How to Profitably Invest in Foreclosures

Within the realm of real estate investing, each type of investment (foreclosures, fixers, land, REITs, etc) has its good and bad times to buy. To be a successful investor you need to be able to identify not only which type of investment is the best at any given time but also which sub-category within that investment type you should look to specialize in, and when in the market cycle to buy.

Perhaps you are new to real estate investing (or not) and have heard that foreclosures currently abound and offer the best way for investors to gain instant equity in a property. This may well be very true. But the designation "foreclosure" is a general term comprised of many types of properties. Understanding the different types of foreclosures, where in the time line a particular foreclosure stands and which type of foreclosure offers the bet deal is critical to your success as an investor.

Along the time line of the foreclosure process, there are three basic areas that present buying opportunities for investors. The first of these has investors buying before the foreclosure auction. The second opportunity comes through buying homes directly at the auction. The third and final possibility is to buy properties after the auction is over, either directly from the bank or from an auction company. These bank owned properties are referred to as REO's or Real Estate Owned. Each of these stages in the process provide unique benefits as well as challenges. The smart investor will need to contrast the pros and cons of each method in order to find the best and safest investment opportunities within the broad field of "foreclosures."

The first opportunity for foreclosure investors, buying before the auction, encompasses the period of time when home owners are behind on their payments and realize they are in danger of losing their home but have not yet been foreclosed upon. This sub-category will include listed properties from the multiple listing service (MLS), short sales, notice of defaults (NODS) and notice of trustee's sales (NOTS). For a number of important reasons, this is not a good time for anyone to be attempting to sell a home through "normal" retail channels. The sluggish nature of the housing market, the excess low priced inventory on the market, lending resrictions, and the anxiety of potential buyers willing to sit on the sidelines and wait for conditions to improve combine to make selling retail nearly impossible for most home owners. Sellers cannot compete against foreclosures so unless they too become a foreclosure they have no viable way to sell their home. This means that we as investors will have a very hard time finding a property to purchase with equity in it, at this stage of the foreclosure process.

There is one segment within this first stage to which we should direct a little bit of extra attention: short sales. A short sale occurs when an owner is in trouble and a potential buyer comes in and negotiates with the bank to purchase the property for a value less than the amount owed on the loan. This provides both a potential solution to the home owner and a way for investors to get a home at below market value. The downside to this method is that with the huge amount of foreclosures blanketing the nation, short sales are taking way too long to complete (4-6 months on average) or aren't going through at all. Some recent statistics show that only about 20% of short sales actual close. There are still many companies, Realtors, and investors that are quite successful in short sales, but this niche is difficult and not one in which most investors find success.

The second opportunity for investors comes through buying properties at the foreclosure auction or trustee's sale. Note that some states liquidate foreclosures through judicial proceedings, while others, like California and Nevada, have trustee's sales that are held on the courthouse steps. The positive side of buying foreclosures at auction is that the competition for the property you are looking to buy is not usually all that stiff. However, in trust deed states you must have cash or the equivalent of at the time of the auction to be the winning bidder. This eliminates a huge majority of potential buyers as most folks do not have $100,000 or more easily accessible in cash. Because REO properties are now selling for levels under amounts owed on comparable properties in the (NOTS) stage, buying at the trustee's sale is not a viable way to buy in most situations. Most properties brought to auction at this point are failing to sell for asking price and are reverting back to the banks and becoming bank owned REO's. Again, there are professionals who are buying good properties at trustee's sales and auctions, but it is not an easy way for a beginner to break into the foreclosure arena and it is a very small segment of the market at this time.

By far the best, easiest, safest, and most lucrative way to buy foreclosure properties at this time is during the third and final stage of the process: when the properties that are not sold at auction revert to the banks and become REOs. Because of the huge volume of foreclosures now on the market and the record numbers that will be coming in over the next 12-18 months, banks are lowering their prices daily just to move inventory. Banks are also, in many cases, placing homes with listing Realtor agents that specialize in selling REO homes.

If the properties do not sell in a 60-90 day period (after initial price discounting) many properties are going back to the bank and being re-listed t an even lower price with an auction company or sold off in bulk REO portfolios of $5 million and up for literal pennies on the dollar. Another benefit of bank owned properties is that they are almost always vacant, making it easy to get inside and inspect them before purchasing. This is usually not the case when purchasing in other stages of the foreclosure process where most homes are still occupied by owners or tenants.

As an investor and licensed Realtor that has bought homes in all stages of the foreclosure process, both for myself and for my investor clients, I am advising my clients to take full advantage of what could be one of the best foreclosure buying markets we will ever see. I personally am based in the Las Vegas area and I have seen the Las Vegas real estate market go from the #1 hottest in the nation in 2004, to one of the slowest in 2007. In 2009 volume is increasing and Las Vegas is once again becoming one of the best and busiest real estate markets in the U.S. There is one thing and one thing only that is driving this change: foreclosures.

MGM Auction Sets New Low Comps for Signature Towers

I recently attended the public auction held to sell 20 units in the three MGM Signature towers located just off the Las Vegas strip. The auction was held on April 21st and was attended by about 125 people. All units were sold.

MGM has been forced to clamor for capital since its flagship project, the record setting City Center development in Las Vegas, ran into funding difficulties and innumerable construction setbacks and delays. MGM's major financial partner in the deal, Dubai World, announced that they would not honor their obligations to the project. This announcement brought the already struggling MGM Mirage corporation to the edge of Chapter 11 bankruptcy filings as they struggled to find alternative financing. MGM Mirage has financial covenants due to expire on April 29th and May 15th. There has been speculation that they may need to sell off some major assets, such as the Beau Rivage in Mississippi or the MGM Grand Detroit. Just recently, however, investor Carl Icahn and private equity fund Oaktree Capital Management have stepped up and acquired hundreds of millions of MGM Mirage bonds. Should this deal go through it might save MGM Mirage from having to sell further assets in order to stay afloat.

In the meantime, MGM's loss was investors gain in the Las Vegas condo market. The auction saw new record low sales prices for both one bedroom and studio units in the MGM Signature complex. The top one bedroom sold for $255K and the low sold for $185K. The previous low comp for a one bedroom unit was $274K. So this sale brought the comp down quite a bit from $274K to $185K. The top studio unit sold for $200K and the low sold for $142K. The previous low comp was $174K. So again the comp came down from $174K to a new low of $142K.

It will take approximately one month for these units to officially close and for the new lower comps to register in the MLS. There are still 24 REO/bank owned units available within the Signature towers. Once the new comps register, there will be another great buying opportunity for anyone still interested. I will then be advising my investors to put in some cash offers for lower than the new low comp prices and test the waters.

This MGM auction, and others that are coming up shortly at different locations, are proving that high rise prices in Las Vegas are finally coming down to levels where they are extremely affordable as a second/vacation home option and even as an investment. If you have any interest in the MGM Signature condos or other high rise properties please feel free to give me a call to discuss your options.

Trump Says, "Buy Real Estate!"

Donald Trump, billionaire and real estate mogul, echoed what real estate agents have been saying for months in a recent appearance on Good Morning America. "This is a great time to go out and buy a home," he said. "You might even lose your own home and you'll end up getting a better one." As home prices around the country plummet, it creates a unique buying opportunity for both would-be homeowners and investors.

Trump acknowledged, however, that financing is difficult to come by these days and criticized banks for not easing lending restrictions. "What the banks are doing is terrible," he said. "The banks have billions and billions of taxpayer money, and they're not giving that money or loaning that money to the taxpayer," referring to banks that have been receiving funds under the government's Troubled Assets Relief Program. Trump believes that banks that are taking government assistance or bail out money should be subject to guidelines and restrictions on what they can do with that money. Certainly some of it should be used to infuse the economy with cash by lending to consumers.

So how can the average investor or home buyer make a purchase these days? Trump suggest buying bank owned properties (REOs.) Banks will help buyers finance the homes they're trying to sell, Trump said. The banks "don't want these homes; they've got thousands of them," he said. "They don't know what to do with them."

Las Vegas is the number one city for purchasing REO properties. Leading the nation in foreclosures for the last two years, Las Vegas has more bank owned properties than any other city in the nation.

If you are interested in purchasing bank owned homes for occupancy, investment or cash flow, please contact me as I specialize in this area.

Las Vegas Real Estate Insider Club April Meeting Roundup

Wednesday, April 8th saw the Real Estate Insider Club meeting for the first time at our new location at the Fairway Hospitality Center at Putter’s Bar & Grill on Rainbow at the 215. Since reformatting the club earlier this year, attendance has grown each meeting and we quickly outgrew our space at Tommy Bahama’s.

This meeting was another success as attendees enjoyed presentations from several guest speakers as well as our usual commentators. As we helped ourselves to the dinner included in the $25 entry fee, Jenna Bohannon from Old Republic spoke about home warranty options. She detailed which pre-existing conditions can be covered by home warranties and which are excluded as well as other general information.

Jenna was followed by regular presenter and “Las Vegas Realtor on the street” Scott Meservey. Scott presented sales statistics and MLS data from March and pointed towards inventory that is depleting month over month and median sales prices that are holding steady as possible indicators that we may quickly be approaching a bottom in the beleaguered Las Vegas real estate market.

Rich Warren shared his viewpoint on the broader national economy. With government intervention at an all time high, Rich noted that the billions of dollars being spent by the Feds to stimulate the national economy may be exacerbating the nation’s woes. By desperately trying to throw money at the problem, the government is quite possibly simply delaying the inevitable upcoming crash and thereby delaying the start of a recovery period as well.

We were then privileged to hear from James Jackson, a government employee who works with the Section 8 housing program. He explained the benefits landlords can achieve by seeking Section 8 tenants for their properties. He also explained possible downfalls and how to protect yourself as a landlord. His talk was well received and he fielded several questions on specifics from interested investors.

Tamara Bostrom from Spiral Digital Media shared with the group several tips for how entrepreneurs, investors and small business owners can use internet marketing to generate leads and increase exposure. She specifically mentioned that establishing yourself as an expert within your particular niche is a great way to effortlessly network and bring in new clients. She also discussed the importance of projecting a professional image through great design. Hiring a graphic design firm, such as Spiral, to create a logo package, design business cards and produce a great website will help businesses to stand out from the crowd in these tough economic times.

Our final speaker of the night was Darci Poloni of Poloni & Associates. She discussed the benefits real estate investors can achieve by placing their properties in separate LLC entities as opposed to keeping them held in the name of the individual. She touched on spreading liability, umbrella insurance policies and other protections. She also discussed some of the specific practices that must be maintained once LLCs are formed in order to insure that the corporate veil cannot be pierced if litigation is ever brought against the entity.

We are looking forward to another great meeting on Wednesday, May 13th from 6-8:30pm at the same location.

If you would like to contact any of our speakers regarding their services:

Jenna Bohannon
Old Republic
(800) 445-6999
jennab@orhp.com

James Jackson
Section 8 Housing Program
(702) 451-8041 X1530
jjackson@haccnv.org

Tamara Bostrom
Spiral Digital Media
(435) 275-5980
tamarabostrom@gmail.com

Darci Poloni
Poloni & Associates
(702) 616-9240
poloni-law@cox.net

Historic Buying Opportunities in Northwest Las Vegas

“I will tell you how to become wealthy. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”
Warren Buffet

We are currently facing the greatest economic downturn since the Great Depression. Individuals and corporations alike are tightening their belts and refusing to spend money…holding on to whatever they have in an attempt to weather the storm. Certainly prudence in this economic climate is wise. But what should also be remembered is that many of the great American fortunes were made in the 1930s. As others looked for cover, the great investors of the time looked for opportunity. We are faced with the same choice now that they faced then…try desperately to hold on to what we have, or build our wealth.
So where are the opportunities in today’s storm? Where can we invest with any kind of security? The surprising answer (given the recent bubble burst) is real estate. Why? Because when you invest in real estate properly…when you do it the right way…it does not rely on the strength of the economy at large to generate returns. This is because, in the world of real estate, cash flow is king. Appreciation potential is secondary. Not so with the stock market, by contrast. If you invest in stocks, the stocks must appreciate in value in order for you to realize a gain on your investment. If the economy weakens and your stocks depreciate in value, you lose money. A similar situation occurred with those who invested in real estate two or three years ago and ignored the need for properties to positively cash flow. These investors relied on appreciation to generate returns. When, instead of appreciating, the real estate bubble burst and price came falling down, these investors lost everything and faced disaster.
The good news is that, done correctly, not only can this mistake be avoided, but real estate can become the greatest investment opportunity of your lifetime. The key is cash flow. If you purchase a property that cash flows strongly then your investment will generate returns for you even if it declines in value. The bonus, of course, being that when the property does appreciate in value (which historically real estate always does) you will make even more money.
The key then becomes identifying and isolating these strong cash flow buying opportunities. Las Vegas is currently leading the nation in foreclosures, with 1 in every 60 homes in some stage of default. Our home prices have dropped over 70% in some cases from highs of two years ago. When you combine these low prices with a very strong rental market, you create great the best real estate investment opportunity we have seen in years.
Zeroing in even further, I believe that the Northwest area of the Las Vegas valley, specifically, is a hidden gem for real estate investors. While the Henderson and Summerlin areas tend to draw more attention, the Northwest valley has rents that are only slightly lower than these areas, but home prices that are substantially lower. The Northwest is also the newest area of development in Las Vegas. The majority of homes on the market are less than five years old. Tucked conveniently between two freeways, the area features a burgeoning infrastructure with new government and retail development. A brand new hospital and library complex recently opened, along with 3 new high schools, a middle school and 2 elementary schools. The college of Southern Nevada has a new campus beginning construction later in the year and retail developments continue to pop up at every intersection.
As an example, one of my clients recently purchased a one bedroom condo in the Northwest for $41K. This same condo is now renting for $750 per month. This has resulted in a positive cash flow, after all management , insurance and other applicable fees, of over $400 per month. Also in the Northwest, I was able to broker a deal for a different client on a 2 bedroom condo for $51K. This is now renting for $950 per month and producing a positive cash flow, after all expenses, of over $600 per month. And the truly great thing about these deals is that they are not isolated bargains. It did not take us months of looking and grueling negotiations to purchase these properties. Deals like this are reasonably plentiful in the Northwest Las Vegas valley. But you do need to know where and how to look, and you need to make your offers in a timely manner. As prices have come down, investment money has begun to pour back into the Las Vegas valley. Competition is beginning to heat up for buyers, but there is still enough supply to meet the increase in demand.
As a full time investor , I own over 20 rental properties myself so I know what to look for in a potential deal. I also specialize in helping out of town investors purchase and maintain investment property in Las Vegas. The first part of this equation is obviously finding and negotiating a great price on a property her e in the Las Vegas valley. The second part is providing my clients with full service property management. After we find a property that cash flows strongly at a great purchase price, we will put all of the property management features in place to insure that the investment is truly hands off and turn key.
If you are interested in these opportunities, this is a great time to come to Las Vegas and allow me to give you a personal tour of this neighborhood. Hotel prices are low (you can stay at the Trump for $79 on a weekend night), flights and cars are cheaper than they have been in years, even food is on sale.
We do not expect prices in this area to dip much lower, if at all. With mortgage rates at historic lows, we are seeing cash coming back into the Las Vegas real estate market as domestic and foreign investors look for stable, profitable places to put their money. I have personally hosted clients from Canada and China in the last month. I would love to host you as well.

Does the Rise in February Sales Mean the Bottom is Near?

Home sales soared nationwide in February leading many market analysts to wonder if the bottom has finally come for the distressed U.S. housing market. But it is important to note that sales also rose in December and September without a bottom arriving. Another important factor to consider is that even as home sales have risen, median home prices have continued to fall nationwide.

Steve Bottfeld, a real estate analyst with Marketing Solutions presented at our Real Estate Insider Club of Las Vegas last year and outlined a three point test to gauge the bottom of a real estate market. First, he looks at the inventory of homes listed on the local Multiple Listing Service (MLS). Second, he evaluates the sales data. (Sales rose in February.) Lastly, he considers the average median price of homes in the market...which, as of February, is still descending.

Bottfeld stated last year that the hold out factor in the data for the Las Vegas housing market was the median home price...and that appears to continue to be the case, not just in Las Vegas, but across the country as well. As soon as we see the median home price stabilize, according to Bottfeld, we will have found the true bottom of the market.

So what does all of this mean for us property investors looking to add to our portfolios? Should we hold off on purchasing property until the market reaches an identifiable bottom?

I think that the answer is a resounding “NO.” The key element to consider when purchasing investment real estate in a stagnate or declining market is cash flow. Cash flow is king. As long as an investment property cash flows at the time that you buy it, you will not have to count on appreciation to make your deal worth while. The property will continue to provide you with monthly income even if the value dips slightly before a bottom is reached. Any appreciation you do incur will be a bonus.

Las Vegas Real Estate Insider Club Keeps Growing

Wednesday March 10th was the two year anniversary of the Las Vegas Real Estate Insider Club founded by me...Glenn Plantone. The event was recently moved to the meeting room inside Tommy Bahamas at Town Center on the south Strip. We have already begun to outgrow this location. This last meeting saw over 65 attendees enjoy special presentations from our guest speakers as well as our regular educators.

Our first guest presenter of the evening was Ranya Botros of the Nevada State Contractors Board. Along with her partner and lead investigator Greg Welch, they spoke about how to protect yourself from unscrupulous contractors, both licensed and unlicensed. Greg was able to share several stories of individuals who were taken advantage of and how the Contractors Board aided in their defense.

Out second featured speaker of the evening was Carla Carlson of Direct Credit. Carla spoke specifically about loan modifications in today’s marketplace. Not everyone is aware that loans on investment properties can often also be modified. Carla has years of experience with credit and lending and found it a good fit in the difficult housing market to begin helping individuals with loan modifications.

In addition to our guest speakers, we also benefited from updates and educational pieces from our regular contributors. As the host and founder, I shared with the group a story about a client of mine that ran into trouble with his HOA (Home Owners' Association) regarding rental restrictions in a newer community. I suggested getting a copy of the CC&R’s and reading them before looking to purchase within an HOA community if you are thinking of renting out the home for investment reasons.

Co-host Jeff Howard shared his thoughts on lease-options and explained that our current market is creating a great opportunity to buy inexpensive properties and rent them out to folks that have become credit challenged.

Scott Meservey, our "Realtor on the street," was able to give his update on the local market place and current foreclosure trends.

Our economic update this month was given by financial planning expert, author, Bigger Pockets columnist and recent Harry Reid communicator Mr. Richard Warren. Although an eternal optimist, Rich also prides himself on being a realist. Rich discussed the possibility that our current recession may end up evolving into an economic disaster as severe as that of the Great Depression in the 1930’s. However, this current situation has also presented us with one of the best opportunities to purchase real estate that we may see in our lifetimes.

We are looking forward to next month's meeting which will feature a representative from the Las Vegas Housing Authority speaking on the ins and outs of government sponsored Section 8 housing as well as Internet Marketing and Small Business Marketing specialist Tamara Bostrom who will give tips on how to stand out from the crowd in today's difficult economic climate. This is a meeting any investor and entrepreneur will not want to miss.

We love the value that we currently offer with the meeting: attendees pay $25 which covers not only admission to the club but also dinner and drinks. But as we continue to grow, we must look for a new venue for future Las Vegas Real Estate Insider Club meetings. If anyone is aware of another site that can offer the same benefits but accommodate more people, please contact us with more details.