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Property Management Blog

Published on Saturday, March 24, 2012

5 Strategies You Can Use to Profit on Foreclosures

Strategy #1 - Stop Foreclosure Services

This strategy works best for a homeowner who is in foreclosure, wants to keep the house and has the financial resources necessary to keep the house. A homeowner that falls in foreclosure in this scenario usually has done so because of a temporary situation that has now been rectified. For example, let's say you have a homeowner that lost a job. As a result of the job lost, he or she got behind on payments and is now in foreclosure. Now let's say that they got a new job and they can afford to make mortgage payments. However, what they cannot afford is having to make all of those back payments that are necessary to bring their loan current.

By offering stop foreclosure services, you can help the homeowner by negotiating with the bank to arrange a loan modification or forbearance plan. This is when the bank agrees to modify the terms of the loan to allow the homeowner to bring the loan current by restructuring it to be more affordable.

How do you make money? In return for negotiating with the bank, you charge the homeowner a fee for your services. Just keep in mind in many states, you cannot collect a fee for stop foreclosure services until after the services have been rendered and you have successfully negotiated an arrangement for the homeowner with the bank.

Strategy #2 - Preforeclosure Purchase

This strategy works best for a homeowner who is in foreclosure that doesn't want to keep the house. However, there is plenty of equity available in the home that the homeowner can sell the house at a discount and still be able to pay off the loan in full.

In many cases, a homeowner in this scenario will go to a real estate agent and have the property listed. However, there are some scenarios in which you can still make a profit. For example, if the house is in poor condition, it is not going to sell for full market value. You can negotiate to purchase the house for significantly less than market value to justify the repairs that will need to be made to the home.

Strategy #3 - Short Sale

This strategy works best in a scenario in which the homeowner doesn't want to keep the house. However, there is more money owed on the balance of the mortgage than the actual market value of the property. This is also known as being "upside down" on the loan.

In this case, you can utilize a strategy known as a short sale to profit on the property. With a short sale, you offer to purchase the house at a price that is less than what the loan is worth and more in line with the actual value of the property currently. Many banks are willing to lose money on the loan because it's cheaper to get rid of the non-performing loan than it is to have to incur the expense of foreclosure.

Strategy #4 - Deed In Lieu Of Foreclosure

This is a strategy that many investors don't know about. A deed in lieu of foreclosure is when the homeowner agrees to give the house back to the bank without the bank having to foreclose on the property. The bank takes ownership of the property and the homeowner moves out of the property.

While there aren't a lot of benefits to the homeowner, it does bring closure to the process and allows the homeowner to be able to move on, instead of allowing the process to continue to drag out through a full foreclosure process.

What you may not realize is that many banks and lending institutions are willing to pay money to investors if they can assist the bank in getting the homeowner out of the property. It is not unheard of for a bank to pay an investor $1000 or more to get a homeowner to sign a deed in lieu of foreclosure and make sure that the property is turned back over to the bank.

Strategy #5 - Buy At Foreclosure Auction

The fifth strategy is to simply purchase the home at the foreclosure auction. This strategy is the one that you have to use if none of the other four strategies work. However, if you have the cash available to take advantage of this strategy, or if you have the investing partners or wholesale buyers that you can flip to, you can still make money off foreclosures at the auction. The key is to make sure you don't get caught up in the action and bid too much on the property.

By understanding how to use all five of these investing strategies, you will be able to close more deals. This is because many deals that you may have had to pass on if you didn't know one of the strategies above, you will now be able to go after and profit off the deal. Knowledge is power in this industry, so make sure you get the knowledge that you need to be successful.

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Landlord Knowledge Base

If you’ve ever considered investing in a few rental properties in Philadelphia or Bucks County, PA now might be a good time. Prices are still low in Philadelphia, but have been on the upswing. According to the National Association of Realtors, the median price of an existing home in a US metropolitan area grew 13.7% between July 2012 and July 2013, the latest in a 17-month streak of year-over-year price increases. 

New landlords can choose from properties that are likely to appreciate and a large pool of potential renters.Licensed realtor Pat Mueller cites a few reasons for this trend: “Many families have lost their homes to foreclosure and are entering the rentals market for the first time in years. Mortgages are also harder to get now, so fewer people are qualifying for a new one.”The more skills you bring to the table to get into Houses for Rent in Philadelphia Philadelphia or Bucks County, PA and the more time you have to devote to your properties, the faster you can make a return on your investment. 

But investing in rentals can also be disastrous (or too stressful to be worthwhile) without expertise. Here are three professionals you may consult about your new rental properties, and what you can do to mitigate how much they cost you:Handyman:  You may need to hire a specialist for some work on your rental. If you need new outlets or new pipes, for example, hire an electrician, plumber or licensed contractor. Handymen usually tackle smaller, more manageable tasks, like:

  • Painting and paint removal
  • Drywall repair
  • Minor appliance repairs (fixing a leaky toilet or faucet, among others)
  • Installing tiling or flooring, moldings, windows, doors
  • Refinishing decks, cabinets and other wood items

When You Could Skip It: You could do any (or all) of these projects yourself if you have the time and interest in learning. Of course, this only works if you live relatively close to your rentals and are flexible enough to service them on short notice. And if you’re willing to respond to the occasional 5 AM basement flooding.

Average Savings: Any base rates or costs-per-hour vary from location to location in Philadelphia or Bucks County, PA , but nationally, you can expect to spend an average of $60 to $85 per hour for repair costs. It general costs less to hire an individual handyman than a handyman employed by a company. Expect an additional charge if your job requires a trip to the store for materials.

Resident Property Manager As the owner of a handful of rental properties, you may be able to manage them yourself, but if you want help, a single resident manager would probably be more cost efficient than a property management company. Resident managers may:

  • Serve as a handyman
  • Advertise vacancies in your units
  • Show apartments to prospective tenants
  • Review rental applications
  • Collect rents

When You Could Skip It: Again, the closer you live to your properties and the more spare time you have, the less likely you are to need a manager. The obligations of being a boss will also cut into the time you save on maintenance.

Average Savings: The national median wage for residential managers is just over $25 per hour. Research the wages in your community and adjust according to how much responsibility your manager will take on. 

Real Estate Agent: Once you’ve gotten your financials in order and done your own research on the neighborhood(s) you’re considering, you might contact a realtor to show you potential properties. You can also arrange for a realtor in Philadelphia or Bucks County, PA to show rentals once they’re ready to rent.

When You Could Skip It: It depends. Even if you’re a local, or have thoroughly researched the neighborhood(s) you’re considering, a realtor is a great resource for a first-time rental buyer. Realtors have access to data and statistics not necessarily available to the general public and first-time buyers may not know all the right questions to ask. Using a realtor to fill your Houses for Rent vacancies is less of a no-brainer, depending on your other time commitments or whether you plan to hire a resident manager who could do the same thing.

Average Savings: As a buyer of rental properties, as when buying your own home, sellers typically pay most, if not all, of the buyer’s realtor fees. In this case, Mueller points out there’s little reason not to work with a realtor. For help in filling your units in Philadelphia or Bucks County, PA, the services of a realtor would set you back between 10-20% of the unit’s rent per month.  Mueller recommends interviewing with several brokers before making your final decision to invest into Houses for Rent .

The Bottom Line: As a new landlord, you can’t necessarily control the flexibility of your schedule or the amount (and cost) of unexpected repairs to your properties. Rentals are a long-term investment. However, to maximize profits from your Houses for Rent, new rentals, you can buy close to home and start small. It is best to begin with just one or two properties. This will allow you to maximize the time you spend on your properties’ needs, and minimize the amount you’ll have to pay anyone else.

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