Short sales and REOs a-plenty here in Las Vegas. In late 2004, and most of 2005, the latest and greatest loan package for the masses was called the “2/28,” whereby the purchaser has a 2-year fixed loan with an interest only payment, typically with a 2-year prepay as well. At the end of which (obviously) the buyer is supposed to re-finance into a better and more sold loan using the accrued appreciation. So what happens if the appreciation didn’t quite reach expectations, the interest rates went up, and the qualifications for loans tightened up? A sprinkle of panic, a pound of concern, and a whole lot of stress, followed by the threat of foreclosure becomes prevalent. Investors and primary occupants alike bought into this package due to the fact that it was quick, easy, and the qualifications were very lax. The focus was getting in with the best rate, and having the lowest possible payment. The idea was that the individual’s financial position and the appreciation would soar wildly during that two year period, and that everything would work out for the better.
Year two has arrived, interest rates have gone up, appreciation didn’t quite exceed high expectations, and the reality of a volatile and shifting market has come into play, resulting in Las Vegas currently running third in the country for REOs (bank owned properties) and foreclosures. Those who haven’t quite reached the foreclosure point are desperately trying to short sale their properties (selling the property for the cost of the loan, plus escrow and agent fees. This would come out as nothing more than a break-even point for the seller, allowing them to walk away from the house with minimal outstanding debt).
If you are a rehabber, or always wanted to try your hand at it, this would be the opportune time to do so. Just make sure you and the agent you work with run through all the numbers very carefully (i.e. comparative market analysis) to make sure the property comps well below market (at least 20%). (I am finding that some banks are pricing their homes with the market, rather than under market.) Once you have identified a house 20% below market, go and see it in person (or have the agent do it for you). Pay specific attention to the details of the house, the community, demographics, and the overall potential appeal of the house. Another words, DO YOUR HOMEWORK! This is an investment, and it warrants some research. If you like what you see, write an offer (I write my offers running off a contingency of inspection. That is unless you are confident in your inspection abilities, and can verify with certainty the presence or absence of mold, a properly working a/c and HVAC unit, etc.).
If you are intending to offer on more than one unit, it is a good idea to include the verbiage: “Seller is aware the Buyer is making multiple concurrent offers on other properties. This contract is Valid ONLY if the Buyer accepts in writing the seller’s acceptance or counter of this offer.” This keeps the ball in the buyer’s court. If it truly is a good deal, (or even a decent one) chances are someone else will find it (if they have not already) so you have to treat this with some urgency. This is not something you can usually sit on and ponder for weeks on end. I have found that giving the seller (in these cases, the banks) 24-48 hours for a response time is not realistic. Banks will take anywhere from as little as 3-5 days, to as much as a week and-a-half to accept, counter or reject an offer. This is due to one of two things, either the bank is just slow to respond due to the channels the offer has to pass through, or the bank stalls for a few extra days to see if any other offers come in that may be more attractive.
Another very useful tip to look into before you make an offer is to look the property up on Zillow. Although I have found their numbers to be a bit off (and in some cases way off), there is the one main advantage of finding out what the bank paid for the property, and when they took it over. This can greatly assist you in finding a realistic offer price that will be acceptable to you and the bank. Also, before you offer, have some realistic numbers in mind as to how much the repairs are going to cost for the property. This will get easier over time, but have someone on hand to help you for the first few times.
Know what your bottom line is (that is purchase price, plus repairs, closing costs, holding costs, agent fees, and escrow fees); in case there is a counter offer by the bank. You must know what your estimated profit margin is, so that you know how much “wiggle room” you have. It is a good idea to over-estimate the repairs by 10-20% as well, just to have a pad in there. Rehabs are not something you want to count on down to the penny, because that will be the time that something unforeseen comes up, and it could cost you your profit, or worse…That said, rehabs are a great way to make some money, especially if you are willing to do some of the work yourself (which increases your profit by that much more, provided you have the time). If you do not have the time, find an agent that works regularly with rehabbers, they should have some references for you of some general contractors, painters, carpet guys, tile guys, etc. If all this is done properly, and you prepare for worst case scenarios, you can easily net $10,000-$25,000 per house, after all expenses are paid.
A word of caution, for those of you who love HGTV and are adamantly taking notes on all the “Flip This House” and “Flip That House” (yes, they are two different shows), there is such thing as over-improving a house, and the mistake will cost you! Do your homework, and find a savvy agent that will do theirs as well. Improve for the area. Quality work is great, and yeah, you want to make the house attractive to buyers, but there is a huge difference between having the nicest house on the block and over-improving. Having the nicest house on the block can be as little as having new flooring, new appliances, a little landscaping, and a fresh coat of paint on the interior and exterior of the house.
Over-improving will get you so far up the debt ladder that you will end up having to sacrifice and lose money just to get the thing sold. You have to make a budget (one that will bring the house up to market value, or just slightly above), and stick to that budget. One problem is that rehabbers get too involved with the property and start improving the house as they would want it, not as the surrounding community needs it. Just be careful with that one, it can burn you and ruin your rehabbing experience.
So, to recap, the steps are as follows:
1. Find a good agent (preferable one who does this regularly).
2. Identify a few potential properties (chances are you will go through a couple before you find one you really want to do).
3. Go see the properties (try and “guesstimate” what repairs will cost you).
4. Look up the property to see what the bank paid.
5. Write an offer contingent on inspection (unless you feel daring).
6. Get an inspector in there and get estimates immediately!!
7. Improve the house for the neighborhood (be careful with this one). You should already have a GC/repair guys on hand.
8. List and sell it with your new favorite agent.
9. Collect your money, and do it again.