There is still a Secret to buying a home?
With all of the information on the internet you wouldn’t think there are any secrets left would you? If there weren’t any secrets, how come everybody isn’t buying houses at half price and getting rich? You know there must be something missing right?
The internet has been a great tool to open up information to the world. Some of it good, some not so much. You might be asking how could more information be bad? The obvious answer is the creation of analysis paralysis. With so much information available it is very easy to get bogged down in the details, and never make a decision.
Since many people confuse the gut feelings of fear and excitement, they can’t tell the difference and don’t make a decision at all. Remember the last time you were at a restaurant and the waiter asked “are you ready” and someone said “You go, I’ll know in a second.” Imagine that problem with the pressure of a monthly payment.
The Internet Gives Away The Information, But Not The Secret!
Recently in the real estate world there has been another problem caused by easy access to information and a subtle change in the market. Right now many people are getting information without understanding what it means. Specifically I am talking about foreclosures and REO’s. Many people consider them the same thing and they are not.
Last year the market was very different. Stocks were up so investors were staying in the market. Like a Shaman in the old days saying there would soon be light after an eclipse, Warren Buffet says he would like to own thousands of single family homes and then there was light on the wholesale real estate market.
At least once a week I get a call or a lead from a website that starts the conversation with “I want to buy one of those million dollar foreclosures for four hundred thousand that I saw on realtorsmokingdealoftheweek.com.” and they say, “does that really exist?”
The answer is yes, on the wholesale market, and not so much anymore on the retail markets. The realty is yes, someone owed one million or more on a home that just sold for four hundred thousand or so. And, under the right conditions, I can help you get one of those houses if you are ready to make a wholesale buy. Otherwise, you might pay eight hundred thousand for a home that someone else paid over a million for. The conversation then goes to NOD’s and Pre-Foreclosures. Everyone wants a deal and they think the deals are everywhere and they are for everyone.
Unlike most other markets, real estate presents a different level of risk. Especially when it comes to speculation. I usually start with “So, do you invest in stocks?” most of the time the answer is “Why?”. I then ask “Do you borrow money for investing in stocks on margin?” That is usually followed by a puzzled look or silence on the phone.
When you buy a foreclosure site unseen and ask the bank to invest money, that is exactly what you are doing. Right now, banks aren’t doing that.
So what is the Secret that will let you get a deal?
Let me first explain what you see online, and what they don’t tell you about unless you do some digging. Let’s start with the NOD since that is the first thing in the foreclosure process. There are dozens of websites both free and paid that will show you the NOD’s or notices of default.
All the filing of an NOD means is the banks told the homeowner that they aren’t paying their mortgage and the bank would like their money. They are also filing a copy at the county recorders office so they can eventually maybe someday start the actual foreclosure process.
What these websites don’t tell you is that most of the NOD’s filed are for people who are trying to get a better deal from their bank. It is a tactic used to negotiate a reduction on the loan.
I still call every single person that gets one in my area, hoping to list the house as a short sale. If they really can’t pay for the house, and they are underwater they will normally sell. There are a couple of really aggressive agents in my area that also do this. If I call back a week later so many agents have called the phone is normally unplugged. For an agent it pays to be first here.
The reality is that the banks are more likely to negotiate if they leave. If they stay, the banks are leaning more towards foreclosure these days. My guess is that since we are at the bottom of the market in many areas, the banks think they will recover more this way. It’s just my guess as an outside observer. At this point about 1 out of 80 end up on the market, as a short sale, and at least a dozen agents will call in the first two weeks.
The next step is a “pre-foreclosure”. This is where the home is easier to read. By this point it is either for sale as a short sale and the owners are making an effort to get out, or they are running a gamble to see if the bank will go all the way to foreclosure. The grey starts getting a little more black and white. Picking up a house in this area that isn’t already listed is highly unlikely. I would put the odds in the 1000:1 range that you could convince an owner and a bank to sell you the house at a great price during this phase.
Finally we get to the “foreclosure”. Well not really. This is where the “auction date” is set. This is the cash only auction on the courthouse steps, not the auction at auction.com or Williams and Williams. Investors and banks bid for the house on that day, well sometimes. About 50% of those dates are extended for a list of reasons that will make your head spin. Sometimes the house is allowed to go to a short sale just one day before the auction. It has happened, although not as much recently that a dual track house, which was approved for short sale and is in escrow, gets foreclosed because the two guys at the bank aren’t talking.
If the house actually goes to the auction there are two outcomes. 1. The bank bids to keep it or 2. An investors bids for it.
In the first case, this is where every agent that has a relationship with the bank scrambles to get the listing. If the house is in good shape, the banks will clean it up to FHA standards and try to sell it at a “retail” price. The home is good enough to get a loan on.
If the house is a dump, the bank then assigns a “wholesale” price, which is what investors are looking for. The house won’t qualify for a “standard” or “FHMA compliant” bank loan. You need cash or very expensive “hard money”. Unless you have a lot of time on your hands and are a good contractor, it is tough to get in as a wholesale buyer. This is where many homes make it to the big sites like Williams and Williams. If you know what you are doing this is probably where you can get the best deal as a non-professional investor.
The problem at these situations is Auction fever. Many times I will price out a home and it will hover in that range and suddenly someone makes a crazy bid and emotion takes over. At the end they pay too much. Have your number in advance, walk the property, deduct repairs and be disciplined don’t go over. Dean Graziosi teaches a method for bidding on homes he calls the 25 to 1. He says you should expect to make 25 offers to get one accepted. That takes a little discipline and a lot of stamina.
This is where the confusion is. A lot of people think that they should be able to get a “normal” home loan and buy a house “as-is” and fix it up. The reality right now is that banks are not allowed to, nor do they want to accept this risk.
This is where information without understanding is a problem. People spend dozens of hours scouring sites to get a “deal”, and then they call an agent because they don’t understand that buying wholesale houses is a business, not a hobby. If you are going to borrow “hard money” at very high interest rates, you have to be dead on your budget and flip the house quick.
Don’t give up when you learn the truth.
Explaining how this always results in the same deflation of the excitement the people have when they pick up the phone and call me. Sometimes it even creates anger at the system for locking people out. The reality is the system is protecting people from themselves who don’t have the skills or money to get it done and those who lack the focus and determination to keep doing it even when everyone else would have quit.
So now the big answer. There isn’t really a secret. When you see an investor make $5,000, $50,000 or even $500,000 on a deal, they didn’t just work that deal. They likely worked hundreds or even thousands of deals and offers to make some good money. The more they practice, the better they get. Like Art Williams says, they “Do It” a lot. The real secret to success in real estate is the same as the secret to success in any venture. Focus, determination and discipline will always carry you a long way. You have to start with focus. If you don’t know what to focus on, try reading “So Now What?”.
The big risk with real estate is that you might not make money for a while. Day trading, you might make money in an hour, with home flipping or investing in can take weeks or years. When you leverage with other peoples money. The upside percentages can be phenomenal and the downside can be devastating.
Success in Real Estate requires some different thinking.
You always need an exit plan before you start. If you don’t you might be handing the bank the keys to your house.
That isn’t to say you shouldn’t buy Real Estate. There are always great deals once you learn the business, and with interest rates under 4% I feel strongly that it is time to buy. Last year when I posted that the market had bottomed in Orange County along the coast, I dove in head first and bought the most expensive house I could afford at a short sale.
I was wrong though. The market had a very small but steady decline for another 60 days after I made my declaration and moved in. For a minute I started to doubt my call and agree with the so called experts who said there was another 10-20% that the market could fall. Along the Orange County California Coast, that 10% never happened, and the bottom is now being tagged in the late summer of 2011 by those same experts.
Recently, the same floor plan I bought that is sitting just two streets over sold at the courthouse auction for 18% more than I paid, and the investor has it listed for 24% more than I paid. If he gets the price, I will be a happy homeowner. The reality is, he probably overpaid and will be waiting a while to get his money back.
So how can you put this market to work for you?
If you have the patience, the best way to come close to a wholesale deal is to buy a short sale. A short sale means that you are going to buy the house for less than the bank is owed for it. The average in Orange County CA is just under 300 days right now from open to close on a short sale. Nationally it was 308 days last month. That is why you need patience. As a general rule, the closer you are to the amount owed, the faster the sale happens.
For fist time buyers, the homepath program is another great opportunity. There is a deal called “first look” meaning investors can’t bid. This is something every renter should be looking at. Why pay rent when you can own? I don’t know. Just like an investor, to get a really good homepath deal, you might need to see 20 or 30 homes and bid on 10 or 12 of them. You can check it out at homepath.com
The bottom line is if you need to move anytime soon and are using the banks money, my advice is find the best house you can afford and be happy. If you have some time and would like to trade that time for equity while hoping the loan rates don’t jump up, take a shot at a short. Finally if you have cash and aren’t a professional investor, buy wholesale very carefully with an agent who has been an investor themselves.