Housing Foreclosures

There's an old maxim that I believe generally rings true, and that is, "buy low and sell high." It makes sense, and to be honest, sounds very easy to do. However, that isn't always the case. Understanding markets is an unbelievably challenging thing to do. Just ask most of the Institutional investors on Wall Street. I'm not naming any names, but one company in particular has had their stock plummet from over $100 to just about $2 in the span of weeks resulting from the recent calamity known as the sub-prime mortgage crisis.

To put it another way, the market is currently in the midst of repricing risk. What this means to me is that there is a lot more uncertainty than there used to be. What is the value of your home or investment property in the wake of the sub-prime lending debacle? What is the value of a barrel of oil or an ounce of gold as investors search for alternative opportunities? People and institutions that were supposed to know these answers just don't know anymore, and that makes everyone's financial life miserable.

But it doesn't have to be. Uncertainty can be a beautiful thing if you are willing and able to manage that uncertain risk properly. There is a goldmine out there that is just waiting for people to pounce on it, but it takes guts, and it won't just fall in your lap.

The opportunity that I'm alluding to is the current housing market and foreclosures in particular. According to InvestWords.com, a foreclosure is, "The legal process by which an owner's right to a property is terminated, usually due to default. Typically involves a forced sale of the property at public auction, with the proceeds being applied to the mortgage debt." Wow, thats an awful lot of jargon for one sentence. Let's break it down so that we understand what's going on here.

A legal process: I suppose that means that there is some law that governs the property of sale. Now, there are a tons of laws, and I'd probably have to go and study for the Bar before I could give you a proper understanding. However, I suppose that foreclosures involve legal matters. Got it.

Right to property terminated: This sucks if you're the one being foreclosed on. This pretty much means that you don't have the right to own this home anymore.

Usually due to default: This means that the owner was unable to make required debt payments, most likely in the form of a mortgage. This then means that authorities have to step in and take your home away.

Forced sale of the property [...] proceeds applied to public mortgage: This is the sweet part of the deal. This means that the bank, who technically owns the home (they are being repaid by the owners), wants to offload their debt (risk) for the house to another entity. This is the part of the process where you can make some serious cash, real fast.

So now that we understand exactly what foreclosure is, how can we capitalize on it to make a huge killing so that we can buy our Porsche, Ferrari, or Playstation 3? The process isn't all that complex, but it requires a lot of "dotting of I's and crossing of T's." You have to have enormous attention to detail and be quite bold in your actions. As I started out by saying, this is an uncertain time in which risk is hard to measure. However, there is opportunity out there, so don't just watch others, get out there with them and enjoy the fruits of capitalism.

• Process

When I discuss the purchase and sale of foreclosed homes, I will do so generally. Of course there are a lot more details to it than I could ever possibly express here, but ultimately I see it as a three step process.

1. Find Location
2. Price and Purchase
3. Renovate and Sell

I'm going to discuss these three aspects generally.

• Find Location

All over America, people are being struck by the sub-prime mortgage crisis and this is leading to extensive numbers of foreclosed homes. According to Forbes Magazine, in 2007 there were 79% more foreclosures than there were in 2006, and in the same article they cite Congress's Joint Economic Committee who have projected that 2 million Americans will lose their homes in the next 2 years. This is very unfortunate. However, I'm an optimist and I believe that there is a silver lining to every cloud.

Foreclosures have hit Michigan (Wayne County), Nevada (Clark County), Arizona (Maricopa County), and California (Riverside and Los Angeles Counties) hardest. There are thousands of foreclosed homes in these areas that are just waiting to be bought up at a premium. Once you find an acceptable location, we go onto the next step.

• Price and Purchase

This is probably the most critical part of the whole process, because as most financially literate people would concur, your profit is made when you purchase the item, not when you sell it. Anyway, the pricing of a foreclosed home can be a tricky task. I would therefore advise getting a Realtor or some sort of pricing expert to come in and price the home you're looking at. Paying $500 for their services will be well worth it in the long run. They are trained professionals that can advise you based on the quality of the home, location, and comparable houses in the area.

Another tricky part about purchasing a foreclosed home is the fact that in today's market, the market of uncertainty, it is critical to have a fantastic credit rating and probably have enough cash on hand to make the down payment on the home. The nice thing about making a down payment on a foreclosed home is that it is typically at a huge premium from the original price, because it is in the bank's best interest to offload the property, because it is substantial risk to them. Finding a buyer alleviates a small part of the banks risk in the short run.

Therefore, a home that would ordinarily be sold for $100,000 can now be bought for $70,000. Consider the following graph provided by Yahoo! Real Estate that shows the average price of a home in California over the past 12 months. It has declined from $516,000 to $430,000. Thats a 16.6% decline. And that is merely on average. If you really look hard you can find houses at a far greater premium. Talk about buying low.

**Click the Image to see it more clearly**
Purchasing the home will be the trickiest part of this whole transaction. There will be some fees surrounding this transaction, but they are inconsequential in the long term. You should always be thinking about this as an investment over time, except you are the one in control of this investment, which may be a lot different to your prior investments.

The purchase price is critical and you should negotiate this properly. Do not cut corners on this aspect of the process. It can be the difference between $1,000 and $10,000.

• Renovate and Sell

The final portion of the process is where the greatest amount of uncertainty comes in. Just as I have been telling you that these are uncertain times, and indeed they are, this is truly where you will encounter this reality. It is unfortunate that there isn't an unlimited pool of people trying to buy a home at any given time, but today, most people are in the same mindset that you probably are. That is that you're uncertain about the future and you'd rather hold onto your money, because you're not sure what's going to happen.

The way to improve your chances of sale is by performing the first part of the process properly. Find a great location in which there was just one or two homes that got foreclosed on. Finding a neighborhood in which foreclosures are rare is like finding a diamond in the rough. In my own experiences, I find that foreclosures are like dominoes. One falls and the rest around them soon follow. No one wants to buy in these areas, because they are cesspools of uncertainty. Find a great location!

Make sure you also renovate your home. This will cost a little bit of money, but a little bit of money can go a long way. Work hard yourself cleaning it and installing things yourself. If it is too hard for you, get a professional to do it. Find a friend who knows everything there is to know about installing windows or air filters (or whatever it may be). Pay them for their time. It will make a huge difference.

Selling homes is tough these days. Take a look at this graph that represents new home sales between January 2002 to January 2008. They have declined sharply in the past 12 months. However, uncertainty is bound to become certainty once again, and when that happens, home sales will increase. It just takes a little bit of nerve to make these moves right now because of all the uncertainty surrounding this investment.

In order to sell your home, use a Realtor. They know what they are doing and can find the right people for you. Also, your time is valuable so use it doing other things like creating your empire that you are well on your way to doing if you are getting yourself into selling foreclosures at this moment. It is a little uncertain, but remember, "buy low, sell high." Sounds easy, but sometimes you just have to look a little deeper and go against the crowd to truly get results.

• Conclusion

Currently, there is a huge opportunity in the housing market. You can make unbelievable money purchasing and selling foreclosed homes. Consider it a one to two year investment. Based on your ability to negotiate the price of the house, this could easily net you in excess of 30% over a short time frame. It is important to be absolutely methodical in going about purchasing a foreclosed home. Remember the process: Find the location, Price and Purchase, Renovate and Sell.

Buy low, sell high. Make me believe that isn't easier said than done.