After receiving close to 20 calls in the last 2 weeks from hopeful Florida foreclosure investors with stars in their eyes and some cash in their pockets, it is necessary to discuss what foreclosures are and what they are not in terms of investment potential.
Experienced investors who have been buying Florida real estate for the last 10 or more years can sleep through the next 2 paragraphs. But those who are new to the game need to pay close attention; because you have just jumped into the next real estate bubble. Fortunately, this bubble is not expanding with the speed of the one that just burst in 2006.
Instead, this is the bubble that is more like bubble gum. It is sticky and gets caught on everyone’s shoes. If you do not clean it off in time, it makes a mess. Here is what is going on in today’s South Florida foreclosure market.
The smart money has bought and continues to buy in bulk from banks. These investors bring several hundred thousand to a couple of million dollars in cash to the table when they buy. They are able to purchase foreclosed properties from banks at 30-50% off market prices.
If the properties need work, they bring in crews to fix them up at costs well below what most people pay for repairs. Then they put these properties back out on the market at, or just below, market price; they sell them to happy first time buyers who look at a used house with a new inside and perceive that they are buying a bargain of their own. The result: satisfied investor, satisfied customer, everyone lives happily ever after, and, the most important part, this makes news.
In fact, it makes so much news that it catches the eye of the amateur investor, the one who has been saving every penny because he or she is looking for the NEXT BIG THING in real estate. After all, the media has been telling us for the last 3 years that Florida real estate has never been lower. If you’re from out of state, you may be under the impression that Florida residents are standing on corners just begging passers-by to take their homes from them so that they can move on with their lives.
Sadly for investors, fortunately for most Floridians, this is a tale of mythical proportions. Statistically, 1 out of 5 Floridians is upside down. However, not all of them are trying to sell their homes. For those unfortunate enough to have been foreclosed upon, their homes move into the possession of the bank
Here’s where the new investors are starting to salivate because it looks like we’re getting down to the explanation of how to acquire a foreclosure for pennies on the dollar.
Sorry, new investors, but you’re going to be disappointed. It is new investors like you who have bid foreclosure prices up to levels that make it impossible for the professionals to make a profit. In order to make a profit on a foreclosed property, especially one that needs to be rehabbed, that property must be bought at no more than 40-50% or market value. Another 15-25% or market value goes into that property to make it worth living in. That brings the total to 65-75% of market value before sale.
But the whole point of buying a foreclosure and rehabbing it is to make a profit on it by selling it to a new buyer at a higher price. If you follow the formula outlined above, it is possible to make that profit.
However, for those new investors who are purchasing these foreclosures at the price the bank asks, there is no room for profit. When a property is purchased at market value, even though it is labeled “foreclosure,” there is no room to rehab it and then mark it up.
Unfortunately, new investors, entranced by the word foreclosure, simply jump on these properties and end up in bidding wars. Foreclosures in Florida are typically selling at or above the original price that the bank was asking.
However, too many of these new investors think that the word “foreclosure” means something far more than property owned by a bank. This group calls local realtors and says something like this: “I want to purchase a 3 bedroom, 2 bath house with a 2 car garage. I want it to be no more than 10 years old.” The seasoned realtor who knows the area and what prices of such homes are, responds with a statement like, “You’ve got a wide variety of choices in that range, depending upon neighborhood. Prices will run anywhere from $300 to $500 thousand. So please give me an idea of what’s comfortable for you.”
The new investor, flush with cash and lack of knowledge, says, “Oh, that’s not a problem, because I only want to buy foreclosures.” They seem to feel that by uttering the word “foreclosure,” they will cause prices to shrink by half to two thirds.
Sorry to burst that bubble, but this is simply not happening. Banks may be slow to act, but they are not stupid. They have sufficient numbers of people who give them realistic values of properties in their portfolios. The banks put properties out at market value or slightly below. Then they depend upon the force of investor demand to bring those prices up to or beyond market value.
So, for those of you who have been around the block, by all means call us realtors and ask about foreclosure properties. We’ll gladly direct you to them, but you already know that they’re priced close to market. To all of you new investors, consider the old cliché that anything that sounds too good to be true, usually is.
Written by Marc Jablon. Marc is a real estate analyst based in Florida and is with Realty Associates.
marcjablon@yahoo.com / 561-213-6139
www.MarcJablonHomes.com
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