Is now the time to buy Foreclosures?

Is Now The Time To Buy Foreclosures?
Peter G. Miller
The past few weeks have seen breathtaking declines on stock markets worldwide. What was first described as a “correction” has now devolved into a full-fledged capital freeze. What was first called a “subprime crisis” can now be seen for what it really is, a massive financial meltdown.

Assets worth trillions of dollars have been wiped out in the past year, and it’s difficult to look at investing in stocks or property and not wonder makes sense in such troubled times.

No one knows what will happen next week much less months and years into the future. What we do know is that downturns can be both long and brutal. Japan — a nation of savers with a powerful financial sector — saw its Nikkei 225 securities index reach 38,915 on December 29, 1989. Almost 19 years later the same index went below 8,300.

In the U.S. the Dow topped 300 at the end of 1928, but it took 26 years — until 1954 — before the Dow once again finished the year above that level.

What is it that we can do? Despite what you may hear on late-night television, there are no sure-fire, guaranteed investment strategies — especially at a time when the pillars of corporate capitalism are both shaken and stirred.

But there is a future. People will eat, classes will be taught, supermarkets will open, buses will run and most people will want to live indoors — meaning that much of the economy will go on, if not precisely as before then at least in some recognizable fashion.

“America remains the economic engine of the world,” says Jim Saccacio, Chairman and CEO at RealtyTrac.com, the leading online marketplace for foreclosure properties. “We are now having tough times, and we may well have tougher times, but economic activity is not falling to zero. As we have done in the past, we will regroup, restart and get going once more. Because we have a growing population, there’s little doubt that housing and real estate will be at the heart of any effort to move forward.”

Strategies
It’s often said that some of the most successful investments have been made by going against the grain, by selling when most are buying and vice versa. There is substantial risk in such a strategy, but then there is risk in all investment decisions — and in investment decisions not made.

In the context of foreclosures, going against the grain now would mean buying while others are selling. Is there any sense to such a strategy? Not a guarantee of profits, but some lucid and reasonable case for such purchases?

The answer is yes.

The goal during in recent years has been to buy now, sell quickly and pocket capital gains. In a rising market such an investment approach is attractive but not when values are falling or stagnant. The better option in hard times is to seek capital preservation and ongoing income.

Go back to the Depression — the 1930s. People didn’t trust banks, even banks that paid interest. Forbes magazine says “T-bills got so popular that for brief periods between 1938 and 1941 they carried negative interest rates.” (See: A Brief History of Stock Fads, September 14, 1992)

Imagine that. Why would people “invest” in government securities that were certain to produce losses? Because minor declines were more tolerable than placing money in banks that might fail and wipe out entire investments.

So who made money during the Depression era? One group was those who bought selected real estate at sunken prices and simply held on. The importance of such properties was that they threw off increasing amounts of income over the long-term. No less important, capital was preserved.

What About You?
So is now the time to buy foreclosures? The answer with a caveat is yes. The caveat? Not for everyone.

The experiences of years ago suggest that going for income and long-term benefits is a logical and reasonable strategy today. Given that foreclosures are often available with significant discounts, it follows that they represent a good starting point in the search for long-term income and capital safety.

But are foreclosures right for you? There’s no universal answer because all properties, markets and investors are different; however, here are 10 core questions which can help you decide:

1. Do you have financing in hand? Speak with lenders and give them tax returns and other documents to get pre-approved for a mortgage before looking at houses. Ask about fixed-rate loans that can serve as a hedge against inflation — if rates go up you’re safe, if rates go down you can refinance.

2. How’s your local market? Is the inventory of unsold properties increasing? What percentage of homes on the local MLS have either been foreclosed or are distressed? The general rule is that the bigger the foreclosure percentage the bigger the foreclosure discount. Speak with local brokers for specifics.

3. Are new home builders discounting units in established projects? If so, that’s good news for new buyers — but bad news for previous project investors. In general terms, less new construction means more housing demand if the local population is growing.

4. What are the rental rate and vacancy trends in your community? In some situations home prices are falling but rents are going up. This is happening because while homes are cheaper, many would-be buyers can’t get financing so unit sales are dropping. At the same time the number of potential renters is expanding — in part because several million people have been foreclosed and now need to live somewhere.

5. What foreclosures are available in your area? Check the RealtyTrac listings for details. You may be surprised at the number of available properties in even the most expensive areas.

6. Can you do your own repairs? Some of your own repairs? It always pays to have good relations with licensed trade people such as plumbers, electricians, home inspectors, pest controllers and contractors. With some properties it may make sense to partner with a professional.

7. Can you afford vacancies? What about monthly losses if the rent is less than expenses? Don’t fall into a cash flow trap, make sure you have enough dollars to comfortably acquire property, fix it up and hold on over the long term.

8. Will foreclosure owners such as banks, S&Ls, credit unions, insurance companies and pensions provide financing? In some cases the answer is yes. In other words, when considering foreclosures see if purchases can be seller financed — even if the “seller” is a big institution.

9. Would it make sense to buy a foreclosure as a residence and then rent out your current home? Lenders are now instituting new rules that constrict such plans. As one example, the FHA recently introduced a buy & bail rule designed to prevent owners from buying new homes and abandoning old ones. Under the new standard you will likely need a lease, deposit and a month’s rent before you can get an FHA loan for a replacement property. The problem is that it may be impossible to meet such new requirements until the original property has actually been vacated and prepared for tenants. Look for private-sector lenders to adopt similar rules.

10. What do local laws say? New regulations in many states have been designed to prevent the abuse of those facing foreclosure. While well-intended, some of these regulations are very broad — and they include stiff penalties. Work with local brokers and attorneys to stay within the law and avoid the pitfalls and penalties created by these new state regulations.
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Peter G. Miller is the author of the Common-Sense Mortgage and is syndicated in more than 100 newspapers.

 

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