I am thinking about a sideline income by buying bank foreclosed houses in my area. The ones that I have looked at recently are brick bungalows
and small english tudors with about 1400 sq ft. I recently missed a couple that sold in the $35,00-45,000 range in areas that normally sell for $75,000-110,000 when they are in good shape. Most of the houses are structurally good on the outside but need an interior overhaul. I have renovated two large homes for my family and have all the tools and equipment and plan to do the work myself. These homes are only available with a special warranty deed from the banks. If I proceed with this, I am thinking of buying the homes thru a LLC company funded by a loan from myself that is payable back to me when the homes are sold. I only plan to fix up and sell at market prices. What are the pitfalls?
Thanks
Stan
Replies
Stan, those numbers look great if the repairs aren't too high.
A warranty deed is the best deed you can get. I've never heard the term "special" inserted before it. Could you elaborate on what you mean by "special warranty deed"? Im just curious.
I'm also curious about the loan to your LLC regarding the tax consequences. I understand that making loans is legal, but I wonder if you aren't opening up your LLC to charges of comingling if you establish a pattern. On the other hand, it still might not make a difference as long as the proper documentation is in place and interest paid. I vaguely remember something about this issue...I can't find my real esate accounting book...I probably burned it when I fell into a trance trying to read it.
blue
Just because you can, doesn't mean you should!
Warning! Be cautious when taking any framing advice from me. There are some in here who think I'm a hackmeister...they might be right! Of course, they might be wrong too!
The special warranty deed has not been explained to my satisfaction. A realtor for the bank claims that this type deed means that the bank only guarantees a clear deed for the time the property is in their possession. It sounds like an out for the bank if there are unknown liens attached to the property prior to their possession. I plan to have a title search made before any purchase. The idea of making a documented loan to my own LLC (with interest) is just an idea at this stage to protect my personal assets in case of some unforeseen liability issue. The LLC's only real asset would a liened title and working capital and the liability would be a mortgage to myself. This may not even be possible in my state.
Stan, you need to have a consultation with your title people about their coverage of this "special warranty" situation. Obviously every property purchase comes with risks and foreclosures are no different. Each state has their own rules, so you need to have a consultion with a competent REAL ESTATE attorney. Once you've been educated by professionals, you'll be able to assess your risks.
I'm going to assume that the bank is offering the special warranty because they did not obtain a warranty deed from the previous owner, and therefore doesn't have any way of knowing if the previous owner encumbered the house just previous to it going back. There could be outstanding mechanics liens out there not filed yet, or things like that....IRS liens come to mind....
All those things have time limits per law and you should understand which dates and types of liens are pertinent to your property.
The LLC thing sounds legit, logical, simple and very common.
blue Just because you can, doesn't mean you should!
Warning! Be cautious when taking any framing advice from me. There are some in here who think I'm a hackmeister...they might be right! Of course, they might be wrong too!
There are no pit falls if you know what you are doing . If you dont it will eat you quick.
You need a full knowledge of remodeling and structural construction. You need a prep course in real estate from at least books bought . You need all the house investor books you can afford to buy and you also need Breaktime .
Tim Mooney
Stan, I've flipped a few houses but have never actually bought a foreclosure. I'm not sure where you're at, but in Michigan (the way it was explained to me) houses bought at auction are subject to up to a 6 month "redemption" period. This means that the previous owner has a chance to get his house back.
Another thing I was told is that once you buy the house it is up to you to evict anyone that may still be living in the property.
Finally you must be careful that the mortgage you are bidding on is the only one on the house, otherwise you may be just paying off someones credit card refi.
As far as doing title searches on the properties, you can access this info right at most city/county buildings.
Bottom line just becareful and do your homework.
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What do you do for a living ?
One pitfall that rarely is mentioned is holding costs. Taxes, utilities, interest payments or in the case of borrowing money from yourself interest lost.
In my are having the water turned on immediately triggers you getting bills for sewage, storm sewer rehab fees, and trash pick up. The water bill minimum is $7 a month but the city billed sewage and sanitation is $47 a month. If you take 6 months to rehab you lost $300 for something you wouldn't use. Just an example of things that can occure that will drive your costs up.
Other things to watch for are insurance. In my state (Ohio) you can't get insurance on an un-occupiable building unless you go through a special state insurance deal that requires a re-appraisel every time you spend 5k. A royal pain so I try to deal in cash and self insure until the building looks inhabitable then insure it. Risky but again a cost that will drive your holding costs through the roof. DanT
I am a project manager in an engineering department and a small potatoes commercial landlord.Stan
Why arent these properties not considered as part of your rental fleet?
Why are they so cheap?
Look , I look for properties all the time . I just found one property for half its worth. There might not be another opportunity.
I buy all I can get A HOLD of for 70 percent of market not including repairs. If I were there you wouldnt have a chance buying them at 50 percent of market share. What are you waiting for? If somthing will appraise for 100 and I can purchase for 50 less repairs , it dont take even a second to pull the trigger. Its a shot duck!!!!
Tim Mooney
Edited 3/8/2005 8:10 pm ET by TIMMOONEY52
I own one. I bought it at $107,000 and today its worth well over a million.. Buy only when the market is greatly depressed or there is too much risk.. Have a lawyer check everything out and make sure that the lawyer you hire has enough assests that you can go after him if he screws up..
I had a friend who got the cheapest lawyer possible and that laywer was a young kid just learning the ins and outs.. The kid missed a couple of serious things and as a result the friend lost not only the house but also the house he put up as collateral to buy the repo..
Try to beat the repo lists, by the time a house shows up there, all the real proift is gone.
Get friendly with banks.. Talk to the realestate loan officer. and ask if he'll put you in the loop.. Often they will turn you onto a struggling homeowner and let you assume a loan rather than have it go bad and reflect negatively on their loan record..
Save your money and have a fair amount of cash plus excellant credit..After you flip a few you can be a bit more selective but you'll want to get several banks working with you first..
Go by the three rules.. if the location is wrong but the structure and comsmetics are ok then it's a decent deal. if the location is good but the structure is bad and the comsmetics are good it's marginal, but if the location is good and the structure is good don't worry about the cosmetics..
But if two out of the three are bad avoid it, too great a risk! No matter how cheap!
Remember the three absolute rules of buying realestate..
Location, location, location.. Never buy in a bad area! ever! never ever! Solid working class? sure, resort or older neighbor hood? fine, but never ever buy near public housing or in despressed locations.. anyone who buys there is looking for a steal!
Don't focus on cost.. focus on yield and if you can't figure that out accurately spend more time learning.. Realize that what you figure it will cost to fix up is usually under by a factor of two at least.. Don't try to skimp on the realitor, they not only can help you find a buyer but also your next property, they get a look at stuff you won't see otherwise..
Try to buy the worst house in the best neighborhood you can afford..