Investing in Foreclosures- How do Investors Make Money Investing in Foreclosures?
It’s no secret that investors are still making money in real estate. They are able to close the deals and still manage success even in a down market. How is this possible and what is their secret? How are they still making money on foreclosures and houses that have been just let go?
There are some common factors that can be found in investors, especially those in real estate. They belong to a group of people that can experience success in any market but these particular investors are making money in real estate. Yes, they have to know real estate but they also have to have the following characteristics:
* Common Sense
* Networking abilities
* Strong work ethic
You may have read this list and thought to yourself, “I have those characteristics, so why can’t I start investing and making money on real estate?” You can! There are ways you can enter the real estate arena and begin to make money quickly. There is a reason and a method to investors making money on foreclosures.
It is possible to make a profit on almost anything if you buy it for a low enough price and then inflate the selling price to make money. Think about something as basic as a booster club at your local high school football game. The booster club moms buy the food, drinks, and supplies at a large supply store, use discounts, or have someone donate the items. They then take the items and inflate the price to make money from the products. They volunteer their time so the only gap to close in the way of costs is the actual product cost. That is one of the reasons they sell a can of soda for almost 3x what is really worth. People pay it because they support their local teams.
The same can be true of real estate. If an investor can buy a foreclosure for a low enough price, even after they update the inside, they can still inflate the price enough to resell it. People will always need a home in which to live so there will always be a demand for reasonably priced, good condition housing. There are not many buyers who are moving that want to deal with a foreclosure and all the problems and hassles. The title may be difficult to obtain and the house may need a lot of work. This is where the investors can swoop in and work their magic.
When the investors see a foreclosure, they see dollar signs. The lower the price, the better the deal for them. A low priced home may need work on the inside. The investor will not spend more money than what they will make. Think back to the booster club sales. The booster club is not going to buy steaks and have them available for sale when the majority of people would not try to cut and eat a steak during a football game. It just doesn’t make sense to do that and they would be excluding regular patrons who would always be ready to purchase a hot dog and drink. This doesn’t make sense to only cater to those who want a steak every once in a while.
The same is true of investors in real estate who have to remember the market to which they are targeting. The investor can buy a house in a middle class neighborhood for a low price but if they put in too many upgrades, they will wind up losing money. They need to put in the minimum upgrades and features so the house sells and will be appraised within a reasonable range. There are few high dollar buyers in the everyday world so designing homes to only suit those budgets and styles is not a wise investment.
It is a fiscally responsible idea to invest in properties that appeal to a broad range of people and a wide array of budgets. The investors who are putting their money into foreclosures are also doing so in order to make back their money, not lose money. They will only put in the minimum amount necessary to sell the house within an acceptable budget. They know the area. Most investors will choose a certain area and stick within that area because they develop relationships with contractors and others who will help them as necessary. They learn what buyers want in that particular area.
For example, some people in various cities prefer a certain building material to be used and things such as granite counter tops and wooden floors while others will prefer a tile floor with a laminate counter top. These preferences can vary and it is part of the investor’s job to figure this out. Once they learn the area, they can cut down on the time to rehab a property such as a foreclosure. They will go into a recently bought house and be able to know within an hour what they want to change, an approximate cost, and how to proceed quickly and efficiently. With many investors, comes a team of contractors, decorators, and others who will work together to turn over the property quickly. This is called “flipping” and investors who can do this quickly will be the most successful. By keeping costs low, they will make a profit.
In some cases, the investor can still overpay for the house and the area value goes down before the house can sell. A smart investor will figure out the break-even point and get rid of the property as quickly as possible. The longer they hold onto a failing property, the worse they will wind up and the more money they stand to lose. This is a risk for them in the beginning but the main goal of an investor is to take those risks and cause them to dissipate. Not only should the risks be diminished, they can even disappear and then the investor comes out on top.
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