Making $$$ in Foreclosures

Are You Right For Foreclosures?

The key to making money in foreclosures isn't sizing up a particular property -- it's knowing yourself.

Specifically, your timetable, temperament, budget, fix-up skills (or access to them), and intended holding period.

If you're deficient in any one category, the odds of success go way down; two, the odds become infinitesimal.

Timetable. Before embarking on a lender-mediated property, ask yourself: can you wait a week or longer to find out if your offer is accepted? (1-2 days is the norm for non-bank deals)

If you're pursuing a "short sale," can you wait weeks -- maybe months -- for the bank(s) to approve the sale?

In the meantime, you'd better make sure you don't have to vacate an apartment or house -- or have access to a friend or parents' basement, if you do.

Temperament. More questions: will you be OK if you happen to get bumped from the house at the last minute -- possibly weeks or months after acceptance?

How do you feel about "swallowing" such lender-dictated terms as forfeiting your earnest money before you know whether you qualify for a loan; or accepting the home "As Is," with no Seller disclosures or legal recourse in the event of major problems?

Budget. Often times, the purchase price of a foreclosure is just the "cost of admission"; the subsequent fix-up costs can be equal or greater than the cost of the house.

Do you know what needs to be fixed? What doesn't? Who will be doing the repairs?

Fix-up Skills. If you're a contractor, you already know the answer to that last question. If you're not, what's your strategy for getting bids? Contractors come in all sizes and shapes. Some prefer to do bids, others work on a time-and-material basis.

Holding Period. The same foreclosure glut that let you buy low might very well turn and around and bite you as a quick Seller. Especially if you're planning on a market turnaround to generate your profit (vs. sweat equity), you should have a 2-3 year holding period, minimum.

Bottom line: is there money to be made in foreclosures and short sales? Sure.

But I'm not convinced that there isn't more money -- not to mention time -- to be lost.

Free House! (with qualifying land purchase)

Buy the Land . . . Get the House for Free

Benjamin Graham, the father of value investing, famously recommended buying stocks that trade at a discount to the company's underlying "book value" (basically, assets minus liabilities).

His rationale was that a company's book value established a floor under its stock price: even if the company's business went away, investors' share in the company's net assets would make them whole (if not a profit).

In the housing market, an analogous approach would be to buy homes selling for less than the value of the land they sit on. Even if the home is assigned a value of zero, in theory the value of the land literally puts a floor under the owner's investment.

Today, it's possible to find hundreds of Twin Cities homes selling for less than their "book value" -- that is, the tax-assessed value of the land underneath them.

However, before you rush out to buy one of them, two caveats:

One. A lot with a house on it is not the same as an empty, buildable lot. Transforming the former into the latter can easily cost $20,000 in demolition, permits, etc.

Two. Who's going to buy the lot? In a healthier market, demand would come from both developers, who would put up "spec" housing ("build it and they will come"), or, owner-occupants who wanted new construction.

In a recession, neither group is very active.