Distressed Property Investment Strategies

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Distressed Property Investment Strategies

I believe that this article is a good one; however, you should research the laws in your state. For example, I am licensed in Maryland. Anyone doing these type transactions need to understand how to interact or not with a distressed homeowner. The consequences involve jail time and heavy fines. Again, check the laws in your state.

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While the raw numbers of foreclosures is way down, compared to a decade ago, even now thousands of homeowners per day are faced with a home-related financial-distress situation, i.e. pre-foreclosure, property tax default notices, IRS and state income tax liens, etc. Add to that a recent government study which showed that 70% of US adults live paycheck to paycheck, with virtually no savings in the bank. Best estimate is that over one million households experience potentially catastrophic financial problems every year.

Simply put, many distressed homeowners simply can no longer afford to live in their home. They may have suffered a major illness, injury, job layoff, divorce, death of the breadwinner, etc. What they need is a way to move out of their home, with some cash in their pocket and their good credit rating still intact (as much as possible). Unfortunately, many if not most of them lack the money required to fix up the house to maximize its selling value. Others have let the problem become so serious that they have run out of time to get their house listed with a realtor, accept an offer, and then wait for escrow to close. That is where real estate investors (REIers) can play a key role.

Potentially Intimidating Complexities for REIers

Would-be REIers can experience their own feelings of anxiety. Many REIers get overwhelmed by the difficulties they face if they wish to invest in a distressed property. For example, the popular perception is that in order to invest in a distressed property, you have to pay all cash. Not true. The reality is that many distressed properties can, in many instances, be purchased with a home loan, sometimes even including fix up and renovation money in the very same mortgage. Others require little or no cash.

Distressed Property Funding Options

How much cash you need to bring to the table depends on the type of distressed property you are dealing with and what stage of the investing process you choose to get involved. First we will cover situations where you need to put up all the money, then some money, and finally almost no money.

1. Auctions. If a bank is foreclosing, eventually the house may be sold “on the courthouse steps” (or nearby) to the highest bidder, for all cash. Property tax auctions, income tax auctions, etc. may occur online or at a brick and mortar location. Result: Many if not most auctions require you to bring “cash-on-the-barrelhead” money that you must hand over the same day you win the bid; others allow you to put down a deposit, then come up with all the money in 1-4 weeks. Read up carefully on this subject before bidding.

2. Pre-foreclosure. Here you negotiate with the homeowner. One option: What is known as a “cash-for-keys/deed-in-lieu” transaction. You hand them some money, they hand you the keys to their house. How much cash you need to come up with is the result of negotiating between you and the homeowner. Hire a real estate attorney to help you get through the first few deals of this type, to play it safe.

3. Bank owned (REO), short sales. Best case scenario: you can buy the house and the bank will finance the purchase price AND needed fixup money. You will probably have to cough up some cash to cover closing costs, down payment, etc. But that is all negotiable. With some banks, over half of the properties they own are subsequently bought by the new homeowner with at least some bank financing.

4. Hard money loan. These are expensive loans, but may be worth it. They usually require you to bring “skin in the game” cash to the table—typically 20% of the purchase price or 30% of the ARV (After Repair Value)—in order to qualify. Other restrictions may apply. Make sure you have a full and comlete understanding of how hard money loans work. Newbies can easily get burned with their first rehab deal.

5. HELOC (Home Equity Line Of Credit). This should only be used for short-term financing. Assuming you have equity in a house you now own, consider opening a HELOC, which is a form of revolving credit—think how a credit card works. Depending on the lender, they may be willing to extend a credit line for 75% or more of your current equity.

6. Private lenders. These are individuals with cash on hand, or they have a self-directed 401k retirement plan, and wish to invest their funds in yields higher than those offered by banks. They usually charge less than a hard money lender but more than with HELOC loans. Attend REI meetings, look at Craigslist ads to find those with funds they wish to invest in second or first position private home loans.

7. Equity investors. When the deal is over (refinanced, sold, etc.) they receive a share of the profits proportional to how much money they invested in the property. The advantage is that you can avoid making monthly payments, because you are not borrowing the money.

8. Joint venture: you bring the deal, they bring the money, split the profits at the end. This is a variation on an equity-type investment.

What We Do: Quickly provide short-term, first position, private capital funding, to real estate wholesalers, among others. Contact info: Tod Snodgrass, emdfunding1@gmail.com, 310-408-7015

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