Are Real Estate Investors Going into Foreclosure?
More foreclosures will be coming onto the market in 2010, and some of those homes may have been a previous investor’s downfall.
Working on my end of year reports placed me in a reminiscent mood, and last week’s post about an electrical problem that I found in a few homes caused me to realize that there have been a few homes that I inspected which were too good to be true. Sure there are foreclosures that are relatively new homes. You would expect them to be in shape to sell fairly quickly. There are homes that need quite a bit of work. This past year saw homes that could be deceptive, so you need to take a careful look.
A tempting property location does not ensure your success as a real estate investor. If you live in Houston, you are quite aware that town homes close to downtown are quite popular. Just east of downtown, there are a few opportunity locations. I inspected a town home that had never been lived in, but it had a great price being a foreclosure. The builder/investor decided on ten units for his lot. Not planning well may have led his finances to be strained, so everything went into foreclosure before completion. The lender hired a builder to complete the job, feeling that this may be the only way to get their return on investment. Four properties were near completion. The builder worked on them, but I was told that he is having second thoughts about finishing the job, because he found too many issues. In the unit that I inspected, I found that he had not really resolved all the issues either. The lessons that I would take away from this site are:1) before taking on major projects, weigh your financial risk carefully; and 2) spend time evaluating what the job entails.
As for the first lesson, great locations with the right type of home do not always bring great rewards. It is easy to jump onto a growing trend, like becoming a real estate investor and buying foreclosures. I think that some investors saw a golden opportunity these past few years, and they failed to do their own risk assessments. All investments carry some degree of risk. In real estate development, you have to consider how the project will play out from the start until you have the tenant or buyer. Make a list of everything that could go wrong at each stage, then have a plan to deal with each item. Take special notice of your financing, because without the money, your project cannot last.
As for the second lesson, I would like to give you another example of a home inspection. This happened a few times, where I walked into a foreclosure to see a mixed bag. Part of the home looked brand new, while the other part appeared to be falling apart. Home inspectors pay attention to the workmanship, and you can tell the difference between homeowner and real estate investor projects. In the last home of this nature, the buyers had fallen in love, because so much of the surface repairs had been completed. The home looked great on the inside. When going through the house, I found projects that had been left undone. The gas line had been disconnected from a furnace. Wiring boxes were left open with no fixture or receptacle. The dishwasher was off kilter. These were the signs that could be seen during a normal walk-through. On closer inspection, I found major issues with the roof and framing in the attic. As I continued down the house, more items for repair cropped up. All of them were behind the cosmetic upgrades. (I am always surprised that investors or other home buyers do not check doors. There is always a shock when I tell them that there are problems with the doors that they could have seen).
Next year will present real estate investors with more opportunities. I think as more people feel comfortable with their own finances, we will see a crop of new investors in the market. I am all for that, but they should not jump into this market without some thought, or we will be facing the same situation all over again.
A tempting property location does not ensure your success as a real estate investor. If you live in Houston, you are quite aware that town homes close to downtown are quite popular. Just east of downtown, there are a few opportunity locations. I inspected a town home that had never been lived in, but it had a great price being a foreclosure. The builder/investor decided on ten units for his lot. Not planning well may have led his finances to be strained, so everything went into foreclosure before completion. The lender hired a builder to complete the job, feeling that this may be the only way to get their return on investment. Four properties were near completion. The builder worked on them, but I was told that he is having second thoughts about finishing the job, because he found too many issues. In the unit that I inspected, I found that he had not really resolved all the issues either. The lessons that I would take away from this site are:1) before taking on major projects, weigh your financial risk carefully; and 2) spend time evaluating what the job entails.
As for the first lesson, great locations with the right type of home do not always bring great rewards. It is easy to jump onto a growing trend, like becoming a real estate investor and buying foreclosures. I think that some investors saw a golden opportunity these past few years, and they failed to do their own risk assessments. All investments carry some degree of risk. In real estate development, you have to consider how the project will play out from the start until you have the tenant or buyer. Make a list of everything that could go wrong at each stage, then have a plan to deal with each item. Take special notice of your financing, because without the money, your project cannot last.
As for the second lesson, I would like to give you another example of a home inspection. This happened a few times, where I walked into a foreclosure to see a mixed bag. Part of the home looked brand new, while the other part appeared to be falling apart. Home inspectors pay attention to the workmanship, and you can tell the difference between homeowner and real estate investor projects. In the last home of this nature, the buyers had fallen in love, because so much of the surface repairs had been completed. The home looked great on the inside. When going through the house, I found projects that had been left undone. The gas line had been disconnected from a furnace. Wiring boxes were left open with no fixture or receptacle. The dishwasher was off kilter. These were the signs that could be seen during a normal walk-through. On closer inspection, I found major issues with the roof and framing in the attic. As I continued down the house, more items for repair cropped up. All of them were behind the cosmetic upgrades. (I am always surprised that investors or other home buyers do not check doors. There is always a shock when I tell them that there are problems with the doors that they could have seen).
Next year will present real estate investors with more opportunities. I think as more people feel comfortable with their own finances, we will see a crop of new investors in the market. I am all for that, but they should not jump into this market without some thought, or we will be facing the same situation all over again.
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