Foreclosures are expected to rise in the coming months, but there are still significantly fewer than there were at the same time last year. As moratoriums are lifted, we expect to see an uptick in foreclosures, though not to the same degree as the previous recession. For real estate investors who are interested in flipping homes, this means new opportunities are coming up, but the market remains tight. The more you can understand about the market and the process for flipping foreclosures, the more profitable your real estate deals will be. With the looming expiration of moratoriums, it's good to have a team lined up and ready when opportunities arise so you can make a solid real estate offer.
The Process of Fixing and Flipping Foreclosed Homes
Foreclosed homes that have been neglected are a burden for the bank but an opportunity for savvy real estate investors. Investing some time and resources into improvements and selling the home at a profit is a great way to generate income from real estate.
The first step is to gain an understanding of the local real estate market. Without this, you risk losing money if you can’t sell the improved home for a price that covers expenses—let alone make a profit. Once you identify an area with potential, find foreclosed homes for sale from sources such as newspapers, foreclosure websites, real estate agents, mortgage lenders, government agencies, or real estate software that shows pre-foreclosure data.
One of the best things you can do is to build a relationship with an REO agent. These agents are handpicked by the bank to work on their REO portfolios. They have the inside scoop on what’s coming and what's available.
When you find a potential property, do a competitive analysis to determine how much the home could sell for, and negotiate a good price that allows you to make improvements and a profit. Many real estate deals rely on the 70 percent rule that says the purchase price should be 70 percent of the after-repair value (ARV) minus the cost of repairs. For example, if the ARV is $200,000 and the house needs $20,000 in repairs, the purchase price should be no more than $120,000 because ($200,000 x 0.7) - $20,000 = $120,000. You can stretch this rule if you are a real estate agent or contractor.
Determine what improvements need to be made to increase the value of the home and give you the best return on investment. These depend on the property but might include an upgraded kitchen, flooring, new appliances, and windows. Research the real estate activity in the neighborhood to see what types of homes are selling fast.
Some of the factors to consider include:
- Features and styles that are dominating
- Foreclosure rate
- Price trends
- Inventory levels
- Socioeconomic developments
Create a budget and stick to it. Any overages will cut into your profit. This is where having a good core team comes into play. The contractor on your team should be experienced and plan for contingencies, and the inspector has the important job of making sure the budget is enough for the project.
Finally, list the home and sell it. Alternatively, if the market has shifted and you can’t get a sale price that meets your target profit, refinance the property and rent it out to generate rental income. Pay attention to changes in the market and know that from the time you buy to the time you flip, market conditions could change. If you can’t get the sale price you need, be prepared with a plan B, which might include refinancing and renting.
The Best Loans for Flipping Foreclosed Homes
When making a real estate deal for a foreclosed home, time is of the essence. Before making an offer, you need to know your financing can cover the purchase price plus the cost of improvements and carrying costs such as insurance, debt service, utilities, and property taxes.
In many cases, a traditional mortgage won’t work due to the condition of the property and the pressure the bank puts on approving buyers with fewer contingencies. Possible options include getting a home equity line of credit, cash-out refinancing of a property you already own, or a fix and flip loan from a private lender. You can also find an equity partner to come in with a cash offer. Working with a private lender for a fix and flip loan comes with advantages over a traditional bank, including a faster time to close, creative financing solutions, no dependence on your credit score, and the ability to finance properties in poor condition.
The Process of Working with a Lender to Flip Foreclosed Homes
Having a good core team is crucial when fixing and flipping. This includes working with a realtor, contractor, and lender. Look for a lender that will work with you directly and respond quickly with qualification letters. This will allow you to save money and have a direct connection to the source of funding. Building a relationship with a hard money lender also opens up the possibility of creative solutions that you can’t do with a conventional bank, allowing you to move fast on hot real estate opportunities. Start by asking a lender what their qualification process is and submit the documents needed so they can get qualified and submit same-day offers.
To learn more about the many benefits of working with a private lender, read The Borrower’s Guide: Fix-and-Flip Hard Money Loans.