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Better Bargains With Foreclosures and Pre-Foreclosures

This article was written by in Real Estate and Home. 7 comments.


I’ve taken a cursory look at the possibility of investing in real estate near where I live, with the intent of buying a property for rental. The numbers don’t work well in my favor. I’ve confirmed this with friends experienced with renting their properties in the area; most would not do it again if given the choice. The small potential profit is not worth the extra effort and stress.

To make the numbers work more in the investor’s favor, there’s the possibility of purchasing foreclosed or pre-foreclosed homes. If you can get a significant discount on the price and minimize the out-of-pocket costs required to make the dwelling attractive, there’s a better chance of making a profit. Buying a house in a distressed situation, whether from the buyer in a pre-foreclosed status or from the lender or bank once foreclosed, is not very simple. Auctions are attended by professionals, and the best deals are monopolized by the most experienced investors. It can be difficult, expensive, and time-consuming to break into the elite group of foreclosure investors.

Zillow Pre-ForeclosureZillow is making this process a little easier or less expensive for the amateur investor. I’ve been a fan of Zillow for a while. The website, and particularly the iPad application, helps me easily find public information about any property. While driving around neighborhoods in which I might like to buy a house, either for myself or as an investment, I can get an idea about the cost of the home.

The application uses a map and GPS to locate the house of interest, and provides details such as a history of sales prices and Zillow’s own market value estimate of the property. The application also identifies which homes are currently for sale and offers homeowners a chance to advertise their homes to potential buyers without officially putting them on the market. Of course, I don’t actually use the iPad while driving.

Now, the website also indicates when a home is in a pre-foreclosure or pre-market status. This means that the bank has initiated proceedings to foreclose upon the property, but the home is not listed for sale yet. Previously, this information had been difficult to aggregate or has been kept away from the general public by services that require membership fees. Zillow’s new feature brings a wider inventory of potentially better deals to more investors for free.

That doesn’t mean, however, that it’s going to be any easier for amateur investors — those without connections in the foreclosure real estate market in their location — to get better deals. Professional investors find pre-foreclosure deals within a day or two of the public filing, and with cash in hand and experience making deals, are often able to make the most out of the information they have. If Zillow’s information is as slow as two days, the best deals might no longer be available. That doesn’t mean it’s not worth pursuing, because the deals one might find with Zillow might still be better than the deals one might find if you wait for a foreclosure auction.

Zillow’s new development is bad news for companies who profit by charging membership fees to access an aggregation of public information. When a competitor comes in and offers customers the same information for free, the company that charges its customers must come up with a new business model fast or explain how their paid service is worth the price compared to the free service.

To feature foreclosure and pre-foreclosure listings, Zillow has introduced a foreclosure center, making it simple to search just for these deals without other listings cluttering the screen. A search in my ZIP code reveals a surprising number of pre-foreclosure properties within a mile. I don’t have to walk very far to see fifteen homes Zillow has marked as pre-foreclosure.

Without walking around to see these homes, the pricing looks favorable. The estimated foreclosure prices seem to be 15 to 20 percent below Zillow’s estimated market value for these homes, putting these properties in the “good investment” range based on that information alone. Of course, if these properties need a significant amount of work, the value as a potential investment decreases.

I’d be interested to hear what seasoned real estate investors think about this new development.

Published or updated October 25, 2012. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 7 comments… read them below or add one }

avatar Money Beagle

The biggest problem you’re likely to face is competition. I think there’s a realization that prices have hit bottom and so there is more interest for anything that’s going to be considered cheap or below market. Just as you’re realizing that it could be profitable, so will many of your closest friends. So the challenge you will face is determining how aggressive to be so that you can get the best value while not being overly aggressive and paying more than you should.

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avatar Jenna, Adaptu Community Manager

I would love to get more involved in rental properties. Especially since the house right next to me is for sale and I think I could get a good deal for it, unfortunately, I don’t have any money saved up for a thing like that… Want to buy it for me and I’ll manage it?

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avatar William @ Drop Dead Money

You’re on the right track. There are two considerations to keep in mind, though:

1. As with anything, it pays to listen and read a lot before acting. Attending the auctions and seeing how the bidding goes is invaluable learning, even though you never place a bid. Just as with stock investing, you’ll begin to discern the Warren Buffetts and the bozos. In the beginning they look the same, it’s only with time that you see who does “the winning things.”

2. The time for good deals is probably behind us for this economic cycle. The best time for buying is when there are almost no bidders, and that’s in the bottom of a recession. If the past 80 years is any indication, you only have about 5-7 years to wait before the next bottom is upon us. This gives you good time to become an expert in this market without laying down a dime.

True, this is not the ultimate in instant gratification :) but I promise you if you do this you will make a lot more than you will by jumping in now. Oh, and in the meantime you can save like crazy so when you jump you can make more or bigger deals.

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avatar mbhunter ♦139 (Cent)

I have one rental property (it was our previous house; we decided not to sell the house when we moved up).

For unique reasons I’m looking into getting another one.

Here are a few suggestions:

1. Get some friends who really know what they’re doing. I have a friend who knows construction really well, and can see the problems with a house that many people wouldn’t be able to see. He’s saved me from a couple of very costly mistakes. The real estate agent is not your friend here. They just want to sell the property.
2. Look at a lot of houses that meet your criteria. Know what the houses should go for, and what a good price would be. Basically, learn about houses in your area, as much as you can.
3. Read books by John Schaub. Attend a seminar if you can (they’re reasonably priced but you may need to travel).
4. I wouldn’t pay cash entirely for the house if you can help it, with mortgage rates as low as they are.

Have fun! I’ve had good fortune with my house so far. We’ll see how well it survives the Frankenstorm though. o_O

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avatar Investor Junkie

I agree the NY tri-state area it’s pretty tough to find deals that make sense without too much risk or too much invested.

Regarding foreclosed or pre-foreclosed units keep in mind this area is much different than say California, Florida, or Nevada where more of them have occurred. Most of that was new housing, not existing housing, which most is around this area.

Also house prices have not decreased like we’ve seen in those areas. The rent ratio is still kinda of high.

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avatar Daisy @ Everything Finance

I’m from Canada where foreclosures aren’t such a good deal. We call them “court-ordered sales” and the government sells them at market value or sometimes even more. We can bid on them but if they are any amount below market value, there are usually a plethora of bids so you are unlikely to win if you do low -ball. BUT – sometimes, especially in a buyers market, you can low ball, nobody will offer anything else, and you will win. Which is nice. We don’t have Zillow here but that would be awesome if we did to see all the court-ordered sales.

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avatar Boss' Assistant

I am not a real estate investor, but I would like to become one in the next few years, so I am looking forward to the comments on this topic. Good luck on your search.

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