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  • Investing in a Shifting Real Estate Market

    by Catherine Mylinh

    Savvy investors know that there is always money to be made in a down market—and that’s certainly true for real estate.

    With waves of foreclosures and short sales flooding the market, it might be a beneficial time to purchase an investment property. And it’s a buyer’s market—median home prices in California were well below $300,000 in February 2009. Historically low mortgage rates add to the appeal of purchasing property.

    So if you’re thinking of investing in real estate, here are some things to consider:

    Check public records
    Find out who is listed on the property’s title, whether a foreclosure notice has been filed and how much is owed to the lender(s). This is important because it will help you to determine how much to offer, and how it will affect your investment goals.

    Do your homework
    Research as much as you can about the area in which you are interested in buying. Web sites like Move.com, Redfin.com, Trulia.com and Zillow.com can tell you a lot about comparable prices, school districts, and even nearby shopping and entertainment venues. Whether you plan on re-selling the property or renting it out, the more you know about it, the better.

    “You’ll not only be better able to negotiate an offer price, but this extensive knowledge will also be valuable after you’ve purchased the home and need to market it,” says Steve Donahue, assistant vice president of Tech CU Mortgage Origination.

    Get pre-approved
    Many banks require that you are pre-approved before they even begin negotiation talks with you. But that’s not all.

    “You may need to get pre-approved through your lender as well as through the bank that owns the property,” says Michael Mendenhall, a Realtor at Keller Williams Realty. “The lender that owns the property wants to have a stronger negotiating position. They want to know how much you qualify for if they need to make a counteroffer.”

    Understand the foreclosure process
    There are two main steps in the foreclosure process:

    Auction or trustee sale:
    After the property owner has defaulted on the mortgage, the property is sold by the lender to the highest bidder at a public sale.

    Bank-owned:
    These properties are also known as real estate-owned (REO) properties. If the property is not sold at auction, it becomes “real estate-owned” by the bank or lender. REO’s are usually handled by real estate brokers. Talk to a real estate professional about how each stage can be profitable for you.

    Understand the difference between foreclosures and short sales
    A short sale is typically executed to prevent a foreclosure, but the decision to proceed with a short sale is predicated on the most economic way for the lenders to recover the amount owed on the property. Because lenders usually accept less than the total amount due, short sales can take months to approve. Furthermore, lenders are not required to approve any offers presented in a short sale at all.

    The shortest time Mendenhall and his team were able to close a short sale transaction was three months, but he says that’s rare: “Most short sales take between six months and a year—investors usually don’t want to wait that long because the price will likely drop again within that period.”

    Get an experienced real estate agent
    An agent with experience in foreclosures and/or short sales will help to expedite your transaction and protect your interests. Because these transactions are usually much more complex than regular real estate deals, you don't want to miss any important details or learn that your transaction won’t close on time due to your agent’s inexperience.

    “The clock is ticking here,” says Mary Woolsey, a Keller Williams Realtor who works with Mendenhall. “Some lenders require that the foreclosure deal close in 30 days. They may even charge a per diem penalty which could cost as much as hundreds of dollars per day. Make sure your agent understands these special addendums.”

    You should also consult with a real estate lawyer on any state, county, and city laws that could affect your transaction, or your future plans for the property. An accountant can help you determine any possible tax ramifications for purchasing a short-sale or foreclosed property. 

    Smart investments pay off
    Donahue says that if there’s one thing the housing crisis has taught us, it’s that it’s more important than ever to do your research before you buy a home. But he adds that history has also taught us that there’s money to be made in times like these.

    “Talk to several lenders and real estate agents,” Donahue adds. “Don’t be afraid to ask questions—especially about loan terms, associated fees and total costs. Get a monthly breakdown of the total costs of the loan as well as how much you will pay over the life of the loan. Having this information will help you to plan for your financial and investment goals.”