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Bargains are not defined by recent peak value. Rather, they are defined by how far below CURRENT market value you can buy it. Despite the fall in the overall market, there are techniques that can be used to find bargain purchases. I have a two-volume book on the subject: How to Buy Real Estate for at Least 20% Below Market Value.
Buying real estate and hoping it would go up in value worked some of the time in some places in the past, and will again some time in the future. This book, in contrast, contains strategies that work almost all the time in almost all markets and regions. And if the whole market goes up while you are making bargain purchases, you get that profit, too. But you are not dependent upon market-wide appreciation for your profits.
The two volumes combined contain about 180 actual case histories, often giving the name and phone number of the investor who did the deal.
The first chapter gives an overview of the various ways bargain purchases come about. The second chapter thoroughly discusses the ethical issues involved in what many call stealing property. The other chapters each cover a separate technique for making bargain purchases. See the table of contents for the list of techniques covered.
Has the current recession altered how you approach bargain purchases? You bet! One effect is that pre-foreclosures and foreclosure-auction bargains have all but disappeared in many markets. The reason is the properties are underwater (mortgage balance exceeds current property value). At the pre-foreclosure and foreclosure auction phases, investors buy equity. If a property is underwater, it has no equity. So almost all the pre-foreclosures and auctions draw no bids and just flow through the pre-foreclosure and auction phases to become OREOs (“Other Real Estate Owned” by banks as a result of foreclosure). At that time, the mortgage balance becomes ancient history and the bank just sells it for what it can get. Are those OREOs big bargains? No. The lenders ought to be cutting prices faster, but for whatever reason, they are not. They are incurring significant carrying costs for month after month to hold out for a top price. They are also now listing the properties with real estate agents so they generally sell for market value or close to it.
Some Florida investors found that the lenders who are the most financial difficulty give the best sales prices while other lenders that are relatively strong and profitable are less willing to bargain.
I am often asked which volume is better? This used to be one book. I cut it into two volumes because it was getting too big. Volume one contains an overview and ethics chapter plus 15 chapters on 15 different techniques. Volume 2 contains 18 more chapters on 18 more techniques.
Which volume should you buy? Both. The only reason to buy just one is that you are explicitly interested only in topics covered in one volume and have no interest in any topic covered in the other. (You can read which topics are in each volume by looking at their tables of contents. See below.)
All investors should know about all the techniques. Even if you do not adopt each as your strategy, you will probably encounter opportunities to use almost all of them over the course of your career. If you have never read about them, you will probably be blind to the opportunity and miss out as a result.
One unexpected opportunity that is good right now is vandalized OREOs. Many OREOs are heavily vandalized either by the owner who got foreclosed or by squatters or neighborhood vandals. These are the only properties that I am hearing that are real bargains at present. These are part bargain purchase OREOs and part fixers. See my book Fixers for details on how to do those. A great many bargain purchase opportunities also include fixer characteristics.
In theory, you can still buy at the pre-foreclosure stage if you do a short sale. That’s a deal here the lenders agree to release the property from their lien for less than they are owed because the property will not sell unless they do. But my son’s recent experience and reports from around the country cause me to conclude that short sales are generally a waste of time. The lenders take forever. Time is money. Screw them. You have better things to do. Let them learn to speed up with some dumber investor than you.
Some investors take the attitude that the long time it takes to get answers from the lender on most short sales is good because it drives away impatient buyers. As long as you do not have to make repeated follow-up calls to make sure the lenders do not forget about your offer, that could make sense. Also, you need to be careful that the market does not change during the wait such that you no longer want the property in question that the price the lenders finally agreed to.
A similar thing can happen with underwater properties at the foreclosure auction. The foreclosing lender can set the minimum bid below the loan balance. They should if they want it to sell at the auction. But they rarely do.
People automatically assume that collapsed prices mean bargains. In fact, while it is easier to find properties to buy nowadays, remember when the profit comes. It comes when you resell the property, not when you buy it. The late Paul Thompson was a foreclosure auction buyer. I asked once if high foreclosures was a great time for him.
No. It just makes it easier to buy, but it simultaneously makes it harder to sell. And you have to do both to make money. It just changes the pie chart of where you spend your time. Nowadays, you spend more time selling and less time buying. It’s not better. It’s just different. The skills required are different.
In addition to needing more marketing expertise, you also need to work much harder to figure out the current market value of the property in question. With fewer sales and recent falling prices, confidence about current market values is hard to come by, but it is crucial to investing in any market conditions.
Financing is harder to get now, so you need to think about it more and make sure you have it lined up in advance as best you can. This is especially true of any speed strategy. All strategies involving vacant properties, like rehab and flipping, are speed strategies. Another common speed strategy is being faster than all the other buyers in your market. If you have to execute fast, you’d better make sure your financing is locked or at least probable. You cannot assume it will be there based on pre-2007 experience. We’re not in 2006 any more, Toto. Because it’s always a topic of great interest, I have written four different books on real estate finance.
It used to be that you could bamboozle homeowners who were being foreclosed into deeding you their home on the pretext that you were going to rescue them and save their home and credit. Invariably, such deals result in in the investor getting the house really cheap and the person who thought he was being rescued out in the street.
This was never moral. I never advocated it. I have long urged investors to comply with the sorts of suitability rules securities brokers have to comply with. Suitability says you do not do a sophisticated deal with an unsophisticated person even if you explain it to them. The problem is they think they understand but they do not. Many have said that’s their problem. Morally, that’s incorrect.
More importantly, politicians in legislatures have discovered it. They call it predatory lending or foreclosure rescue scams and they are outlawing it and urging prosecutors to give it a higher priority. The pertinent laws often use the word “unconscionable” to describe these scams. I agree. In some cases, like Illinois, the new law essentially outlawed whole approaches to pre-foreclosures.
So if you are buying pre-foreclosures, which are still viable in markets where few houses are underwater, you’d better check to see what the pertinent laws are, and make sure you check for laws that were recently passed. California has long had such laws and I talk about them on page 18 of Volume 1 of How to Buy Real Estate For at Least 20% Below Market Value.
The second chapter of ...20% Below Market Value is about the ethics of making bargain purchases. Generally, if you have been following that advice, you would have nothing to worry about regarding the new laws against “predatory lenders” and “foreclosure rescue” scammers.
Because it scares buyers away, the current recession ought to magnify the number and profitability of current bargain-purchase opportunities—except where properties are underwater. When properties are underwater, the only profit is from short sales or lowered minimum bids in forced sales. There is a chapter on short sales in Volume 2 of How to Buy Real Estate for at Least 20% Below Market Value only it’s called Discount Lien Releases, another name for short sales.
34 of the 36 chapters in How to Buy Real Estate for at Least 20% Below Market Valuecover specific techniques. In most cases, the drop in market values has thinned out the number of bidders bidding against you for the bargains in each category. I already discussed the various phases of foreclosures and short sales. Here are the other chapters where bidders are almost certainly fewer in the current recession (the chapters in bold also should have increased numbers of properties for sale in the current recession):
Too many investors are drawing overly broad conclusions like, “Real estate’s bad now.” That’s incorrect thinking. You need to look at each situation on its merits. In many bargain-purchase niches, the number of properties available at bargain prices has increased because of the economic crisis and resulting layoffs, bankruptcies, drops in property values, and business failures. Furthermore, across the board the number of buyer you have to outbid to get a bargain purchase has dropped—the people who draw the overly broad conclusions are gone. Many who would like to bid cannot get the financing under the new, tighter rules of mortgage lending.