Spoiler Alert: Not all foreclosed properties are good investments. A better question to ask is “How do you separate the good from the bad?” which is what I’ll try to answer here…
I believe it’s common sense that not all foreclosed properties are good investments. You don’t need to be a rocket scientist to know this.
However, based on the number of times I’ve been asked the same question, I feel a lot of people out there have a misconception about foreclosed properties.
Let me make it clear, NOT all foreclosed properties are good investments, and it would be foolish to think all of them are.
A lot of foreclosed properties are bad investments…
Don’t ever expect all foreclosed properties to be good investments because if you do, you are setting yourself up for frustration, disappointment, and failure, especially when you start finding foreclosed properties that turn out to be horrible deals. More on this later.
“Hey Jay, are you saying foreclosed properties are no good?”, you might be asking.
I’m not saying ALL foreclosed properties are no good. It depends on a lot of factors. However, fact remains, majority of foreclosed properties will make bad investments.
What foreclosed properties can turn out to be “bad” investments?
When I say bad investment, it means they are overpriced, it has problems that cost too much to fix (or worse, it has problems that cannot be fixed), it has a pending court case, it may have illegal occupants, etc… or all of the above!
No, I’m not discouraging you, I’m just trying to help with managing your expectations.
However, I still believe there are hidden gems out there that can make worthy real estate investments.
The key is finding them.
One needs to look at a lot, and when I say a lot, I mean a huge number of properties (at least a hundred… more on these later), to find those hidden gems.
What are foreclosed properties that have good investment potential?
What are those “hidden gems”? For me, I look for the following:
- Foreclosed properties that are significantly cheaper than comparable properties in the same location, where the discount is more than enough to offset the cost for repairs/renovation, transfer costs and expenses… or cost of ownership if you will buy and hold. Ideally, it should have room for profit (see #2 below)
- Foreclosed properties that can provide your target Return On Investment or ROI. In other words, there must be enough room for your target profit.
- It must be within my target location/niche. I believe it would be pointless to buy a good property that will cause “burn-out” because it is located too far away (unless you have a property manager and there is still room for profit even with the additional cost).
With these “essentials”, you can be sure only a few properties will end up having the potential to become good investments…
Actually, there are more things to consider, which I covered in the following article: Top 5 Things to Consider when Buying Foreclosed Properties
As mentioned earlier, you may have to look at a huge number of properties to find a few that are promising… investing in foreclosed properties is a numbers game.
There are good investments out there… it’s a numbers game
I’ve said it before and I’ll say it again, investing in foreclosed properties is a numbers game.
The greater the number of foreclosed properties you look at, the greater the chance that you will find those good enough deals, and even some great deals.
However, you will find a lot of bad deals in the process, but that’s just part of the game. It’s okay to find horrible deals, as long as you find out before you bought the property, so you can move on and continue looking for better properties.
Keep in mind that one cannot just give up after looking at a few properties. I often hear people get frustrated with foreclosed properties after looking at just one or a couple of properties, or even with just one listing that really did not have many properties to begin with.
And then they give up and say things like…
“I’ll never find any good deals…”
“The numbers will never work…”
“This is too hard…”
“I’m just wasting my time…”
Sorry, nobody said foreclosed real estate investing is easy! It may sound simple, but it isn’t easy.
The 100-10-3-1 Rule
You basically need to look at a significant number of properties to find those properties that are worth a second look.
How many would that be? The general recommendation would be to find about 100 properties worth a second look, after doing initial shortlisting.
Out of those 100 properties, you will probably find 10 worth inspecting.
Out of those 10 worth inspecting, you might find 3 properties that are worth giving offers for or bidding for, if they were for sale through a public auction.
Out of the 3, you may end up buying 1.
That’s a brief overview of the 100-10-3-1 rule.
I’ve read many variants of this rule from books and also from some of my mentors but they are basically the same.
You analyze 100 properties, inspect 10, submit offers on 3, and end up buying 1. These are just average numbers, but you’d be surprised how accurate this average can be in real life. Been there, done that!
Anyway, I’ll probably write a dedicated article about this in the future.
Other numbers to consider
Of course there are other numbers to consider when applying the 100-10-3-1 rule and when “doing the numbers”.
Numbers like After Repair Value (ARV), projected repair costs, target profit, Maximum Allowable Offer(MAO), Cash on Cash Return (CCR), Return-On-Investment or Return Of Investment(ROI), Net Operation Income(NOI), Cashflow, etc., to name a few, also need to be considered.
For each of these numbers, you as the real estate investor will ultimately have to decide what is acceptable for you. These numbers will determine if a foreclosed property is a good deal or not.
If this sounds too daunting and tedious for you, I would be the first to say that investing in real estate might not be for you.
But there’s no harm in trying, right?! Imagine what could happen if you consistently did this until doing the numbers became a habit and then you actually became good at finding properties that have good investment potential!
No, I won’t have time to explain all of these numbers now, but one by one, they will be covered here soon.
Sometimes it’s all in the mind
What happens around us can mess up how we think. For example, a bad experience can “blind” us in a way, let me explain…
I still remember during the early part of 2008 when I found myself unable to find any good deals in any of the listings of foreclosed properties that came my way.
I was disgusted with what she allegedly did (as far as I know, the case is still pending, which is why I still use the word “allegedly”). The complainants were people who trusted her (some of which were people I know… myself included, although my monetary loss was insignificant compared to others’).
Because of this whole incident, I decided to invest in mutual funds instead of real estate.
My respite from real estate investing however was short-lived because I eventually met another mentor, Doctor Jon Abaquin, who was also featured in Larry Gamboa’s book “Think Rich Pinoy”(see page 155).
In one meetup, Doc Jon challenged me and a couple of my friends… each of us must buy a “Good” property within 90 days.
Lo and behold, from the same listings lying on the table in my bedroom where I could not find any suitable properties, all of a sudden I was able to pinpoint at least 3 very promising foreclosed properties from 3 banks.
I ended up submitting an offer for the most promising one. Later, that one offer got accepted. 🙂
That experience opened my eyes…
From that point onwards, deep inside I knew that there really are good, and great deals out there, I just have to look a little bit harder!
What if I found a promising foreclosed property but lack money to invest?
My take on this: Financial literacy is a prerequisite to real estate investing.
Being financially literate leads to proper management of one’s money and finances, which should then help one save enough capital for investing. When that right deal comes, you will be ready.
I also believe that being financially literate means not biting off more than you can chew. Establish your target price range and focus on properties you can truly afford while consistently building your capacity to earn/capital…
If you think that would take too long, then another option would be to find investors for your deal, although personally, I would recommend that beginning investors do it by themselves, especially on the first few deals.
I believe you should build your track record with your own money first before risking other investors’ money. If you can’t even handle your own money, how do you expect to be able to handle the money of investors?! Sorry if I may sound harsh, but hey, this is just my opinion.
So how many properties have you looked at?
Have you looked at 1, 2, 3… and have given up already? If yes, you are NOT looking hard enough.
Remember, the more you look and do the numbers, the greater the chance that you’ll find that real estate investment for you.
Now you know what to answer the next time someone asks you, “Are foreclosed properties good investments?”
Simply tell them NOT all foreclosed properties are good investments. Majority are bad, but there are still a few good deals out there. You just have to be patient and look for them.
I’m pretty sure most of you out there will eventually encounter this question once you decide to invest in foreclosed properties and people learn what you do.
Well, I hope to help save you the trouble of coming up with your own answer, which can turn out to be a very long one, just like mine. If you want, you can just send them over here, and I hope my answer above will be of help.
Got more questions about investing in foreclosed properties? Let me know by leaving a comment below.
Good luck and happy investing!
To our success and financial freedom!
Owner and founder, ForeclosurePhilippines.com
Text by Jay Castillo and Cherry Castillo. Copyright © 2022 All rights reserved.
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Note: This article was first published last August 30, 2010 and I updated it a bit when I read it after a decade. 🙂
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