Last month I received a phone call from “Michael” in St. Louis. He’s a very private real estate investor so I know he wouldn’t want me to use his last name. Somehow, about 10 years ago, he appointed me to be his “mentor.” I didn’t even get to vote!
Ever since we met over a beer at the St. Louis Lambert Airport (when TWA was still a great airline there), he’s been phoning me almost every month to tell me about his latest fascinating real estate adventures. Michael has accumulated about 20 rental houses, quit a job he hated with his family’s business, bought a nice home in St. Louis’ best suburb, and is supporting his family with the rentals from his houses. Some of his acquisitions have been mortgage foreclosures.
Purchase Bob Bruss reports online.
I could hardly believe what an incredible foreclosure bargain Michael purchased last month from a foreclosing bank. This is probably his “best deal” ever. He reports it is a brick, five-room, two-bedroom house in an “up and coming” St. Louis neighborhood. He told me a Milwaukee bank foreclosed on its $60,000 first mortgage and took title to the house because there were no bidders at the foreclosure sale (probably because, he tells me, the house needs about $10,000 of repairs). Michael didn’t even know this was a foreclosure as he was driving around the neighborhood looking for distress property purchase opportunities. But the story gets better! After he checked out the details, he offered $28,000 (remember, the bank was owed $60,000 by the defaulting borrowers). When his offer was accepted by the bank, Michael then went to his St. Louis bank, which not only loaned him the $28,000 purchase price but also the $10,000 for fix-up costs. In other words, he got 100 percent financing! The bank’s appraisal shows the house is worth several times Michael’s purchase price, plus the fix-up costs. Needless to say, Michael is a very savvy investor!
This is just one example of profitable foreclosure bargains that are available in all price ranges. Some foreclosure investors like to buy, fix-up, and then “flip” to make quick resale profits. But Michael buys to keep his properties. I can’t recall him ever selling one of his rental houses. Other people buy foreclosures to “flip” some properties and keep the others – thus creating both immediate cash flow and long-term investments.
However, Michael does periodically refinance his rental houses to take out tax-free cash as his equity grows from (a) market value appreciation and (b) mortgage principal balance pay-down. I share Michael’s success story because it shows the foreclosure opportunities that are available. Good times or bad times, foreclosure property opportunities are always with us.
But I can hear you asking, “Didn’t Michael take advantage of some poor borrower who lost his/her home?” The answer is “no.” He told me the sons of the deceased owner inherited that vacant house free and clear. They borrowed $60,000 against it, spent the money elsewhere, and didn’t make the payments, letting the house fall into disrepair and foreclosure. The out-of-town bank that bought that loan just wanted to get rid of the house (it was probably an FHA-insured or PMI private mortgage insurance loan).
WHAT CAUSES FORECLOSURE AND OTHER DISTRESS PROPERTY OPPORTUNITIES FOR BUYERS? There are many causes of property foreclosures. The most frequent are divorce, unemployment, drugs, alcohol, death in the family, disputes between owners, local economic conditions, mental problems, and greed.
To illustrate, I recall one defaulting borrower who refused to sell me her house because she thought I would be getting a bargain purchase price. Rather than sell to me and get some of her equity out in cash, she let that house go to foreclosure sale auction where she lost 100 percent of her equity and received nothing!
My personal experiences with borrowers in foreclosure show they usually aren’t thinking smart. I could regale you with true stories of foreclosures that would make fascinating TV shows – maybe I should produce the next new TV reality show, called “Foreclosure Houses.”
Somebody profits from every foreclosure and distress property – why not you? You didn’t cause the borrower’s problems. But foreclosures create profit opportunities so you might as well be the person who benefits.
There is nothing unethical about buying foreclosure property and earning a profit!
All types of properties go to foreclosure sales, not just single-family residential. For example, Donald Trump’s books explain how he picked up several foreclosure commercial properties in New York City – such as what is now known as the Grand Hyatt Hotel (formerly the old Commodore Hotel) at New York City’s Grand Central Station.
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