Many of our Active Members email me with questions about deals they’ve found. I’m happy to answer them so I can help them buy a house they’ve found in our pre-foreclosure data at a substantial discount from fair market value.
The following email really hit home with me. It shows how easy it is for someone to think that just because a house is “in foreclosure” it must be a good deal, Nothing could be further from the truth.
Finding the profitable deals and avoiding the losing propositions takes good research and some legwork. This must be done before ANYONE makes an offer on a foreclosure home.
As you read this member’s questions and my answers, ask yourself this: Without expert advice, would any of you have pursued this deal? Chances are, you might have, and then would have wound up losing money and concluding that buying properties in foreclosure “just doesn’t work.”
Well, it DOES work! You just have to understand what to do and how to do it.
First, here’s the member’s email, word for word. Read on and learn.
I am a new Active Member to Foreclosures.com and I need your advice. I received a response from a letter I mailed out last week to an owner in Default on your list. The owner immediately said she would sell her house to me. She wants to walk away with $11,000. Being that this is potentially my first deal, I don’t want to make a mistake and buy a property I should not.
After getting the loan and lien information from the owner over the phone, I decided to meet with her and see the house. The home is on a somewhat busy street in Rancho Cordova (outside Sacramento, CA) and there is a bit of traffic passing through.
Here are the particulars:
3 bedrooms, 2 bathrooms
2 car attached Garage has been converted to bedroom
Kitchen needs to be remodeled.
Both bathrooms need to be remodeled.
Roof is FLAT. All other homes have pitched roofs.
1st Mortgage $122,900
2nd Mortgage $7,905
I believe I can sell the property after repairs for $175,000 – $180,000.
Is this deal worth pursuing?
Do you consider the FLAT roof a negative?
Do you consider the traffic a negative as well?
Please let me know your advice and direction.
Thank you in advance for your time.
– Larry F.
Dear Larry:
These are all great questions and you’ve done a great job of jumping in with both feet! You will find over time that the more questions you ask, the clearer the picture becomes and the easier it is to put a deal together.
Sounds simple I know, but now I’ve come up with a whole other set of questions that need to be asked, together with some hints on getting the right answers:
- Why does the seller want $11,000? How did they come up with that amount? What do they need that money for? — to buy something or pay something off? Is this based on their perceived “market value?” Do you see my points here? Let’s get back to WHY $11,000 is “the magic number?” Maybe much less than $11,000 is TRULY what they would take. How much less? Try asking “well, if you can’t get that, what would you accept?” Keep asking and asking them until you get the truth. Find out what amount is the LEAST they will take.
- Have they tried to sell the house themselves ? Have they talked to any Realtors? Has it been in escrow? You need to know the history of the sellers’ attempts to sell. Get the details… Ask, ask, ask, listen, listen, and listen.
- After closing, where will they move? How much money do they need to move? When can they move? Ask, ask, ask, listen, listen, and listen.
- What do they think the house is worth “as is”? What do they think it’s worth “fixed up”? Just ask the questions and shut up Don’t say anything that might influence what they tell you. Keep your mouth closed, and just wait for the answers just ask, ask, ask, listen, listen, listen.
- Whatever they say, reply “that seems high to me… ” And see what they say next. Another good comeback is “with a flat roof? Hmm, I don’t think so…” and see what they say… ask, ask, ask, listen, listen, listen. Read more about this here.
Next, I need to know the total square footage of the house (before they converted the garage to a bedroom). Can the garage be converted back easily? How is the fencing and landscaping?
Without seeing the house and comps, my guess is that you will have a $20-$25/per sq foot rehab bill. I also think $160,000 is probably a better top value considering that a “flat top” roof is worth less than a standard composition roof and your top comparable is $170,000.
I think you can already see that this one isn’t going to work. Here’s the math that will show you why. Remember that our first rule is to pay no more than 70% of your projected market value:
Maximum you can pay is $77,000
Oops, this deal DOES NOT PENCIL, does it?The loans total $131,000, and the most you can pay is $77,000. They are very “UPSIDE DOWN” in this property (They have no equity and, in fact, with their second mortgage. they have spent whatever equity they did have). “As is”, the house, may be worth no more than what is owed on it or even less.
They should hire a Realtor to list their home for sale They will probably have to do a “short sale” (where the house is sold at market value, the seller gets just enough money to move, and the lenders pay the commissions and take a reduced payoff on their loans).
Good luck and hope to see you in the future in one of our Lab programs, as this deal would NOT have made it past Step 1 (“Weeding the Leads“) Please don’t be discouraged, and remember what you’ve learned here. Keep looking and keep asking the questions. The deals are out there, and you’re learning how to spot them.
Best wishes, Alexis
