REO Bank Foreclosures

Bank foreclosures are one of the most popular ways to buy real estate for pennies on the dollar. I have found it to be more like quarters in most cases. There is a large inventory and many resources with which to find bank-owned properties. These are properties in which the buyer has defaulted on their mortgage and the bank has seized the property through foreclosure.

If you want to invest in these, the first step is to figure out how to get enough of these deals on your desk to peruse. You’ll have to sift through quite a few to find the one that fits what you’d consider pennies on the dollar (less than 50% of market value). There are a ton of REO websites online (Realtytrac is the main one I know of) and those are a good place to start.

Getting hold of a real estate agent who specializes in REO is another good tactic. This is good because they are familiar with the market, have access to the MLS, and are likely skilled at negotiating short sales (short sales are basically when the bank will consider selling the property for less than it is owed). With those three pillars in your REO strategy, you will have more than enough offers on your table.

Be careful not to accept just any deal. You may be tempted because it will seem like none of them are pennies on the dollar, or all of them have already been taken. Do not be tempted to contract a property that falls outside your criteria. Understand what you want and stick with it. Communicate those wishes to everyone involved. It will take time, but you will find what you are looking for.

Fiscal Executions

In my opinion, foreclosures present a better opportunity to buy real estate for pennies on the dollar. With tax foreclosures, there is usually a surprise sale, a tax deed sale, or something of the sort. This means that the local government, in order to settle the balance of taxes owed on the property, will hold an auction of that property to be sold for the amount of taxes owed.

The good thing about this type of acquisition is that you can actually buy real estate for pennies on the dollar. Sometimes a property can be purchased for a tenth of its actual market value. This gives the investor more options due to the amount of capital incorporated. For example, the acquired property could be sold wholesale to another investor at a price well below market and still make money. For example, some counties in some states have tax deed sales every month and the property taxes owed are sometimes less than $10,000. The market value of these properties can be $40k – $100k in many of those cases. If you could acquire one of these properties for $10k and wholesale it to another investor for $15-$20k, you would still make $5-$10k per month doing it. The other strategy is to sell it for full market value once it’s presentable. In the latter scenario, you’ll keep the property longer and have more money invested in it, but you’ll still make more money from the deal.

The challenges with this type of deal is that there are unknowns about the property we are buying. I, for example, bought one of these for $8,000 and then found out there were squatters in the house. A family lived there rent free and I eventually had to go through an eviction process to get them out of there. One of the other challenges is getting a clear title. It takes time to do this, unless you have a system set up to speed up the process. Title must be clear and a quitclaim deed will be issued upon successful completion of the process. A reserved title basically means that no one else can establish rights to the property, including the previous owner. No liens remain after the procedure. There is a chance that someone will come back to claim the property, but you will have to pay them back for the property to claim it. This can only happen during the silent title proceeding period, which could be up to 90 days. To me, it’s still a better deal than REO, especially if you’re willing to do your homework on potential investment properties.

Tax lien certificates

Tax lien certificates give you the best of both worlds. Not only can you buy real estate for pennies on the dollar, but you can earn interest income (tax-free) if that doesn’t happen.

Both tax liens and tax deeds are auctioned, but there are some differences between tax lien certificates and tax deed certificates. In essence, with tax lien certificates, we are lending money to the municipality for taxes owed by the property owner. They, in turn, forward those interest charges to the property owner. If the taxes are not collected after a certain period of time, the property reverts to the lien holder. The interest earned on these certificates is tax-free and the percentage return can range from 10% to 40%, depending on where you are located. The invested money is immobilized for a period of one to three years, also depending on where you are. This scenario is the worst case. Your money is tied up for three years and you earn 10% to 40% interest on your money as compensation.

The best case scenario is that you buy real estate for pennies on the dollar. You will get a property that is worth much more than what you invested. A powerful strategy is to combine this tactic with a self-directed, tax-sheltered retirement account. You can build your retirement money through this strategy (via Roth IRA) and have full tax-free earnings and it is a very safe investment strategy.

The two disadvantages of this strategy are that it ties up your money and the investor is expected to pay taxes in full within three days of the auction. If liquidity is an important part of his strategy, then he should stay away from it. This is a good strategy if you have a good amount of cash saved and don’t mind having it tied up for a year or more.

discount mortgages

If you like income and growth strategies for investing, then discount mortgages are a great strategy for buying real estate for pennies on the dollar. This is a cash flow strategy. Sometimes smart investors or home buyers can negotiate flexible terms on a purchase. Sometimes these terms include a seller “having a role” in the deal. This means that instead of the buyer obtaining financing from a bank or other lender, the seller essentially becomes the home’s lender. The buyer will pay a mortgage to the seller instead of the bank and the seller will hold a lien on the property until the mortgage is paid off.

Unless you’re in the cash-flow business, it can be unappealing to have someone pay you incremental payments on a home you wanted to sell outright. As a discount mortgage investor, we can provide you with a solution. We can usually offer a lump sum cash payment for the payments the seller receives. The lump sum we offer is normally 70% or less of the face value of the note. The time value of money is an important factor with these discounts. I suggest not to pay more than 60% if the ticket is of high quality.

A high-quality note is one that has a buyer with an excellent payment history, good credit, and stable income. The benefits of doing this are (1) that we can choose the rate of return we want to receive on this investment and (2) if things go wrong, we could end up with a property that is worth much more than what we have in it. This is also a good retirement strategy because it could be a source of income for us later on, if we decide to keep these good performance notes*. Similar to tax lien certificates, it would be powerful to combine this with a tax sheltered retirement account.

The downside to discount mortgages, like tax lien certificates, is liquidity. It provides monthly cash flow, but binds our principle for a good amount of time. There are transfer/assignment options for the note, but the face value will most likely be affected if we were to collect from another investor. This is a longer term strategy. We must feel comfortable receiving the cash flow in exchange for the lump sum. Also, to be in this business, we must do our homework to understand the financials behind the strategy (future value, time value, interest, etc.).

Distressed Properties (Motivated Sellers)

This is a real estate buying strategy for pennies on the dollar that requires some sharp negotiating skills and a bit of chasing. Finding distressed properties is an art in itself. There must be a system to locate them, otherwise the offers will be few and far between. A distressed property is a property that has been abandoned, dilapidated, off the market for too long, or has an owner with personal problems that make them unable to manage the property at this time.

The good thing about this type of property is that sometimes we can get them at a great discount. However, most of the time it will be difficult to get a discount of 50% or more. The other thing to keep in mind is that there will be a lot of work involved in cases like abandoned houses, blighted properties, and other similar superior fixes if we are looking to capitalize on full equity. Wholesaling and bird hunting are good strategies for those who don’t want to spend as much time on it. Bird lovers can find these properties and sell them to other investors for a finder’s fee.

I have found it more difficult to achieve a win-win negotiation with vendors in these situations. When it comes down to it, they want to sell the property to get their money, and my goal is to get the property for pennies on the dollar. The key here is to identify sellers who are motivated by other reasons and focus on those instead of money. For example, they may be living far away from the property, have had difficulty selling, and no longer want to deal with traveling back and forth or continue to pay money for taxes and maintenance. In this situation, we can focus on the time and money they will save by taking it off their hands. This is a good strategy for someone who is skilled or has a good network.

How to Buy Real Estate for Pennies on the Dollar (Summary)

Robert Kiyosaki points out that we make money when we shop. Using any of these strategies, or a combination of them, will help us do just that. For me, built-in capital is the ultimate goal when investing in real estate. Other people have different goals for real estate investing, such as tax deferral, depreciation, and other similar tax strategies, as well as building wealth with the expectation that the value of the property will increase. These are good strategies too. I tend to buy real estate for pennies on the dollar because, for me, it gives me more protection against risk. There is a lot of built-in equity to work with. I hope this discussion is as beneficial to you as it is to me.