by bank (Morgage Comapany) and d) Property was not sold during auction


Now, bank again tries to auction it to recover as much as possible and take it off their books. Here is a brief on how this works out:

Home original purchase price: 260,000
-------------------------------------------------
Home current retail price: 240,000 (Value went down)

Sale Price                        115,000
Closing Costs                      3,000
Cost to Fix                        30,000
Total Cost to buyer         148,000

Approximate equity on purchase date: $92,000

Now, if you want to live in this house for 3 years, then you get $8000 credit as well. If you put in "green" appliances, some more credit ($5,000 or so?).

Was the effort worth 92K? you decide for yourself!

Please Note: A property may sell in short sale, if it attaracts appropriate number of buyers and they feel its worth 215K. Most properties sell during foreclosure. So, it may not ever be auctioned. Also, think of the property that did not attract buyers on three major price reductions. However, REOs are pretty much as good as auctions because during auction you must pay in cash within 24hrs. Bank can lend you money to purchase REOs from them.

Remember, you must negotiate with bank to have them accept as low as possible. Numbers above are just representative. For every dollar bank has on a morgage, they have to set aside seven dollars that they can not touch. so, for a 200K house, there is 1.4M that they have on hold. They want to release that money asap by selling 200K property asap.