If you are actively looking at houses today, it is likely you are seeing properties in these states:
1. Foreclosure – essentially the previous owner could not pay the loan and the bank has taken possession of the house. If the loan was backed by a federal agency (e.g. FNMA) then that government agency has possession of the house.
2. Short sale – the house is still owned by an individual, but they owe more on the loan than the house is worth on the open market. Thus, they are trying to sell the house for less than what they owe on the mortgage. This is subject to the banks approval.
3. Private sale – someone owns the place and wants to move. Maybe it is time for them to move to a diffent house (bigger, smaller) or maybe they need to move due to a job relocation or….
OK, so I have not bought a thousand houses, so my notes here are from my direct experience on houses I have actually bid on.
1. Foreclosures
I bid on a number (8?) of foreclosures and lost when looking for my first rental. Many of these needed significant repair and were under market value for the area they were in. As such, most of them attracted multiple offers and (in my opinion) drove the cost of the house plus the cost of repairs above market value. If you are investing to make money, this isn’t the way to do it. In my experience to date, multiple offers means someone is going to get emotionally caught up in it and pay too much.
I’ve driven past a couple of the foreclosures we bid on to see what is happening. One of them appears to have been purchased by an individual owner. They have cleaned the place up, repaired the damage (visible from the exterior), and painted. It looks very nice and I think they built some equity.
Another place has been under renovation for months. It is starting to look decent, but given the timeline, I can’t belive they are building any equity.
The third reference property sits un-renovated and unoccupied. I lost that bid by $2,000. It seems a shame to let it decay – there was a lot of potential there.
2. Short sale – I have not gotten involved with these because I have been told by some people that it is a long process. However, when I look at comps through the various neighborhoods, in multiple instances the short sales looked to have the best price per square foot, and based on pictures in the MLS seemed to be in decent shape Not a scientific study by any measure, but I think it deserves more scrutiny than I have given it.
3. Private Owners -My first rental was purchased from a private owner. It was in great shape. It was one of the first houses I really liked, but it was priced too high. I watched it sit on the market for months and months and slowly come down to my target area. I bid low, countered a few times, and still ended up with a deal I am very happy with.
I am under contract with a FNMA owned house now. I think it is decent deal, but compared to my first private owner deal, it is much less personal. There is no individual on the other side to deal with – just an agent tasked with getting as much out of the deal as possible. I think this model has pros and cons and will talk about the deal in more detail once I actually close it (otherwise it is all theory!).
